The Energy Intensive Users Group (EIUG) has called for an electricity price compact that sustains tariff increases as close to consumer price inflation as possible for the coming five years. The proposal is made in a precursor to the EIUG’s official response to Eskom’s latest revenue application, which will be adjudicated by the regulator in the coming months.
The EUIG’s mining and industrial member companies collectively constitute 40% of Eskom’s yearly sales and account for just over 20% of the country’s gross domestic product. In 2017, the companies directly employed over 650 000 people in South Africa.
Chairperson Dr Tsakani Mthombeni says in a statement that electricity tariffs, together with price-path uncertainty, represent the biggest threat to large power users in South Africa and that the economy could “no longer afford Eskom’s price shocks”.
Further tariff increases of 57% over the coming three years, as requested by Eskom in its fourth multiyear price determination (MYPD4) revenue application, would jeopardise the survival of its members, and threaten jobs in the productive sectors.
The National Energy Regulator of South African (Nersa) recently published Eskom’s application on it website, along with an adjudication timetable for the MYPD4, which includes public hearings in all nine provinces between January 14 and February 1 next year.
The regulator has also confirmed that it will deal with Eskom’s regulatory clearing account (RCA) submission for the 2017/18 financial year – the final year of the MYPD3 tariff period – as part of the same adjudication process.
The State-owned utility has applied for allowable revenue of R219-billion for 2019/20, R252-billion for 2020/21 and R291-billion for 2021/22. If granted, it would equate to tariff hikes of 15% a year over the three years, before any RCA allowances.
Consumers, Mthombeni notes, have already absorbed nominal hikes of 467% over the past 12 years, which equated to yearly increases of 15.7%.
“These price increases threaten our future. We are already beyond the tipping point for many sectors. Eskom’s sales to industry have declined by 22% overall and by 7% to mining from 2008 to 2018. There is a real danger that this trend will continue as these sectors become less and less competitive internationally. The impact on jobs and economic growth will be significant.”
The EIUG warns that Eskom’s own sustainability will also be threatened by further hikes, which would trigger a vicious cycle of further sales destruction, as additional hikes are instituted to maintain revenue levels on even lower sales.
RUN ESKOM FOR CASH
Over the medium to longer-term, the EIUG believes it will be necessary to revise Eskom’s business model to ensure its sustainability and the survival of its customer base, especially large power users.
However, in the short-term the organisation wants Eskom to take urgent steps to cut costs, moderate price increases and to sustain industrial electricity tariffs at levels that are in line with our competitor countries to enable.
“How could this be achieved? Firstly, the EIUG proposes that Eskom enters a compact with the country to keep price increases as close to consumer price inflation as possible for the next five years,” Mthombeni outlines.
This could be achieved, he adds, by “running Eskom for cash”, whereby the utility is allowed sufficient revenue to pay its operating costs and service its debt, but by disallowing depreciation as a cost item. It would also require cutting staff numbers and improving the management of primary-energy costs.
“This action will need the support of government, the regulator and labour. What it does is to give us sufficient time to properly plan and implement Eskom’s future state to stay relevant in a rapidly transforming electricity industry globally, while allowing Eskom’s customers (particularly its large power users) to survive the transition and keep the jobs.”
The EIUG also called for the establishment of a special committee, led by government, to review the effectiveness of the electricity supply industry, including: the regulatory environment; Eskom’s business model; current and future independent power producer programmes; and the future role of municipal electricity providers.
“Industry experts must be invited to contribute. After which, Eskom can develop a medium-term strategy supported by strategic plans in line with the desired future business model and the National Development Plan aspirations,” Mthombeni said.
Eskom is in the process of reviewing its strategy and has set a deadline of mid-November for its finalisation.
In the meantime, it has published its Medium-Term System Adequacy Outlook which highlights several risks to South Africa’s electricity supply for the period 2018 to 2023 and indicates that additional capacity will be required during the period to restore generation adequacy should the energy availability factor from the coal fleet fall below 75%.
The utility has also confirmed that the power system has become constrained, owing to a rise in unplanned outages and has warned that the system could be vulnerable to load-shedding in the coming months.