Price path for electricity in SA unsustainable

The Energy Intensive Users’ Group (EIUG) has raised concerns that the price path for electricity in South Africa may place consumers and business under even greater pressure in the next few years, since the first round of tariff hikes in 2010

Eskom’s results for 2011, released in June, show an expected rise in total revenue by 28.6 per cent on the back of the 24.8 per cent electricity tariff increases last year. But a spokesperson for the EIUG said it was of concern that primary energy costs have increased by 19.8 per cent.The EIUG says this is a significant increase over and above the 17 per cent increase in primary energy seen last year and expects NERSA to conduct an audit to determine the root causes.

In real terms the average Eskom price this year will be ~50c/kWh. Taking into account that new generation costs about 75c/kWh and adding 30 per cent for transmission and distribution, the electricity price could end up close to a whopping 100c/kWh.  Municipal customers will pay more, while Eskom transmission customers will pay less as NERSA has recommended that municipalities charge an extra 15 per cent for 2010/11, then 16 per cent for each of the next two years.

Taking into account the blending of old and new assets it would be expected that customers should not pay more, and should preferably pay less, than 100c/kWh. Unfortunately, Eskom has been allowed to revalue its assets and so the price advantage of blending has been lost.

Average tariff

The EIUG expects the average tariff to settle around 75c to 80c/kWh by 2016, which means that customers can expect another 50 per cent to 60 per cent increase over the next three years. The group, which represents the biggest business energy users in the country, says it should be a priority to hold increases as low as possible, so as to ensure Eskom’s financial sustainability, while ensuring affordability and competitiveness.

The EIUG supports the need for a strong and healthy Eskom and recognizes the importance of the power utility to the economy of South Africa. However, there is also a need to balance Eskom’s financial health with the affordability of electricity to ensure that consumers do not suffer unduly, and that businesses are able to remain competitive. The next tariff increases will have adverse effects, and far reaching implications for all South Africans. These price increments add additional pressure to Industrial customers to just maintain current production levels and further price increases will result in production halts and job losses, which South Africa can ill afford. Furthermore this demand destruction has further negative impact on price increases leading to further business failures. South Africa has already seen the effect of rising electricity prices on key business sectors, for example, beneficiation which is one of the pillars of the Government’s New Growth Path Plan. 

Job impact

The EIUG are undertaking an industry wide impact assessment of the electricity price path. “We have seen a number of refineries and smelters closing down and need to determine how poor the outlook is to ensure South Africa doesn’t shed critically needed jobs”. The EIUG is urging all companies currently concerned about the impact of electricity prices to go to www.eiug.org.za to register to participate.

The EIUG says Eskom’s results show that the power utility has invested a significant amount of cash in securities, perhaps as a result of borrowing too much cash and having to invest the excess. Clearly, Eskom is not spending as much Capex as expected.

The power utility’s cash position is looking good with interest cover going from 0.83 to 1.54. Ideally, this should be above 2.0 and possibly even 2.5. Debt service cover ratio has gone down slightly from 2.5 to 2, which is acceptable but shouldn’t drop further. The next round of tariff increases will push Eskom’s finances into a very comfortable zone. Regulatory Return on Assets (ROA) is approximately 7.5 per cent, with Eskom and NERSA aiming for 14 per cent. The EIUG says this will increase cash and profitability to unnecessarily high levels and has argued for a ROA target of 11.5 per cent to mitigate the current unsustainable price path.

The debt percentage is around 62 per cent, which is very close to the target of 60 per cent.

Overall, the EIUG says, Eskom’s financial position is looking much better and virtually all financial indicators are improving, but the group cautions that electricity prices must not be “overcooked” or South Africa will suffer.

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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