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South Africa’s Business Leaders Put the Boot into Increased Electricity Prices
South African business association, the Free Market Foundation, has put the boot into an application by Eskom to increase electricity tariffs an average 16% over 5 years dated from 2013. South African Coal Report’s David McKay assesses the debate.
If the tariffs are approved in their current form, the mining sector in particular fears it will hamper growth and could even result in shrinkage.
The FMF said the lack of competition in the South African power market made it almost impossible for Nersa to adjudicate the fairness of the tariff application.
“How can Nersa decide prices Eskom wants to charge are excessive or not?” posed the FMF’s Eustace Davie, who also is a member of the foundation’s energy policy unit, which was created when South Africa was hit with power blackouts in 2008.
“Prices cannot be set in a regulatory framework; they have to be decided in a competitive, open market,” Davie explained.
He called for independent experts to interrogate the figures contained in Eskom’s
third Multi-Year Price Determination (MYPD3): “The matter is too important to be decided upon without thorough investigation,”
Eskom said on October 22 it required an electricity price of 128 South African cents per kilowatt hour (US$14.5c/kWh)
The calculation was based on a compound annual growth in electricity demand of 1.9%, and gross domestic product growth of 2.5% over the same period.
“Electricity prices need to transition to cost-reflective levels to support a sustainable electricity industry that has the resources to maintain operations and build new generating capacity, guaranteeing future security of supply,” said Brian Dames, CEO of Eskom at the time the MYPD3 was announced.
In a withering examination of Eskom’s financial assumptions for the MYPD3, however, Davie said some R366B ($42B) in costs could be stripped out of the R1 trillion ($113B) Eskom said it needed to collect in revenue through the new tariff over the five years of its implementation, ending in Eskom’s 2017-18 financial year.
These costs included R185B ($21B) in depreciation and a further R186B ($21.1B) in Eskom’s stated 7% return it had to make to the South African government.
According to Davie, Eskom’s tariff increase regime, if approved by Nersa, implies a 406% increase over inflation.
“Where in the world would you find this increase over inflation in less than a decade? It’s hugely destructive to the economy,” he said.
Mayihlome Tswete, spokesperson for the Department of Public Enterprises, the government department to which Eskom, as well as other state-owned companies such as Transnet and South African Airways report, said a radical shift in policy regarding ownership of power generation and distribution was highly unlikely regardless of FMF’s objections. “I really don’t envisage any change, or shift towards privatisation,”
Although the Department of Energy had echoed calls by the private sector to diversify South Africa’s reliance on power from Eskom - by encouraging the independent power producer (IPP) sector and nuclear power generation - it’s worth noting that Eskom is involved in an intensive capital expenditure program, Mayihlome points out. “Any change in policy would impact on Eskom’s ability to raise money for its projects,” he said.
There’s also the sense that the South African government is moving towards an increasingly command-style economy, and that it doesn’t trust the private sector to distribute power cheaply to the country’s poor.
“I’m not sure we can trust Eskom to distribute power cheaply either,” declared Chris Hart, chief strategist at Investment Solutions, a financial services company. Hart pointed to a number of inefficiencies in Eskom’s operating and capital-raising activities that would only be bettered by the private sector.
“Government is not prepared to equity-finance Eskom so it is funding its projects out of cash flow,” he said. “And how do we know that the capital projects are the cheapest power we can get?” he asked referring to the 9,000MW of new power from Medupi and Kusile.
“Distribution and generation should always be separately-owned,”
Commenting on government strategy towards command economics, Hart said: “How long will it be before these Marxist clowns get exposed for what they are? They are taking us down an economic model that has failed time and time again,” he said.
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