The age of cheap electricity is over

The government’s R60-billion capital injection for Eskom will come with strings for the parastatal’s management, and added pressure on the regulator to raise prices sharply.

The National Treasury is negotiating with Eskom and the Department of Public Enterprises over how to structure state support for the utility’s R373-billion new investment. It seems that a mix of loan finance options and a cash contribution that will be styled “equity” is most likely.

Director General in the National Treasury Lesetja Kganyago says the final package will probably combine an ordinary loan, a subordinated loan, a loan guarantee and cash.

A direct loan would mean Eskom doesn’t need to raise quite so much cash in the bond market, but it would increase the utility’s gearing, and probably not help its credit rating.

A subordinated loan would mean that the government effectively agrees to stand last in line as a creditor, effectively taking most of the risk an allowing other lenders to view the state contribution almost as if it were equity. That would help preserve Eskom’s credit rating and cap its borrowing costs.

A loan guarantee would have a similar effect, without requiring the treasury to stump up cash from the fiscus. “Entities like the Trans­Caledon Tunnel authority keep on losing money year after year, and people keep on funding them,” Kganyago explains, because the government stands security.

Finally, a direct cash injection, which “means you are taking additional equity”, would cost taxpayers the most but would also be most beneficial to Eskom. Asked how the state could take more equity in a company of which it owns 100%, Kganyago said it was important that this cash contribution not dominate the package “or else we would not be able to hold management to account”.

The money would, in effect, be spent and there would be no calling it back.

Any loan would be the first required by Eskom since 1931, and Finance Minister Trevor Manuel was at pains to insist the R60-billion would not be a grant.

Nevertheless, Kganyago said, it would be much easier to justify the R60-billion for Eskom than the R4,5-billion the Treasury has given the Department of Public Enterprises to bail out the technically insolvent Denel and troubled South African Airways. “[That] pains me … it didn’t produce any new infrastructure; it was to deal with the excesses of the past.”

Kganyago agrees that the R60-billion package has bought the Treasury a seat at the table in discussions with the National Energy Regulator of South Africa (Nersa) about changing the way it considers Eskom’s requests for price increases. And the Budget Review suggests it will ask for some sharp increases. Currently Nersa considers tariffs on the basis of Eskom’s average cost of generation, about 15c a kilowatt hour.

The Budget Review argues that the marginal cost of adding new capacity should instead be the guide. In other words, not what electricity from all South Africa’s power stations costs, but what it costs to add additional megawatts to the system. Based on the current cost of adding capacity, this calls for a six-cent (or 27%) increase in average prices. But basing the increase on the future cost of new capacity would add 15c — 70% — to current prices.

“Previously the argument was that the departments of minerals and energy and public enterprises must make the case to Nersa; Treasury was just a commentator. That is no longer the case,” Kganyago said.

Eskom secures 34m tonnes of coal

Eskom’s rescue plan to secure coal for its woefully depleted stockpiles has already seen the utility secure 34-million tonnes of coal supply, report Nic Dawes and Lynley Donnelly. At a press conference on Thursday, the utility was positive that it is on the road to recovery, though “not out of the woods yet”.

Manuel said on Wednesday that “energy intensive projects [would] be deferred”.

Eskom would only say on Thursday that talks with “various players” were still in the very early stages.

It seems more likely, however, that big new smelters, such as the proposed Alcan/Rio Tinto plant at Coega, are off the table for the foreseeable future.

Kganyago did not want to be drawn on which specific projects Manuel had been referring to, saying “you do the maths”, but he made it clear that smelters are no longer seen as a suitable driver of economic development.

“There would be no point adding a project that takes 2 000 to 3 000 megawatts out of the system, and at a time when you are doing load-shedding it would be difficult to bring in someone and say they won’t [be subject to] it,” he told the Mail & Guardian.

Eskom acknowledged on Thursday that it would be paying “significantly higher” prices per tonne of coal than it has in the past. It added that logistical transport challenges remained a concern.

Eskom would not disclose how much it will be paying for this coal. It has reportedly paid between R120 and R200 a tonne in the past.

Brian Dames, MD of enterprises at Eskom, said on Thursday that Eskom will be getting its coal from “various suppliers within South Africa” and did not foresee that imports would be required to meet the 45-million additional tonnes that it requires. Having secured 34-million tonnes internally, Dames was confident local mines could meet the shortfall. He said that his team was only concerned about procuring two million tonnes of the coal required.

Logistical transport challenges were of concern, however. Dr Steven Lennon, MD of resources and strategy at Eskom, said that while rail infrastructure to supply the coal does exist, it is not enough. The company is building a heavy-haul coal line, but it will only be up and running in two years.

“So we remain heavily reliant on trucks and roads, and transport costs add to coal costs,” he said.

Hey, big spender

Spending by the Department of Public Enterprises has increased at an annual average rate of nearly 90% since Alec Erwin took it over from Jeff Radebe in 2004, the Estimates of National Expenditure released on Wednesday reveal.

Expenditure is up from R678-million during his first year in the portfolio to R4,6-billion this fiscal year as a result of cash injections to parastatals that flow through the department. Those transfers grew at an annual rate of 95% over the four year period thanks to:

The flow of cash from the fiscus to state-owned enterprises, however, should be stanched over the next three years, falling to R316-million by 2010/11, excluding the massive loan package the state will give Eskom, but Erwin’s pet projects are not about to be cut off just yet.

Over the next two years, R4,9-billion is set to be transferred to state-owned enterprises, with the vast bulk of it, R3,5-billion, allocated to the PBMR. By 2011, however, only Infraco is expected need big state transfers — a snip at R140-million.