Eskom facing ‘unsustainable’ 2.2% tariff increase

Eskom is expected to issue a press release on Wednesday that will unpack the negative impact a 2.2% tariff increase would have on its financial stability.

This follows after energy regulator Nersa’s electricity committee on Tuesday rejected an Eskom submission motivating for a bigger increase.

The committee recommended to the energy regulator that the 2.2% increase based on the earlier multi-year price determination (MYPD3) be approved and that Eskom should submit a formal application if it wanted anything more.

The regulator is expected to make a final decision during its meeting scheduled for February 23.

On Tuesday afternoon, after the committee meeting, Eskom urgently informed public enterprises minister Lynne Brown of the unfolding situation, Eskom spokesperson Khulu Phasiwe told Moneyweb.

Nersa earlier confirmed that it considers a 2.2% increase for Eskom unsustainable.

Any further application from Eskom, the committee stated, would have to be made available for public comment. That means the chances are extremely slim for it to be finalised before the increase has to be tabled in parliament by March 15.

There is a possibility that the tabling could be postponed with special permission from the minister of finance. That would, however, buy Eskom only two weeks, since the tariffs have to be implemented on April 1, when the new financial year starts.

Municipalities are also waiting for the announcement of the increase in Eskom bulk tariffs, in order to finalise their budgets. Draft budgets incorporating the Eskom bulk increase have to be tabled in municipal councils by the end of March.

Eskom had earlier submitted two interim tariff applications in terms of the Regulatory Clearing Account (RCA) mechanism that allows it to claw back over-expenditure and under-recovery in previous years under certain circumstances. The two applications total R43 billion.

The North Gauteng High Court last year set aside the interim increase Nersa granted Eskom from April 1, 2016. Eskom and Nersa appealed against the ruling and while the appeal is pending, Nersa has shelved the two Eskom applications.

In the wake of the ruling Nersa seems to be extremely cautious and set on following due process.

It is now unclear what mechanism Eskom could use to apply for an increase over and above the 2.2%. During the committee discussions on the proposed increase Nersa chair Jacob Modise said Eskom could base its formal application on financial distress.

In the same meeting an Eskom request was tabled for Nersa to allow it to submit a one-year tariff application for 2018/19. This comes as MYPD3 draws to a close on March 31, 2018.

Eskom was expected to submit a further multi-year tariff application to be implemented from April 1, 2018 in terms of new methodology Nersa recently approved.

The purpose of the multi-year price determination is to provide price certainty to its customers.

Eskom argued in its submission that there are too many uncertainties in the current environment to make forecasts more than one year in advance. It cited the fact that the Integrated Resource Plan, the Integrated Energy Plan and engagements within government about the incorporation of further Independent Power Producers (IPPs) have not yet been finalised.

The energy regulator is expected to make a final decision on the matter come February 23.

Moneyweb earlier reported that should the Eskom tariff increase be limited to 2.2% this year, it could result in an increase of more than 20% next year.

The electricity committee did not approve Eskom’s application to grant discounts to the company Silicon Smelters. The committee heard that the company first approached Nersa for relief, but was referred to Eskom.

After negotiations Eskom approached Nersa for permission to grant Silicon Smelters discounted tariffs through a system of rebates based on the international price of silicon. The discounts would only be granted for two years, where after the company expects the silicon price to recover. Should the price increase above a certain point, the discount would fall away.

Silicon Smelters, with plants in Polokwane and Emalahleni, would in return allow Eskom to cut its supply during periods of peak demand.

The committee agreed that intensive users should be encouraged to use more electricity, but had reservations about granting the application without a proper regulatory framework. It decided to develop such a framework, but kept the door open for the energy regulator to approve the application later this month, provided the principles guiding such a decision are properly set out.