Big-profit Eskom prepares for next round of increases

The interest on Eskom’s R340-billion build programne increased to R23-billion this year. (Madelene Cronjé, M&G)

The interest on Eskom’s R340-billion build programne increased to R23-billion this year. (Madelene Cronjé, M&G)

Eskom’s profits soared to R13.2-billion on the back of increased tariffs, it announced in its annual results on Thursday. They were up from R8.4-billion last year, representing a massive 58.5% increase.

The steep rise in profits suggests that the three-year cycle of 25% tariff increases that the electricity parastatal was granted in 2010 substantially overshot the mark.
This granted it ample room to drop the last round of increases for the 2012/2013 financial year to 16% instead of 25%, which Eskom announced to much fanfare earlier this year.

Meanwhile, sales growth, measured in gigawatt hours, had only increased by a very low 0.2%.

But Eskom financial director Paul O’Flaherty said the profits were in line with what the National Energy Regulator of South Africa had granted the company.
According to its accounting practices, Eskom capitalised its interest costs, he said.

With the interest capitalised, it did not reflect on the company’s balance sheet.

Tariff increases
The interest Eskom has to pay on its R340-billion build programme, which includes new power stations Medupi and Kusile, increased to R23-billion this year. It will hit R120-billion in the next five years.

The company is preparing its application for the next round of tariff increases, which it will submit to the regulator by the end of July, according to chief executive Brian Dames.

Although the company had worked to rectify the commodity-linked electricity contracts with large aluminium smelters, Dames said Eskom had yet to finalise revised contracts with BHP Billiton’s smelters in Richards Bay.

But the volatility on these contracts had been reduced substantially and this year had seen a small gain on embedded derivatives of roughly R334-million.

South Africa’s electricity system still remains very constrained. With  its buy-back programme, Eskom has been paying large customers to shut down their operations over peak hours. This cost the company a total of R1.8-billion.

Because of the continued strain on the power grid, the cost of running the open-cycle gas turbines increased by more than 280%, costing R1.5-billion last year.

The cost of primary energy, chiefly coal, increased by 29% during the year. Included in these costs is the power Eskom buys through its buy-back programme, power from independent power producers and the costs of running peaking power plants or its open-cycle gas turbines, which run on diesel.