Why Eskom is asking for a 19.9% tariff hike

Johannesburg – Eskom was making a sacrifice on its allowable returns in its latest tariff application to the National Energy Regulator of South Africa (Nersa), which will see a drop of R12bn in returns.

This is according to Eskom’s team of experts who unpacked the details of the power utility’s application for a tariff hike of 19.9% to the regulator for the 2018/19 year.

Nersa has given Eskom the green light to pursue the hike and hearings into the viability of the proposed tariff increase is scheduled for later this year.

Eskom wants its allowable revenue to increase to R219.5bn, up from the allowable revenue of R205.5bn which Nersa maintained for the 2017/18 year. Essentially the 2.2% increase for 2017/18 was below inflation, said Deon Joubert, corporate specialist of finance and economic regulation.

Hasha Tlhotlhalemaje, general manager of regulation said that in essence Eskom was asking for an absolute revenue increase of R14.3bn. "This is a 7% increase from the previous allowable revenue (approved by Nersa),” she said.

Of this 3.6% of the allowable revenue will be generated from standard tariffs, which is comprised of local customers and the remaining 3.4% of revenue would be generated from export and Negotiated Pricing Agreement (NPA) customers, she explained.

If the application succeeds, Eskom expects an income of R206.2bn from tariffs, Fin4 reported previously. Its average tariff is expected to then rise from 89c per kWh to R1.07 per kWh.

In monetary terms this R219.5bn comes from an increase in primary energy sources of R1bn, an increase of R11.2bn in local Independent Power producers (IPPs), an increase of R13.2bn for operating costs and a R2.8bn increase in international purchases. No change is expected in the level of depreciation. The environmental levy is also expected to decrease with R1.8bn

Eskom is also taking into account that returns will drop R12bn from Nersa’s previous decision. if this decision was not made, the price increase would have been “phenomenally” higher, explained Tlhotlhalemaje.

Revenue requirement

                                                                                      Source: Eskom

The 19.9% increase is derived from and sales volumes rebasing by 9.4%, adjustments to IPPs by 5.5% and international purchases by 1.4%. This will bring the price increase, before changes operating costs are considered, to 16.3%.

Considering a 7% change to operating costs, and 0.5% to primary energy costs mainly from coal and water will push the price up 23.8%.

Considering special pricing agreements (SPAs) and exports to change 2.1% and a 6% decrease in returns, the tariff hike comes to 19.9%, explained Tlhotlhalemaje.

Factors influencing overall price increase

                                                                                      Source: Eskom

Clawbacks a separate matter

Tlhotlhalemaje emphasised that the Regulatory Clearing Adjustments (RCAs) were separate issue to this application. She explained that there are two decisions Nersa must make in this regard. Mainly to determine the allowed revenues to be recovered, and then how this amount will be liquidiated in tariffs.

“Nersa can make a once-off decision on the balance and have separate decision on how to phase it. Any RCA decision will not be made for implantation before April 2018,”she said.

Joubert explained it would not be appropriate for the full amount, possibly R20bn, to be recovered in a single year. A decision will be made for Eskom to recover as much that would make it “financially sustainable”. 

Three years of delayed tariffs have to be recovered, amounting to R60bn.

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For only R75 per month, you have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today.
Subscribe to News24
Rand - Dollar
Rand - Pound
Rand - Euro
Rand - Aus dollar
Rand - Yen
Brent Crude
Top 40
All Share
Resource 10
Industrial 25
Financial 15
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot