Rights body challenges Eskom’s 19.9% tariff hike bid

Johannesburg – If Eskom continues to increase electricity tariffs without meaningful transformation to its operations it is the equivalent of throwing good money after bad, warned the Southern African Faith Communities’ Environment Institute (Safcei).

The organisation has submitted its opposition to Eskom’s application to the National Energy Regulator of South Africa (Nersa) for a tariff hike of 19.9% for the 2018/19 year. This 19.9% increase would be an addition to the 114% tariff increase introduced over the past five years.

“It is not prudent to allow Eskom to continue to overestimate its demand and then claw back revenue it does not make,” Liziwe McDaid, programme lead for the energy and climate change programme said in the submission.

“All other operational expenditure are based on overestimation of demand, leading to lock in of coal contracts and water infrastructure, which is unwise as these are not needed.” Further, Safcei is of the view that the presented renewable energy costs are misleading, creating a false impression of its potential.

In the application, Safcei highlights that Eskom is spending more than it can raise from consumers.

The more than doubling of electricity prices is due to “poor decision-making” within Eskom’s “governance structures,” said Safcei. This poor governance has been reflected in the Dentons report as well as state capture reports by the Public Protector, South African Council of Churches and academics.

Safcei wants Nersa to halt any tariff increases for Eskom, until it develops a plan for a sustainable energy future. Safcei also wants no tariff increases related to nuclear-related projects.

Among the issues raised by Safcei include:

Demand

Safcei is of the view that Eskom is “too optimistic” or overestimates demand. As a result customers have to pay higher tariffs to compensate for the decline in electricity sales. “A proper forecast would enable Eskom to cut its expenses in line with expected revenue,” Safcei proposed.

Power stations

“Currently, we have to pay for the cost of building Eskom's Medupi and Kusile power stations,” Safcei said. Eskom relies on government for bailouts. “This means that government is increasing investment into an unsustainable source of energy that we cannot afford.”

Additionally, Eskom’s plan to supply energy at least cost is flawed, Safcei argued. There may be increasing maintenance costs for power stations in future. “Currently, Eskom has a surplus of electricity and could therefore shut down and decommission the oldest plants that are high cost to maintain and are more polluting than newer plants.”

Safcei added: “Our view is that power stations that have been closed for a period of maintenance would appear more expensive compared to power stations that might be running inefficiently due to lack of maintenance.”

Coal contracts

Given increased electricity demand, Eskom will incur increased coal costs by buying expensive short-term coal contracts rather than long-term contracts. “Most coal contracts are such that Eskom has to pay for the coal irrespective of whether it is used.”

Nuclear

The 19.9% tariff increase Eskom is asking for does not include any costs towards nuclear. Safcei suggests including nuclear would see Eskom asking for higher tariffs.

“So in effect by not including the full costs of nuclear, Eskom is not comparing apples with apples in its comparative costing of renewables vs nuclear.”

Water

Eskom pays for its water through tariffs. Water infrastructure is needed for the operations of coal-fired power stations. If new water infrastructure is needed then it will add to Eskom’s costs and will have to be recovered in tariffs, Safcei explained.

“Even if there is no need for additional coal-generated electricity, Eskom will still have to pay for the water infrastructure it ordered the Department of Water Affairs to build,” said Safcei.

“This also has knock on cost implications for government as it is Department of Water Affairs that is going to have to build the infrastructure, increasing the debt of government overall.”

Renewable energy

“Eskom is claiming that renewable energy projects are leading to higher electricity tariffs,” said Safcei. The organisation has labelled this as a “selective presentation” of data as research by the Council of Scientific and Industrial Research (CSIR) shows that energy costs are 40% cheaper than new coal.

Safcei also wants the Regulatory Clearing Account (RCA) approach not to be used to “subsidise” poor decision making. The RCA adjustments allow Eskom to recover funds lost by the decline in sales or escalation of operational costs. Using this approach, Eskom could clawback R60bn through tariffs.

Speaking to journalists at a briefing in September, Eskom’s team of experts explained the reasons behind the 19.9% tariff hike. Eskom would only increase its allowable revenue by 7% to R219.5bn, and is foregoing R12bn in returns. Hasha Tlhotlhalemaje, general manager of regulation explained that the price increases would have been “phenomenally higher” if it had not done this.

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