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Nersa holds SA’s future in its hands

Eskom needs R1.09trn in revenue, MYPD1+2+3 will see a 540% increase from 2008 to 2017.

CAPE TOWN – Business, trade unions, civil society and concerned citizens came together on Tuesday to air their views on Eskom’s request for annual 16% tariff increases over the next five years, as the National Energy Regulator of SA (Nersa) kicked off public hearings on the application.

R1.09trn is the amount of revenue Eskom says it will need to run its operations between now and 2018, the period covered by this multiyear price determination application. According to CEO Brian Dames this will cover operating costs, depreciation of assets, a return for the shareholder and the completion of its new-build programme, specifically the Kusile coal-fired power station.

“We have worked hard to strike a balance between needs of the country and sustainable future for Eskom,” Dames said. Key to this sustainability, he says, is the achievement of a standalone (without the backing of the sovereign) investment grade rating. “For that we require a strong balance sheet.”

Eskom has allowed for anticipated primary energy costs of R355bn over the period, most of this for coal; operating costs of R270bn, demand management costs of R13bn, depreciation of R185bn and a return on assets of R187bn. In addition, purchase of electricity from independent power producers will cost Eskom R78bn.

This will result in a 110% increase in electricity prices from 61c/kwh to 128c/kwh between now and 2018. This follows the previous two multi-year price determinations (MYPD) which saw a doubling of electricity prices in the past decade. MYPD 1+2+3 will see a 540% increase from 2008 to 2017, according to submissions.

Unsurprisingly, speaker after speaker called these increases unjustifiable and warned Nersa that allowing these increases would push the SA economy closer towards negative growth, as businesses were forced to close and thousands of jobs lost.

High electricity prices have already pushed certain divisions of ArcelorMittal beyond the ‘tipping point’ where they are no longer sustainable, said Dennis Britz, principal energy specialist at the steel producer. This resulted in the closure of the company’s electric steel making facility in Vanderbijlpark last October. “That is 1.2m tons of steel-making capacity lost to SA.”

The company is now redesigning its SA footprint in order to remain competitive, he says. “I’m not telling Eskom or Nersa how to do their jobs. I’m just explaining the impact of electricity increases on our company. The impact is that SA could lose its steel production capabilities.”

A balance needs to be sought between sustainability of the sector, social equity and economic growth, says Numsa deputy general secretary, Karl Cloete. “Eskom says on one hand that the impact on the SA economy will be muted. Yet in the same submission it admits that mining and manufacturing will be the hardest hit.” The idea that the proposed increases will not have a serious effect is ‘ridiculous’, he says, considering 70% of electricity is consumed by industry.

Among the issues raised by speakers were Eskom’s calculation of return on assets and its method of depreciation, which collectively comprise 34% of the price increase. “We think a 7.8% return on equity is too high,” says Lance Greyling, a member of Parliament. “Globally utilities achieved a return of 4%, we think this is a more realistic return. Anything more would be double taxation.”

Eskom’s method of depreciating its assets came in for considerable criticism. “Eskom has calculated depreciation of R185bn using current replacement value rather than the more appropriate historical method,” says Leslie Recontre, director of energy services at the City of Cape Town. This means that Eskom is valuing all of its old power plants and equipment as new. This valuation method inflates Eskom’s expenses and is used to justify high recovery costs, adds Greyling.

Special pricing agreements with large multinationals, such as BHP Billiton and Eskom’s ballooning operating costs also came in for criticism.

Though not necessarily a subject for Nersa to deal with, speakers called for more clarity on SA’s electricity policy roadmap, as laid out in the Integrated Resource Plan. “Where are we going?” says Liz McDaid, sustainable energy co-ordinator for the Southern African Faith Communities’ Environment Institute. “And how are the tariffs getting us to where we want to go? This is an issue for government to address, but without this clarity this is a difficult application for Nersa to adjudicate upon.”

The regulator will hear submissions in different parts of South Africa over the next two weeks.

The conclusion the panel ultimately reaches will impact SA’s ability to produce, beneficiate and expand economically.

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