Eskom’s poor plant performance to weigh on Nersa tariff decision

Utility is already asking for R10bn more.
Nersa’s mandate is to balance Eskom’s needs with those of consumers and the economy as a whole. Image: Nadine Hutton/Bloomberg

South African consumers may be spared the full 20.5% electricity tariff increase from April 1 that Eskom has requested – if, as has been suggested, the regulator adjusts the utility’s approved revenue in line with the poor technical performance of its generation fleet.

Energy regulator Nersa is set to decide on Thursday (February 24) what Eskom is entitled to in terms of revenue, and that will form the basis upon which tariffs will be calculated.

This decision is crucial in light of the depressed economy, an expected spike in fuel prices early in March, and rising inflation.

The Electricity Regulation Act provides that the allowable revenue must be set to enable an efficient licencee (in this case Eskom) to recover the cost of its service as well as a reasonable return on assets.

The allowable revenue forms the basis for the calculation of consumer tariffs.

Determining a ‘reasonable return’

At a recent meeting of Nersa’s electricity sub-committee, much of the discussion centred on the regulatory asset base (RAB) that forms the basis for the calculation of such reasonable return.

This committee makes recommendations to the energy regulator meeting, where the final determination will be made on Thursday.

During the previous tariff period (MYPD4), covering the period 2019/20 to 2021/22, the RAB amounted to R875 billion.

In the current application for the next three financial years (MYPD5) Eskom has based its calculations on a RAB of R1.263 billion following a revaluation.

Eskom says in its application that it has followed the Electricity Pricing Policy and the prescribed methodology by determining the value of its assets on the basis of modern equivalent asset value.

The Association of South African Chambers (Asac), among others, is however critical of the increased valuation.

In its submission to Nersa Asac pointed out that Eskom’s generation business is shrinking. It would therefore not make sense to provide for the replacement of all assets.

“Asac disagrees with the RAB proposed by Eskom Generation in the application and considers this as substantially overinflated given the future needs of the business,” it stated.

However, during the electricity sub-committee meeting the discussion centred on the poor performance of Eskom’s generation assets.

Eskom initially based its application on the assumption that its generation fleet would perform at an availability factor of 72%, but during the public consultation it reduced that to 62% – without reducing the allowable revenue applied for.

The committee members were in agreement that consumers cannot be expected to pay through high tariffs for power stations that are not generating electricity.

Read:
Consumers should not have to pay for Eskom’s Medupi, Kusile mess – Asac
Our tariffs are not high, says Eskom
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If the regulator at its upcoming meeting accepts the committee’s recommendation, it may approve a reduced amount of revenue, which will soften the blow for consumers.

Nersa was also awaiting the results of a study by an outside consultant about the social and economic impact of the proposed revenue decision on consumers and the economy as a whole. This will inform its final determination, as its mandate is to balance the needs of the licencee (Eskom) with those of consumers and the economy as a whole.

Asac has described a 20.5% increase as “catastrophic”.

Another aspect of the upcoming revenue determination that is still unclear is whether Nersa will add R23 billion that relates to MYPD4 to Eskom’s allowable revenue for the coming financial year.

This is part of R69 billion that Nersa deducted from Eskom’s allowable revenue during MYPD4 in lieu of three annual payments of R23 billion each that government allocated to the utility over the same period as equity injections.

A high court reviewed and set aside this decision by Nersa and ordered that the money be added back, which means tariffs will have to increase to provide this revenue.

Eskom has already recovered R10 billion of the R69 billion (in 2021).

Nersa however appealed some aspects of the judgment and the appeal has not yet been heard.

It initially indicated that it may add R23 billion back in the year starting April 1, but Eskom indicated that it believes the appeal should first be finalised.

The additional R23 billion will translate into an extra 10 percentage points increase.

In the meantime Nersa has published for public comment an application by Eskom to recover more than R10 billion it believes it under-recovered in 2020/21.

Stakeholders have until March 22 to submit written comments. Public hearings will follow shortly thereafter.

Nersa will finalise its decision in May, and it will therefore not be in time for the upcoming tariff increase.

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Let’s ignore the dogma for a moment and face the facts. It is impossible to determine the “right price” for a product in the absence of competition.

Here we have the central planning body, doing their level best to determine the “correct” price for a monopoly, by using various models, spreadsheets, structures, criteria, inputs, regulations, determinations, and goals, and then it takes one court case to prove them wrong. They try again, and their calculation ends up in court again. Not even the judge is able to determine the correct price.

Nobody knows what the correct price is. It requires the profit motive, as part of the unhampered market mechanism, with the factors of supply and demand, to do that. Every renewable company can produce electricity at a fraction of the Eskom retail price. We need a free market in energy where suppliers are allowed to use the privatized national grid to provide reliable electricity supply at a price that consumers can afford.

Groceries are more important than electricity right? The supply of groceries requires investments in expensive infrastructure, right? Well, Shoprite provides an abundance of cheap groceries to consumers in every corner of the nation, and they never run out of stock either. We never experience any grocery “shedding” like we do load-shedding.

Can you imagine what will happen to the supply and price of groceries and bread if a central planner was involved? They would need many days in court to try and determine the correct price of a can of pilchards.

NERSA should also be taking out the impact of excessive debt.

Eskom has debt no free-standing utility could carry and since government underwrites the debt it can reasonably be viewed as equity. The R35b in interest cost per year is 15% of Eskom domestic revenue! Take it out of Eskom and no 20% increase.

To add insult to injury, councils add 65% to the eskom tariffs so the nonsense debt has an almost R60b economic impact.

End of comments.

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