Eskom to adjust assumptions underlying its 20.5% hike bid

If Eskom gets this increase, with other amounts from claw-backs and court rulings, the economy will go into ‘a nosespin’, but it rarely gets what it asks for – Yelland.
Image: Moneyweb

On the first day of energy regulator Nersa’s public hearings about a possible more-than-20% increase in Eskom tariffs, the utility’s CFO Calib Cassim admitted that Eskom is unlikely to achieve the 72% Energy Available Factor (EAF) of its generation fleet underlying the application.

According to Chris Yelland, managing director of EE Business Intelligence, the EAF figure came in at 61.75% for the last calendar year, down from 64.79% in 2020.

He says the trend has been downward and it is highly unlikely that Eskom will be able to turn it around.

According to Cassim, the loss of Medupi unit 4 due to an explosion was not factored into the 72% EAF assumption. Moreover, Yelland points out that one unit of the Koeberg nuclear power station will be out of service for most of the year, as the generators in first the one unit and then the other are due for replacement.

This represents a loss of about 1 700 MW to the system.

Read:
Koeberg life-extension project running late before it even starts
Consumers should not have to pay for Eskom’s Medupi, Kusile mess – Asac
Eskom’s R3bn Ankerlig power station investment to support Koeberg

Yelland is concerned that a sharp downward revision of the EAF assumption will result in an increase in Eskom’s revenue requirement and therefore a bigger tariff increase.

“If the coal-fired generation units under-perform, Eskom will have to provide for the increased running of open-cycle gas turbines [OCGTs] to keep the lights on,” he says.

This is one of several underlying assumptions that Eskom will adjust.

Cassim is expected to deal with more changed assumptions during the second day of public hearings today (Tuesday, January 18).

In answering a question from a member of the Nersa panel, Cassim said Eskom prepared its application before President Cyril Ramaphosa announced the licensing exemption for private power producers for projects up to 100MW.

Read:
Companies can produce up to 100MW of power – Ramaphosa
Is this Ramaphosa’s most decisive economic decision since taking office?

This is expected to impact on Eskom’s sales volumes as especially large power users embark on projects to become less reliant on Eskom.

Although the full effect may not be felt in the coming financial year yet, any downward revision of the sales volume assumption will also drive tariffs up, warns Yelland.

Eskom has pointed out that about R70 billion of its total revenue requirement of R279 billion is for the cost of buying electricity from Independent Power Producers (IPPs).

The tariffs it pays and the terms of the power purchase agreements were negotiated by the Department of Mineral Resources and Energy and Eskom merely passes the cost on to the consumer. Yelland says Eskom has no control over the cost.

IPP costs

Cassim also indicated that he will address the assumptions relating to IPP cost. He was responding to a question from the Nersa panel about the cost of the IPP tariffs for the first few rounds that was very high.

Some of these agreements have been renegotiated and Nersa received applications to adjust the tariffs downward. Consequently, Cassim faced questions at the hearing on whether Eskom has taken such reductions into account.

Calib Cassim, Eskom

Calib Cassim, Eskom’s Chief Financial Officer. Image: Moneyweb

Meanwhile, Eskom may also have to relook the inclusion of projects in government’s risk mitigation procurement programme.

Karpowership has the largest portion of the 2 000 MW allocation. The award to this company for three gas-powered powerships is the subject of litigation, and financial close has not yet been achieved on any of the projects in this programme.

Read:
Eskom to give renewable IPPs a hand
Nersa defers dispute over Karpowership
Outa asks Nersa for reasons behind approving Karpowership’s generation licences

Chances are becoming slim that the projects will be up and running during the next financial year and Eskom may decide to exclude these projects from its IPP cost. This represents almost R11 billion of the R70 billion IPP cost.

Yelland says the impact on Eskom’s revenue requirement of excluding the risk mitigation programme depends on how it is treated.

“They cannot just exclude it without providing for some generation capacity to fill that gap. It will most probably also be OCGTs, which may even be more costly,” he says.

Yelland points out that Eskom has only two solutions for the money it needs – it wants it either from the consumer or from the taxpayer.

“There are a number of things that can be done simultaneously to alleviate the pressure on Eskom. It can get revenue from the consumer, but not 20% more and it can get assistance from the taxpayer, but also only to a limited extent,” he adds.

“What about selling assets, reducing headcount, getting salaries under control, improving procurement, leasing land and generally cutting cost?” he asks.

Read: Is Eskom getting 20% more, or 40%?

Yelland says if Eskom gets a 20% increase, together with other amounts from claw-backs and court rulings, the increase may even be as much as 40%.

He believes that if this happens, the economy will go into “a nosespin”, while Eskom’s sales volumes will further deteriorate, putting the state power company in a worse position.

But Yelland also notes that in reality Nersa seldom awards Eskom what it applies for.

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Easy adjustment to outdoes to cover : remove the abnormal debt service from Eskom and place it in government – which anyway underwrites Eskom debt.

By rough calculation the abnormal debt service (to global utility norms) is over R50b. That is a quarter of the tariff cost…

Else all that will happen is more people will become self sufficient much faster. See what happens to tariffs when Eskom kWh drops to 150TWh

finger error : outflows not outdoes

LOL
I reached my Gatvol level about 5 years ago and embraced solar.
One of the best decisions I have made to give me peace of mind and freedom from this crowd!!

Yes, absolutely agree with casper1. Solar with battery backup pays for itself in 4 to 6 years. But soon that statistic will become irrelevant – the choice will be between having your own power and not having any power whatsoever.

The longer they wait before they privatize all the SOEs and municipalities, the greater the chance that all citizens will be forced to pay down the debt through the loss of purchasing power of the national currency.

Bankruptcy is creeping closer every day these institutions remain under ANC control. The ANC can hide its head in the sand, and kick the can down the road, until these unserviceable debt issues spill over onto the balance sheet of the banking system.

Then, the Reserve Bank will be forced to act, and that implies that they will take 90% of the purchasing power of savings, salaries, and social grants to repay the debt. If the product that is produced by Eskom is unaffordable, then the debt is also unpayable. Eskom is bankrupt, they just don’t know it yet. They are like the bankrupt emerging farmer who eats his maize seed and breeding stock in an effort to stay alive.

They will print the money. The debt is denominated in terms of the rand. Socialist ANC policies prevent the economy from generating enough income to repay the debt. The capacity to repay SOE and municipal debt have disappeared into BEE and cadre-deployment benefits. Hyperinflation is tantamount to the implementation of a BEE scheme at the Reserve Bank. While it “empowers” some for a short while, this act dilutes the value for everyone else. Seen over the longer term, it is inevitable that the socialist acts of BEE and cadre deployment will encroach on the independence of the Reserve Bank itself. It is only a matter of time before all BEE beneficiaries are “empowered” shareholders of bankrupt businesses.

There is no free lunch in the capitalist system and there is no lunch at all in the socialist system.

That leaves us with the only solution to debt repayment problems in socialist nations. Ignore it until it causes a banking crisis. Then, the problem will solve itself like it did in Zimbabwe, Venezuela, Argentina, and Brazil.

I fear that it will have to come to the total failure of government in SA to serve as a catalyst for change — The history of Africa however points to a rather protracted failure of everything for a very long time !!
Most countries in Africa however never will recover !!
Will we?????

End of comments.

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