The National Energy Regulator of South Africa (Nersa) has announced that despite Eskom’s request of a 35% tariff hike, it will grant at least a 25% increase each year for the next three years.
Eskom is currently assessing Nersa’s judgment, but plans to call a press conference in the coming days to comment on the outcome.
“The hike announced by NERSA is in line with what we expected, although it’s at the bottom end of our predictions,” says Frost & Sullivan energy program manager Cornelis van der Waal. “We anticipated that 25% would be the very minimum for the increase.”
Van der Waal said that Nersa’s decision is sending out the message that while electricity must increase, Eskom cannot have the rate it requested and must look to new strategies to raise equity. “There is no question that we [South African electricity consumers] need to become more energy efficient,” he says. “The way we currently consume resources is not sustainable. However, it seems that the only way to get people to commit to efficiency is through pricing energy resources in such a way that they are forced to review their usage.”
Frost & Sullivan’s Analysis on Eskom’s Tariff Increase
van der Waal issued a report titled “The Implications of Eskom’s Tariff Increase for South Africa” analyzing what exactly Nersa’s decision really means for the state-owned utility. Read below:
The Implications of Eskom’s tariff Increase for South Africa
By Frost & Sullivan energy program manager Cornelis van der Waal
The National Energy Regulator of South Africa (NERSA) released its decision on Eskom’s tariff application yesterday. The final announcement has sent a strong message to both consumers and Eskom.
The tariff has been announced as:
20010/11: 24.8% making the average Eskom electricity price 41.31c per kWh
2011/12: 25.1% making the average Eskom electricity price 51.68 c per kWh
2012/2013: 25.9% making the average Eskom electricity price 65.06c per kWh
Implications for Eskom
Eskom is between a rock and a hard place. For many years government prevented the utility from constructing new capacity, but now that the build program is well under way, the decision makers cannot afford to provide the state-owned utility with what it needs to fund its R400 billion + program.
This means that Eskom will have to re-look at its options for raising capital. The most obvious scenario will be the sale of a significant portion of equity in either the Kusile or Medupi power stations. Alternatively it could lobby government for more funding.
Although the tariff increase will go a long way towards helping Eskom to achieve its build program goals, it is now most likely that some of the program will have to be delayed if alternative funding cannot be raised. This will result in further insecurity of supply in an already fragile system. Eskom will in any case have to commit to using its open cycle gas turbine plants (which run on diesel) until at least 2013. This will obviously increase its operational costs significantly and hence leave less money for the actual build program.
Implications for Industry
South Africa has for many years marketed itself as a cheap electricity destination. Businesses invested in projects based on the expectation that these prices will continue to provide them with a competitive advantage. It is well known that South African labor is neither very productive nor flexible and hence alternative competitive advantages have to be created in order to ensure continued economic growth. Cheap electricity fell into this category.
While the increase in tariffs is certainly better than the requested 35%, it will still have a massive impact on many companies’ ability to compete on the international market. South Africa already struggles with a negative balance of payments and if our manufacturing and industrial suppliers become even less competitive based on input costs, it could mean an even higher deficit. This is something that has to be looked at urgently by government and its broader stakeholders. With over a million jobs lost in South Africa during 2009, this certainly should be a massive red light to policy makers.
Specific industries expected to be very hard hit include mining (gold and platinum), petrochemicals, metal smelters and other industries where electricity comprises a significant part of the operational expenditure.
Implications for Residential End-users
Residential end-users of electricity who purchase electricity from municipalities already pay a high rate for electricity. It is therefore crucial that the regional electricity distributors (RED’s) system gets implemented as soon as possible to ensure equitable electricity pricing.
The poor will obviously also be hit hard and it is very likely that the demand for paraffin and gas will increase as consumers are squeezed further. NERSA and government at large will have to make sure that the poor do not bear the brunt of the proposed increases. At the same time, though, large businesses and industrial consumers cannot be expected to cross subsidize electricity. All end-user segments will have to be analyzed to ensure fair payment.
It is also very likely that illegal electricity connections will increase in future and government will urgently have to foster a culture of payment for services. Paying customers will have to identify non-paying neighbors and identify them as a drain to the system. These non-payers will have to be dealt with harshly and Eskom for one will have to increase its monitoring of electricity theft. It is unfair to expect paying citizens to subsidize the wasteful non-paying electricity thieves. The 15% increase granted to municipalities by Nersa is still too high, but it is at least better than a proposed 35%. A huge positive from the announcement is the block tariffs that have been approved and will incentivise customers to use less electricity. The block tariffs, in essence, result in a higher proportionate monthly bill the more electricity gets used.
Implications for Renewable Energy Companies
Although the current tariffs do not yet make renewable energy (RE) projects competitive against Eskom’s base load power, they do decrease the gap. Companies with sufficient risk appetite could potentially start looking at the implementation of RE projects and take a long term view on electricity pricing.
Frost & Sullivan believes that RE projects (and wind in particular) will be able to compete with traditional base load power in the not too distant future without being dependent on special tariffs (REFIT). The RE space is certainly an exciting market in which to be involved at the moment and early movers will enjoy the benefits of market access and preferential tariffs.
For such projects to materialize though, the single buyer office (SBO) needs to be established as a matter of urgency. Best indications are that it will be established before the end of 2010 – but the question remains how it will be skilled and who will take responsibility for it.
Implications for Neighboring Southern African Countries
Southern African countries have been dependent on Eskom power for too long. The rate increases and the lack of supply will force South Africa’s neighbors to invest more into their own power projects. This will greatly increase security of supply to the larger region and at the same time open the door for real electricity trading. South Africa’s neighbors have access to some incredible energy resources and the development of these should be explored with increased haste.
Key Action Steps
Although there is no single quick fix for the South African electricity crisis, Frost & Sullivan believes that there are a number of important steps that have to be taken as a matter of urgency. They include:
1) As mentioned before, the SBO has to be created urgently.
2) Independent power producers (IPP’s) have to be accredited and power purchase agreements must be signed without further delay. Although these IPP’s will likely not be able to alleviate the power crisis in the short term, their involvement in the market is needed to decrease the inefficiencies and lack of competitiveness South Africa currently experiences.
3) Eskom will have to re-look at its funding model and an equity partner will have to be sought for the current build program. Potential partners could include financial services companies, large industrial electricity end-users (including mines) and the general public through a share offering in the projects. The last method is least preferred by Eskom, but could potentially bring in the money needed to complete the projects on time.
Conclusion
The NERSA announcement certainly came in at the bottom end of Frost & Sullivan’s expectation, which was for an increase of between 25% and 28% per annum. It is good to see that the regulator took industry and end-users into account when they made their decision. Eskom will have a challenging period ahead trying to make ends meet and to complete the largest projects in its history.
The unfortunate truth is that South Africa has failed to take action for too long. There has been too much policy talk and too little action. It is now time for all stakeholders to become more creative in finding solutions – and more importantly to act decisively to prevent further damage to an already frail economy.
For more information on Frost & Sullivan’s analysis of South Africa’s electricity industry, please contact Patrick Cairns on patrick.cairns@frost.com.
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