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Nersa decision fair – EIUG

‘But 9.4% is better than 16%’ – Chamber of Mines.

Energy regulator Nersa’s decision to grant Eskom a 9.4% tariff increase for 2016/17 instead of the 16% it applied for, is fair says Shaun Nel, spokesperson for the Energy Intensive User Group (EIUG) that represents Eskom’s biggest industrial clients.

Nersa’s decision was taken in terms of the Regulatory Clearing Account (RCA) process, which allows Eskom to claw back variances on revenue and costs after the end of a financial year. The decision relates to variances in 2013/14.

Nel commended Nersa for disallowing Eskom’s claim for R8 billion over-expenditure on diesel for its open-cycle gas turbines (OCGTs) and its refusal to allow other customers to pay for Eskom’s losses on special pricing agreements.

Nersa only allowed R1.2 billion for additional diesel use, which is the equivalent of what it would have cost Eskom to generate the same volumes of electricity as it did using its OCGTs, but using less costly coal-fired power stations.

Nel said it was clear from the lower demand for electricity that consumers can no longer afford the rising electricity cost. He said industrial customers increasingly close down during winter months to avoid premium winter tariffs.

Nel said the fact that Nersa granted a lower increase than Eskom applied for, will not result in the return of some of the demand for electricity.

The EIUG also supports Nersa’s instruction to Eskom to submit a new multi-year tariff application, Nel said. It seemed as if Eskom was trying to sneak the big increases it applied for earlier, through the RCA process, he said.

“If the assumptions upon which MYPD3 (the current multi-year tariff determination) was based have changed so fundamentally, let’s go back to the drawing board and assess each one properly,” he said.

Nel emphasised that Eskom cannot rely on the electricity demand forecasts in the current Integrated Resource Plan, as it did for MYPD3. He said those forecasts have proved to be way too optimistic and will have to be revised.

While relieved that Eskom did not get the 16% tariff increase for 2016/17 it applied for, the Chamber of Mines says the 9.4% increase granted “will have a major impact on increasing the industry’s cost base”.

The chamber issued a statement in reaction to energy regulator Nersa’s decision to grant Eskom a further R11.2 billion revenue, which translates into a 9.4% tariff increase for most of its clients.

The increase will be implemented on April 1 for direct Eskom customers and July 1 for municipal customers.

Chamber of Mines CEO Roger Baxter, said electricity costs have been the fastest growing component of the mining sector’s cost base and have increased by more than 300% over the past seven years.

Baxter added: “While the mining industry supports Eskom’s intent to resolve South Africa’s long-term energy crisis, we fully support the statements made by minister Pravin Gordhan in the Budget Review for 2016, indicating that ‘further efficiency improvements are necessary at Eskom to ensure moderation in future tariff increases’, including the possibility of co-funding through public-private partnerships.

“Further pressure on electricity prices will push a number of mining companies further into the red necessitating further restructuring.”

In its reaction trade union federation Cosatu said it is “utterly opposed” to the the 9.4% increase as “consumers are being forced to carry the burden of Eskom’s inefficiencies”.

Cosatu said the increase comes against the background of increases in personal income tax last year and the fuel levy this year, while the costs of other basic services like health are also rising.

“What is clear is that consumers can’t afford any further increases in the cost of living and will be devastated by this latest blow from Nersa. This will actually plunge even more people into poverty. Going forward these tariff increases will have dire consequences for the economy and job creation. This will be exacerbated by the fact that municipalities will also add on this increase and then all that will be passed on to the consumers,” Cosatu said.

Cosatu said electricity is central to the cost base of almost all companies and the increase will lead to job losses and be a stumbling block in opening new businesses. This will slow down economic growth even further, it said.

“We warn employers though not to use this electricity tariff hike as an excuse to retrench workers,” the union said.

Public enterprises minister Lynne Brown said she would study the reasons for Nersa’s decision and discuss the implications with Eskom of the lower than expected increase.

She said Eskom needs additional revenue to complete its build programme. “I have requested Eskom to provide me with a report on the impact this increase will have on their programmes,” she said.

The Nersa decision is an unfortunate setback for the metals and engineering sector and will contribute to more job losses and postpone the sector’s recovery even further, the Steel and Engineering Industries Federation of Southern Africa (Seifsa) said.

Seifsa chief economist Henk Langenhoven said Nersa’s decision would have a crippling effect not only on the embattled metals and engineering sector, but also on the South African economy.

Langenhoven added that collectively the mining, construction, auto and metals and engineering sectors contribute nearly 20% of South Africa’s gross domestic product, hence sustaining these important sectors is crucial for the economy.

“The performance of these sectors has deteriorated significantly since June last year and the outlook for the next two years remains dire. The approved electricity hike will have a crippling effect on these sectors in general and the already declining metals and engineering sector in particular. The metals and engineering sector exports 60% of its production and international competitiveness is key to survival. This electricity cost increase will erode it even further,” Langenhoven said.

He said that most of the impact of the electricity tariff increase would be felt through the direct effects of electricity prices, which have a weight of 4.13% in the consumer price index basket. This does not show the impact on producers, of course.

“The indirect effects are estimated at 0.5 percentage points during 2016,” Langenhoven said.



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