Is Eskom’s glass half-empty or half-full?

2013-03-03 10:01

Nersa finds inflated cost bases and wrongful assumptions in the power utility’s application

The decision by the National Energy Regulator of SA (Nersa) to slash Eskom’s requested revenue by more than R180?billion over the next five years came after the regulatory body found an array of inflated cost bases and wrongful assumptions in the power utility’s application for tariff increases.

In October, Eskom applied to raise its tariffs by 16% a year until 2018, expecting to generate revenue of R1.08 trillion.

Such a fee increase would have more than doubled the residential price for electricity from the current 60.81c per kilowatt hour to 127.87c/kWh by 2018.

Nersa, instead, decided to grant Eskom an annual tariff increase, averaging 8%, to 89.13c/kWh, a compounded escalation of just less than 50% over the five-year period.

The first increase would take effect on April 1.

The increase for smaller households consuming less than 350kWh would be limited to 5.6%. Other residential customer’s tariffs would increase by an average of 8%. While Nersa would hold Eskom to the 8% average increase, the power utility would be allowed to charge energy-intensive businesses more to recuperate the subsidisation of smaller households.

At Nersa’s tariff announcement on Thursday, the body’s electricity subcommittee chairman, Thembani Bukula, said that based on Eskom’s calculations, the power utility would have retained R46?billion if it had had its way after paying all its operating costs and down payments on loans for the building of the Medupi and Kusile power stations.

“We make our decisions based on facts and evidence, and looking at the numbers Eskom has proposed,” Bukula said. “There are no plans going forward for Eskom to build anything, so retained earnings of that level was not justified.”

Nersa cut another R7.9?billion from Eskom’s integrated demand-management programme, the power utility’s campaign to subsidise the installation of solar-powered geysers, low-energy light bulbs, and the like.

“Things like solar water heaters and heat pumps are already funded by the Treasury with a special fund, so we removed (the cost) from this,” Bukula said.

Nersa further found that the base from which Eskom indicated coal prices would rise was higher than the levels used in previous applications. Coal prices are the major component of Eskom’s primary energy costs.

“The application was based on projections that were slightly higher than (the previous application), so the base was higher than what we had approved,” according to Bukula, who said the base price was readjusted to the one used in the previous application.

The regulator also refused to take power buy-backs into account, a process whereby Eskom pays energy-intensive users, like chrome smelters, for not using their allocated power provisions, amounting to a saving of R8?billion. Buy-backs have, in the past, allowed Eskom to keep the lights on during periods when its grid capacity was under strain.

One of the biggest savings, of R45.5?billion, was on depreciation cost, money Eskom has to budget for the replacement of infrastructure.

Asked whether he thought Eskom inflated its prices unnecessarily, Bukula said he wasn’t in a position to comment.

“What we are employed to do is look at the cost of Eskom, extract the deficiencies and give what is appropriate.”

He said the increase would enable Eskom to keep the country’s lights on.

“Our objective is not to run Eskom into the ground. The increase we’ve given will be sufficient for Eskom to continue to operate the power grid system efficiently.”

Eskom, however, could still appeal against Nersa’s decision and reapply for further increases during the next five years should some of its and Nersa’s cost assumptions prove to be wrong.

One such instance could be if the price of coal escalates more than the budgeted 10%. Primary energy costs, which include coal, are the biggest expense item on Nersa’s approved budget.

The Chamber of Mines’ head of technoeconomics, Dick Kruger, said the 10% provision was “on the edge of the ballpark. It could be very, very tight.”

According to him, Eskom could only be assured of adequate coal supply if investors received an adequate return on their investment, saying it takes an average initial investment of R650?million to mine 1 million tons of coal a year.

Eskom, in response, said its application “was based on the current regulatory rules and policy, and Eskom’s mandate to keep the lights on”.

“We will have to study the decision in detail to understand its consequences and assess its impact.”

Eskom revenues 2013-2018

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