Eskom wants 16% tariff increase

Power utility Eskom announced today that it has applied for a 16% annual increase in electricity rates over five years to pay for new power plants and to enable it to buy power from independent producers.

The state-owned utility said the increases, from April 2013 to March 2018, would include a 13% annual hike for its own needs and a 3% rise to support the introduction of independent power producers.

Eskom’s Chief Executive Brian Dames said the utility would spend R337bn on capital expenditure over the next five years and would need R78bn over the same period to buy power from independent producers.

“We are planning for a growing and successful economy,” said Dames. “For that we need to continue to invest in the electricity infrastructure which can support higher rates of economic growth and development and extend access to electricity to all South Africans.”

“We seek to ensure that Eskom can cover the costs of supplying the electricity needed to power South Africa and invest in the future,” said Dames.

“Our application balances South Africa’s needs for a secure supply of power and for a sustainable electricity industry, with our recognition of the impact which tariff increases have on the economy, particularly on the poor,” he said.

The application proposes a price path which continues to migrate electricity prices towards a level where they cover the full cost of producing electricity. This includes input costs such as coal, maintenance and human resources, as well as the cost of servicing the debt raised to finance Eskom’s new build programme. The application also provides for the introduction of new independent power producers (IPPs), particularly in renewable energy.

The current three-year tariff determination (Multi-Year Price Determination 2) by Nersa ends in March 2013. Eskom has submitted its application for the next determination, MYPD 3, which will be decided by Nersa following public hearings early next year. “Eskom has set out the rationale behind its application as comprehensively and transparently as possible to inform open discussion about electricity pricing,” Dames said.

“Nersa will make its decision following an extensive process of public participation. We encourage all South Africans to engage with our application,” he said.
The application is for average increases of 13% over five years for Eskom’s own needs, plus 3% to support the entry of new independent power producers, giving a total of 16% a year over five years.

This would see the average electricity price increase from 61c/kWh in 2012/2013 to 84c in real (inflation adjusted) terms by 2017/2018, for Eskom’s needs only, or 96c/kWh including IPPs.

The IPPs, which will see the first large scale introduction of renewable energy into the South African market, include all three phases of the Department of Energy’s (DoE’s) renewable energy procurement programme (3 725 MW), in line with a determination by the Minister of Energy, as well as the DoE’s peaking projects (1 020 MW).

Coal is Eskom’s single largest cost, and coal costs are seen increasing by 10% a year over the five years, with Eskom’s primary energy costs increasing by 8.6% on average within the five years. Eskom has called for a pact to contain coal cost increases, which averaged approximately 18% over the MYPD 2 period. Other operating costs increase by an average of 8% a year within the five years, with manpower costs rising in line with inflation.

The tariff application will see Eskom’s return on assets improve from 0.9% to 7.8% over the MYPD3 period, with the return going mainly to support the debt raised to finance Eskom’s capital investment programme. Eskom is spending about R337-billion over the five years on its new build programme and the upgrading and refurbishing of its existing assets. The build programme has significant benefits for the economy, providing the necessary infrastructure to grow the economy, creating jobs and skills and stimulating the development of local supplier industries. There are currently more than 35 000 people on site at Eskom’s big build projects and more than R75-billion of contracts have been placed with South African suppliers.

Eskom’s application covers only its committed new build programme up to the end of the Kusile power station project, which is expected to be completed by 2018/19.

“An investment grade rating is vital to ensure that we can access funding, at cost-effective rates, for our build programme. The application will enable Eskom to move to a stand-alone investment grade rating by the end of the MYPD 3 period,” said Eskom Finance Director Paul O’Flaherty.

As part of the application, Eskom modelled scenarios showing the pricing implications of new build beyond Kusile, in terms of the Government’s Integrated Resource Plan 2010, which indicated average increases of 20% over the MYPD 3 period. However, the additional capacity was not included in the tariff requested from Nersa.

Eskom has submitted proposals to Nersa for a tariff structure which would ensure that poor households who use very little electricity experience only single digit price increases over the five years.

Eskom also announced today that it would soon be submitting an application to Nersa to look into the special pricing agreements which Eskom has with BHP Billiton relating to the aluminium smelters in KwaZulu-Natal. The special pricing agreements link the price the smelters pay for electricity to the dollar price of aluminium and were entered into in the 1990s when Eskom had surplus generating capacity, which is no longer the case.

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