/ 22 January 2008

Eskom: SA should expect steeper prices

Embattled South African power utility Eskom warned on Tuesday that current electricity prices were unsustainable and South Africans should expect steeper price increases in the near future.

Eskom’s statement comes as the country faces a crisis in the wake of national power cuts, and a little over a week after the utility was placed on a credit watch negative by Standard and Poor’s (S&P).

The National Energy Regulator of South Africa (Nersa) last year approved a 14,2% price increase for the 2008/09 financial year over Eskom’s application for a rule change that would have resulted in an average increase of 18,7%.

“We are considering the implications and the options available to us to manage the situation,” said Eskom finance director Bongani Nqwababa.

In its first detailed response since Nersa’s December decision, Eskom said that the lower price increase will make it “even harder” for it to satisfy conditions in the current financial markets to assure the funding needed for the capital expansion programme to ensure security of supply.

It said that its inability to implement higher price increases meant it would now have to borrow more to fund its expansion.

Eskom’s 20-year capital-expansion plans run to R150-billion but market watchers have warned that the utility could end up paying double that amount.

“This results from Eskom’s plans to materially increase its capital-expenditure programme in light of the tightening capacity margin in South Africa, as well as significant inflationary pressures, primarily on fuel prices and capital equipment,” S&P credit analyst Mark Davidson said earlier this month.

As much as 75% of the total capital expenditure is expected to be financed by the investment community, while the balance may have to come from the South African government, Eskom’s only shareholder.

S&P said Eskom might turn to the government for potential capital support as a means of mitigating the negative impact full funding would have on its credit ratings.

If funded entirely with debt, the investments would result in a material weakening of Eskom’s credit metrics, even with a sizeable increase in tariffs, S&P said.

Already Eskom is warning that “current electricity prices are unsustainable” and warns that this would “result in steeper increases being required in the near future”.

Eskom said it wanted to use the higher increases to address the recovery of the costs of primary energy (fuel) and for the acceleration of its capital-expansion programme to meet growing demand for electricity.

“Higher fuel costs are due to the fact that coal prices had risen over 30% in the last year, adding to power-generation costs. Furthermore, the cost of plant and equipment has risen by 20% to 50% in the past year, and has doubled in five years,” the utility said.

Car makers ‘not affected’ by load shedding

Meanwhile, South African vehicle makers Toyota, Volkswagen and Nissan said on Tuesday that Eskom’s load shedding was not affecting them.

“Our main plant in Durban is not affected at all because we have a direct power supply, but our component suppliers have failed to deliver parts on time because of this,” said Henry Gazendam, Toyota South Africa’s executive vice-president.

But Gazendam described the impact as “minimal” and “manageable”.

“We are not affected at all. Our operations are running smoothly,” said Heidi Bantam, a communication official at the Uitenhage-based Volkswagen.

Pretoria-based Nissan South Africa said it was also not affected by the power cuts.

“We fortunately have not had any Eskom electricity supply interruptions recently, but should our electricity supply be interrupted, it will affect us severely since production will be stopped completely,” said Veralda Schmidt, spokesperson for Nissan South Africa.

She added that the company would continue to monitor the situation and continue to seek alternative power supplies such as generators to ensure minimum disruption.

Eskom’s nationwide power cuts have frustrated businesses and individuals and is set to continue for between five and eight years.

‘Nothing to do with skills shortages’

The National Union of Mineworkers (NUM) said on Tuesday it laments the chaotic situation in which the country has landed as a result of energy capacity problems but refutes trade union Solidarity’s argument that it is due to skills shortages.

“This lack of energy capacity has nothing to do with skills shortages. We acknowledge that the country has skills shortages but deny that the problems at Eskom has to do with it,” Frans Baleni, the NUM’s general secretary, said in a statement.

“The government conceded that the problems we face are due to its energy policies of the time, which ten years ago rejected Eskom’s proposals that could have enabled the parastatal to increase capacity and thus alleviated the current problem,” Baleni argued.

“It was the government’s insistence that the invisible hand of the market will solve the impending capacity problems that led us to this [sic] troubles,” he added.

“It is the high demand for electricity and increasing economic activities that led to these major capacity problems. To argue that it is lack of skills that led to all this undermines the thousands of people employed at Eskom.

“Unless we are convinced otherwise, the implication of such an argument is that the employees at Eskom, whom many are largely Africans, are synonymous with lack of skills and incompetence. — I-Net Bridge