The lower-than-expected electricity price hike will have to be paid eventually but in the meantime Eskom begs consumers not to use more power.
Eskom on Friday struggled to estimate the cost that the new, reduced tariff increases this year would have on its future’s finances but suggested the resulting shortfall would have to be caught up through price increases ... eventually.
The National Energy Regulator of South Africa (Nersa) estimated an average increase of 16% in electricity prices from April—opposed to the previously planned 25.9%—will cost the company R11.15-billion. The bulk of that—R8.1-billion—will come from returns that were due to accrue to the government as its sole shareholder but will now be deferred for an unspecified time.
“That shareholder return, over a period that will be agreed upon at some stage, will have to be built up again,” said Eskom financial director Paul O’Flaherty.
He made it clear the intention remained to eventually make Eskom capable of raising money on its own, instead of relying on government guarantees. That would require future tariff increases well beyond the rate of inflation.
The government had already deferred the payment of dividends on Eskom profits, but still required a non-cash shareholder return on investment which was factored into previous tariff calculations.
Asked whether treasury had approved the deferral, Public Enterprises Minister Malusi Gigaba said there had been general agreement between him and the ministers of finance and energy, but that the buck on state-owned enterprises (SOE) stopped with him.
“The only debate there is in ANC discussion documents now is whether we should get more SOEs,” he said, after being pressed on rumours of disagreement on who should run Eskom, Transnet and South African Airways.
Eskom could not say how credit rating agencies would react to the new reduction in annual increases.
Such agencies determine what interest rates Eskom pays for the R97.1-billion debt it has tallied to date and the hundreds of billions more required to complete new power stations.
Although confident its ratings would remain unchanged, a meeting with major agencies was only scheduled for next week.
“We have made sure that in terms of all our debt funders, that their returns remain intact and that in no way do we put our ability to service that debt and provide returns at risk,” said Eskom chief executive Brian Dames.
Eskom promised to file a multi-year tariff increase application with Nersa by the middle of the year, even though it would only come into effect in April next year in order to provide time for debate—and to avoid another last-minute adjustment.
One clear concern about the reduction is that major electricity users have already factored the far higher increases into budgets and will now be able to use more electricity than planned which could turn into a nightmare.
“The power system remains tight, none of that has changed,” said Dames, echoing pleas for reduced power usage from all users by Gigaba. “That is still a reality we have to deal with.”
Price elasticity or the degree to which demand will increase as the anticipated price drops is hard to predict.
The government hopes the “savings” manufacturers and others achieve through the lower tariff increases will be passed down the chain and ultimately lead to the creation of more jobs than would have been possible before.
Curiously, that directly contradicts the underlying philosophy on new urban freeway tolls—that increasing the cost of using under pressure infrastructure is an effective way of managing demand.