New tariff to force Eskom strategy rethink

[] – STATE-owned power utility, Eskom, had to fundamentally rethink its strategy in order to absorb the impact of lower-than-requested power tariff increases, said its CEO Brian Dames.

Eskom applied for a 16% a year increase in the electricity tariff from now until 2018, but the application was turned down by the National Electricity Regulator of South Africa (Nersa). Nersa argued the utility had to settle for an 8% a year increase, a process known as the Multi-Price Determination Policy (MYPD3), in order to protect economic growth and encourage job creation.

Speaking at the presentation of Eskom’s full-year results, in which it reported a 60% decline in taxed profit to R5.2bn, Dames said the impact to profitability of the new tariff increase until 2018 could not be ameliorated by company efficiencies alone.

“We have to look at re-engineering Eskom to respond to the tariff. We can’t just make savings. There has to be a fundamental rethink of what we do and for us to develop a clear strategy of how we do that,” said Dames.

This would involve a re-assessment of Eskom’s mandate with stakeholders such that it reduced mandatory spend, find new funding alternatives, win additional financial support from the South African government and even reopening of the tariff discussion with Nersa.

Dames was scathing of Nersa’s reduction of Eskom’s tariff increase demands: “There would be an R11bn benefit to the economy [from the lower tariff] but I’d like to see where the jobs have been created. I will be watching,” said Dames.

The current tariff of 16% – itself scaled back at the behest of President Jacob Zuma in 2012 from 25.9% – was blamed for the bulk of the decline in Eskom’s profitability, as well as a slowing in economic growth and industrial unrest.

One of the consequences of the lower tariff award would be the extension of Eskom’s R300bn funding plan from 2010 to 2017 of which some 82.9% had been secured predominantly through the issue of commercial paper and bonds. “We may have to seek more debt,’ said Eskom CFO, Paul O’Flaherty. In the current financial year, the utility would seek R57bn in capital.

Dames said the rethink on Eskom’s strategy was one of three tasks in the current financial year. The sustainability of the group’s assets, and delivering new power generation, chiefly its R105bn Medupi power station, were the others.

Eskom said on July 8 that Medupi’s first unit expected to come on stream about six months later than forecast owing to contractor-related delays, principally installation of the control and instrumentation equipment., as well as boiler welding problems.

However, Hitachi Power Africa, the boiler contractor, said in an announcement last night that it had completed 97% of its portion of the work on Medupi’s first unit (Unit 6) and was “on track to meet Eskom’s original December 2013 deadline’.

Doug Kuni, chairman of the South African Independent Power Producers, said yesterday the true cost of the Medupi delay was R145bn as a result of “the compounded opportunity cost of lost and delayed growth, capacity and jobs due to constrained power supplies which is unlikely to be recouped’.

Commenting on prospects for Eskom, Dames added that the cost of coal, which formed about half of the 36% increase in primary energy costs, had to be controlled and that discussions would be held with “the regulator’ on the matter.

“The MYPD presents a fundamental problem. There is a regulated tariff on the one hand, but moving [coal] costs on the other. That is an issue,’ said Dames. “The cost plus mines have to provide the tonnages, and keep the cost of coal controlled,’ he said.

Eskom’s concern with coal mines where the price of coal is determined at a certain percentage above the cost of producing it is that Eskom effectively has to finance for the cost of the mines.

During the year under review, Eskom’s electricity sales totalled 216,561 Gigawatt hours (GWh) compared to sales of 224,785GWh previously.