Eskom Applies For a 16% Tariff Increase

Eskom is asking for a 16% tariff increase so that it can keep the lights on.
Published: Thu 25 Oct 2012

What happened

South African state-owned utility, Eskom, is asking the National Energy Regulator of SA (Nersa) for a 16% tariff increase over the next five years, reports Business Day Live. Of this, 13% will go towards Eskom’s operating needs and the remaining 3% will go towards supporting the introduction of Independent Power Producers (IPPs).

Background                                                    

The increase is necessary to cover the utility’s rising costs, explains Eskom’s chief executive officer Brian Dames. He adds that the increase is necessary for a growing economy. He lists maintenance work, financing of new capacity, participation of IPPs and striking a balance to protect the poor as reasons for the tariff hike. The tariff is set to rise from the current 61 cents per KWh in 2012/13 to R1.28 per KWh in 2017/18.

The 16% increase is actually an average, explains IOL. Industries and business can expect a 21% increase and residential consumers, 14%. Less-advantaged residential consumers, who use less power, will see a drop of 1% in the tariffs and some will only see a 5% increase.

The Chamber of Mines is already balking at the tariff hike. The Chamber's chief executive Bheki Sibiya says that if the price increases by more than 100% over the next five years, many platinum mines will have to shut down.

Black Business Council (BBC) general-secretary Sandile Zungu says the high electricity tariffs will contradict the country's aim of creating jobs and boosting economic growth.

The bad news is that the 16% increase may actually be insufficient, reports IOL. Eskom may have to apply for a 20%-a-year increase over five years instead if it has to build additional power stations.

Dames says that the five-year tariff plan should help strengthen investor confidence. The request will total "just over a cumulative R1 trillion over five years."

The application is based on new capacity. This includes power from the new Kusile power plant, the Department of Energy's peaker plant (a power plant that operates during high demand only) which represents 1,020 MW, as well as the renewable energy IPP program which caters for a total 3,725MW of renewable capacity.

The current Multi-Year Price Determination, (MYPD) 2, comes to an end in March 2013. The new MYPD will, for the first time, see the introduction of thousands of KWh of electrical capacity from private sector producers. This will be purchased at levels higher than Eskom prices, reports Business Day Live. Eskom says the cost of buying power from independent power producers (IPPs) will increase from R5bn in the 2012-13 financial year to R22bn in 2017-18. This falls under Eskom’s renewable energy IPP bid program which will see the purchase of 3,725MW of clean power by 2016.

The country’s government has committed to introducing 17,800MW renewable energy to the grid between 2010 and 2030. According to the country’s integrated resource plan for electricity (IRP2010), 45,000MW of new generating capacity will be built by 2030. The total capital cost of the additional capacity will be R3.5tn. Therefore, consumers will have to accept that the country’s developing renewable energy industry rests on their shoulders, writes Business Day Live.

Public hearings for the application are expected to be held in January 2013.

Last Word                                    

Many businesses are concerned that South Africa will go from having the cheapest electricity in the world to being one of the most expensive. This could result in the country’s electricity becoming uncompetitive in the global arena. Brazil’s high electricity tariffs has dissuaded much foreign investment and local companies have been forced to close down due to high operating costs, unable to compete with overseas companies. [Read: Investors Lose Confidence in Brazil’s Power Sector] The sudden cut in the country’s power rate has also led to further investor uncertainty.