Nersa has very little room to limit Eskom’s proposed 32% tariff hike

On the eve of public hearings about Eskom’s application for a 32% tariff increase next year, it has become clear that energy regulator Nersa will have little room to deviate from Eskom’s numbers and limit the increase substantially.

Independent economist Elize Kruger earlier said such an increase will have a hugely negative impact on the economy.

“Households are already under huge pressure due to the high cost of food and fuel, high taxes and rising interest rates.

“An increase like this will increase the burden on households and limit disposable income, putting downward pressure on economic growth.”

Eskom on Thursday updated the assumptions underpinning its application for a second time since it was first submitted as a three-year application on 2 June 2021.

The total allowable revenue it asks for has however remained unchanged from its previous update in January 2022, at R351 billion.

This still represents a percentage increase of 32.03% from the amount Nersa approved for the current financial year.

The deadline for stakeholders to submit written comment has passed, but Nersa will hold public hearings next week where oral presentations will be heard.

In the past few years Nersa has often limited Eskom’s annual tariff increase substantially.

For the current year, for example, Eskom applied for a 20% increase, but Nersa approved only 9.61%.

Depreciation allowance

One of the biggest factors in that decision was a deduction of almost R26 billion from Eskom’s R68 billion allowance for depreciation.

Eskom based the amount it applied for on the valuation of its regulatory asset base of R1.2 trillion. This followed a revaluation by independent international experts.

Nersa however rejected the valuation and put the value at R550 billion, which informed the reduction of the amount for depreciation.

Eskom took this part of Nersa’s decision about its revenue to court and on Thursday revealed that the deadline has passed without Nersa filing a notice to oppose the matter.

Eskom GM for regulation Hasha Tlhotlhalemaje said Eskom anticipates some kind of agreement with Nersa, which will be made an order of court.

That means Nersa will have little scope for making big adjustments in the depreciation component of the application.

Bailout adjustments

Nersa is further obliged to implement a court order to add R15 billion to Eskom’s revenue in each of the following two years and R14 billion in the one thereafter, to partially compensate Eskom for an illegal deduction of R69 billion over the three years of the previous tariff period.

The regulator did this in lieu of an equity contribution by government over the same period.

Eskom proposes that these amounts be ring-fenced for its transmission and distribution businesses.

If Nersa agrees, this will go a long way to putting these two businesses on a sound financial footing and enable the attraction of investment.

The other two big factors in the increase are the cost of energy procurement from independent power producers (IPPs) and primary energy cost.

Eskom is applying for R67.5 billion in IPP cost, compared with the R43 billion Nersa granted for the current year. The increase is largely based on increased purchases, including those announced by President Cyril Ramaphosa as part of the emergency plan to stop load shedding.

The drivers behind the increase in primary energy cost from the R80 billion in the current year to almost R102 billion include the increased volume and price of diesel for the open-cycle gas turbines Eskom uses extensively to keep the lights on, and the increased price of start-up fuel oil.

Grid pressure

The public hearings next week will be held against a background of record levels of load shedding.

This is also reflected in the adjustment of the energy availability factor of Eskom’s coal fleet to 59%. The assumption in the Integrated Resource Plan is 75%, but even in its original application in June 2021 Eskom assumed 72%. This was adjusted to 62% in January and is now reduced even further to 59%.

Despite a wage agreement for a 7% increase concluded following a bruising wildcat strike a few months ago, Eskom did not adjust its operating cost.

Tlhotlhalemaje said it should be offset against a reduction in staff numbers.

This article first appeared on Moneyweb and was republished with permission. Read the original article here.