Eskom's crazy plan

Eskom has been battling to keep the lights on. Now it wants to shoot them out.

It tabled a set of options this week for electricity price increases. The bottom line is that all the options inflict great pain on the consumer and the economy; it’s just a question of whether the pain is inflicted up front or dispensed in doses.

In one scenario Eskom wants to push up the amount a household pays monthly from R700 to R3 000 over five years.

This is the Eskom economy, where a big chunk of a household’s disposable income is paid over to Megawatt Park, with disastrous implications for inflation and the ability of ordinary South Africans to put their money into fripperies such as groceries and school uniforms.

Economists are already saying that, as a result of Eskom’s planned raid on the pockets of ordinary South Africans, a likely rate cut next month will now not happen.

By one prediction Eskom’s proposed tariff increases could see inflation rise to 9%, leading to several interest rates hikes and much more expensive money.

Eskom’s price grab could mean hikes of 250% over five years, according to one economist.
With its revenues currently about R50-billion a year, this suggests an additional R125-billion a year for Eskom in five years time.

This is enough money to fund annually the equivalent of the giant 4 800MW Medupi power station Eskom is building in Limpopo province.

And this is where the problem lies. While Eskom needs new funds to build additional generating capacity, why does it feel the consumer must pay over a very short duration, while the power facility will earn income from the power station for a considerably long period, say as long as 50 years?

Stakeholders, including trade union Solidarity, want to see a return to Finance 101, where shareholders and/or investors tap the capital markets for long-term funding to be repaid over the life of the asset.

There is no doubt that Eskom faces challenges both in terms of operational and capital expenses. Operationally, though, the business does not appear to be that much of a disaster.

Revenues and costs last year were more or less equal at R53-billion and R54-billion respectively, suggesting that the power utility came close to being able to wash its own face.

This excludes a R10-billion loss on derivatives linked to Eskom’s exposure to the aluminium markets. It is less than frank on supplying details on the extent of its exposure to the aluminium price through contracts with the giant smelters at Hillside, Bayside and Mozal.

The large smelters individually consume as much electricity as our major cities, Johannesburg, Durban, Cape Town and Port Elizabeth.

Just five contracts with smelters and other very large users are responsible for as much as 40% of our electricity consumption.

Eskom has scandalously been writing big cheques to at least one giant company while at the same time preparing to squeeze several thousand rand a month in additional electricity tariffs from middle-income South Africa.

I speak of the R1-billion which Eskom paid to BHP Billiton during the six-month period between January and June this year in respect of the secret contract between the two companies.

Government’s strategy is now so poverty stricken that it is continuing its policy of sweetheart smelter deals. It will allow another giant smelter into the country at preferential electricity rates as soon as new capacity becomes available. This is the Rio Tinto/Alcan smelter at Coega which is set to consume 1 300 megawatts of electricity.

There is a refrain now from Eskom apologists which says that we have had electricity too cheap for too long. This certainly applies to the smelters.

One observer estimates that the smelters paid a paltry 15c a kilowatt hour for their electricity last year, but since both government and Eskom do not disclose this information, we cannot know for sure.

On Eskom’s disclosed figures, though, residential households paid 54c a kilowatt hour last year while industrial users, presumably excluding the smelters, paid 22c.

The 54c is more than the electricity prices paid in Australia and Canada and more or less the same as what was paid in France, Sweden and Finland, where rates were just above 60c.

The industrial rate, at 22c, seems very low.

It does appear that we have had too-cheap electricity for too long, but that the beneficiaries of the cheap power have been the giant smelters in the first case and industry in the second.

Eskom will need to supply more information on industrial rates worldwide to make its case before applying for massive increases to households, which consume only 20% of our energy in total.

It should know also that we cannot have an intelligent debate on how best to plan and pay for energy without the data about the sweetheart smelter deals being put on the table.

Eskom has to come clean. Until then we’ll have to think that its current offering is shock and awe akin to the bluster that George Bush mustered ahead of the invasion of Iraq.

Kevin Davie

Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote. Read more from Kevin Davie

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