Eskom shocks with 30% price hike request

Should the National Energy Regulator of South Africa approve Eskom’s application for a 30% price increase, the country runs the risk of killing off economic activity, increased job losses, and numerous business closures, according to experts in economics, energy and mining.

Coupled with increases in Value Added Tax (VAT), fuel levies, and an approved 5.2% electricity price increase on April 1, consumers should tighten their belts.

Eskom’s application is based on their Regulatory Clearing Account that compares uncontrollable expenses and income, as assumed in the multi-year price determination (MYPD), to the company’s actual income and expenses. This allows Eskom to apply for increases over and above the MYPD to cover shortfalls.

Eskom is yet to file its five-year MYPD application, which could see another 20% increase.

Eskom has calculated a shortfall of R66 billion in their projected income since 2014.

But mining and energy expert and interim CEO of GNCC Capital, Ted Blom, believes the approval of Eskom’s application could be seen as a tacit endorsement of corruption and mismanagement, since the proposed electricity price hikes are believed to have been necessitated by shady dealings eating into the utility’s income.

He believes the public are paying for corruption at the parastatal. Nersa should reject the application, “because Eskom has already made a big profit in each of these years”, Blom said.

More than half the claims relate to Eskom’s unrealised sales predictions being “ridiculiously optimistic and unfounded”.

Blom claims evidence suggests that Eskom’s costs exceeding their budgets are the result of poor management and corruption during the period covered by the public protector’s report into the utility. The company has failed to present any independent investigation into its finances, which separate the irregular or illegal contracts from non-corrupt activities.

Blom also blames a bloated workforce for the power giant’s financial woes: “Eskom employs about 30 000 more people than a comparable utility with the same sales profile – plus the salary of Eskom’s staff is more than four times that at overseas utilities.”

Civil society movement Outa has echoed Blom’s objections to the increase, citing the Electricity Regulation Act, which states only an efficient utility is entitled to acquire a return on its operations.

Ronald Chauke, Outa’s energy portfolio manager, said: “Eskom is clearly not an efficient organisation and Outa believes that if Eskom’s leadership applied prudent primary energy procurement and strong auditing practices, the primary energy expenses incurred by Eskom over the past seven years should be about R286 billion lower than they are.”

Outa has calculated that the cost of producing electricity, which is largely linked to coal procurement costs, has increased by 347% per year, despite a reduction in coal volumes burned. They claim overruns on new projects have added a further R20 billion loss to Eskom’s liabilities.

“This coincides with rampant corruption, dubious coal contracting and poor management.”

According to chief economist at the Efficient Group Dawie Roodt, Nersa granting Eskom’s increase could accelerate de-industrialisation, since SA’s electricity prices are already steep when compared to other economies.

“Inflation will accelerate. This will eventually lead to fewer cuts in interest rates, and maybe even higher rates.”

Eskom did not respond to The Citizen’s enquiries, saying they are expected to deliver a presentation on the matter to parliament today.

What are the solutions to Eskom’s electricity price impact on citizens?

• Dawie Roodt believes privatisation of the utility would lead to the market dictating the price, since “neither Eskom nor Nersa know what the correct price of electricity should be”.
• Ted Blom suggests a task force to clean up Eskom and return it to previous benchmarks.
• Blom also suggests opening the grid for willing generators of power and let market forces decide who is competitive, as a solution to the current impasse regarding independent renewal power supplier contracts.         Info:
• According to Blom and Outa electricity should be priced at close to 35c/kWh, when inflated coal supply prices and other wasteful expenditure are removed from the equation.
• Municipalities are currently paying 89.13c/kWh, excluding VAT.
• When the new tariffs kick in on April 1, this will increase to 93.79c/ kWh, excluding VAT.

– news@citizen.co.za

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