Eskom warns inflation-linked hike will trigger demand for additional government support

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Utility Eskom warns an inflation-linked hike will force it to seek even more support from the national treasury, amid massive calls for the energy regulator to reject its request for a tariff hike of 20.5% from April 1 and that it introduces a single regime. – increasing digits instead.

Stakeholder warnings about the unaffordability of the proposed increase for businesses and households emerged as the central theme of the week-long public hearings, which were organized by the national energy regulator of South Africa. South (Nersa) from January 17 to 21, culminating in a hybrid event. in Gauteng.

Eskom, which made major adjustments at the hearings to the assumptions underlying its application, originally submitted in June last year, seeks qualifying revenue, including overdue amounts already approved by the regulator, of 293.4 billion rand for 2022/23.

If approved, the standard wholesale rate would increase from 133.64c/kWh to 161.04c/kWh, or 20.5%.

The utility forecasts sales of 193,579 GWh for the coming fiscal year, which it plans to supply from its own generators as well as power purchases from independent power producers (IPPs).

After a downward revision of the assumed energy availability factor of its underperforming coal fleet from 72% to 62%, the utility is asking for R86.5 billion to cover its primary energy costs.

Controversially, the figure includes R6.5bn for open cycle diesel-fired gas turbines (OCGTs), which Eskom plans to operate at a 7% load factor, down from the 1% initially assumed.

There was much debate in the hearings about the prudence of allowing Eskom to use OCGTs outside of their role as peaking power plants. The utility defended the request on the basis that load shedding resulted in a cost to the economy, which it estimated at R9.53/kWh, three times that of OCGT power generation.

After a significant decrease in alleged electricity purchases from IPPs, from 36,448 GWh in the initial request to 25,135 GWh, Eskom is requesting R52.7 billion to purchase electricity from IPPs, a downward revision of 17.4 billion rand compared to the initial request. application.

The balance of demand includes R68.3 billion for amortization, R66.7 billion for operating expenses, R5.7 billion for debt arrears, R4.6 billion for international purchases, R7 billion for the environmental tax, R2 0.7 billion for the carbon tax and R14.4 billion for revenue related to the previously approved regulatory clearing account.

Eskom also adjusted its return on assets assumption from -1.99% to -1.2%, resulting in a reduced loss of R15 billion, instead of the originally projected R25 billion.

The proposed hike was rejected by business, civil society and local government, with the executive mayors of Cape Town and Johannesburg, Geordin Hill-Lewis and doctor Mpho Phalatese respectively, making direct representations to Nersa during the hearings.

Phalatse argued in his presentation that a rise above inflation would have a “devastating impact” on the citizens of Johannesburg, erode business confidence and disrupt economic recovery.

CEO of the Intensive Energy Users Group Fanele Mondi said that while not all revenue requested was within Eskom’s control, including IPP payments and environmental levies and taxes, it nevertheless believed that the increase should be limited to a maximum of the price index consumption index (CPI) plus 4%.

However, Mondi argued that it would be better to look at Eskom’s costs in isolation from passed-on costs, with the Producer Price Index (PPI) rate providing the main guideline for any cost increases. internal.

Similarly, the chief economist of the Minerals Council South Africa Henk Langenhoven suggested increases should be in line with PPI inflation, or else be governed within a band similar to that deployed by the South African Reserve Bank to manage inflation.

Independent energy analyst Clyde Mallinson also argued that the 2022/23 rise should be limited to the CPI, but suggested that the National Treasury simultaneously pump 400 billion rand into Eskom to deal with its unsustainable indebtedness.

“Eskom needs to be funded by the Treasury to encourage the government to look at policies that cause Eskom to need more money,” Mallinson explained, suggesting that such a move would create the political foundations for the implementation of a new solar wind system. storage-based system that would result in much lower tariffs by 2035.

In his presentation, Eskom CFO Calib Cassim urged Nersa to weigh Eskom’s costs on their merits, before deciding what regulatory levers or policy interventions could be used to offer support to consumers.

“We must not let affordability cloud the merits of Eskom’s bid and effective costs must be able to be passed on.”

Cassim also warned that more support would indeed be needed from the government if Nersa decided to implement a tariff more in line with the CPI than the double-digit hike outlined in its request.

According to Cassim, an inflationary increase would only cover PPI-related increases, which were 5.85% of the 20.5% sought, leaving no revenue to cover Eskom’s cost adjustments or carbon tax.

Such an outcome would have a “severe” impact on Eskom’s operations and leave debt commitments unhonoured.

“Eskom should then contact the National Treasury for additional support to continue operating.

“However, the government has indicated that there will be no further budget support beyond its current commitments,” Cassim added.

Full-Time Regulator and Hearing Chair Nhlanhla Gumede said Nersa would seek to balance consumer needs with those of Eskom when making its decision.

He said a decision on Eskom’s qualifying revenue would be finalized by Feb. 25, after which a rate determination would be made, likely in the first two weeks of March.

The determination of the tariff could still include an amount of 3.4 billion rand approved following the decision on the 2019/20 regulatory clearing account, approved at the end of 2021.

Eskom reiterated during the hearings that it did not expect to recover the R59 billion capital injection still owed to it, in accordance with a court ruling which found that Nersa acted unlawfully when it deducts government injection from Eskom’s qualifying revenue over the previous three years. determination of the rate for the year.

This, despite the fact that Nersa was not challenging, in a Court of Cassation case, the illegality of the subtraction, but rather whether the High Court judgment had overstepped the mark by stipulating a specific tariff instead of returning the decision to the regulator.

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