Eskom's soaring energy costs questioned

Anton Eberhard, who is on the National Planning Commission, has assessed Eskom's options. (Gallo)

Anton Eberhard, who is on the National Planning Commission, has assessed Eskom's options. (Gallo)

But besides the tariff increases to pay for Eskom's current construction programme – the building of the Medupi, Kusile and Ingula power stations – the big question is how it is going to fund new generation capacity after that.

The country's 20-year electricity road map, the Integrated Resource Plan of 2010 (IRP2010), proposes that an additional 9600MW of electricity will be generated by nuclear power, which is roughly a quarter of the total new capacity needed by 2030.

The nuclear procurement programme alone could cost anything between R400-billion and R1-trillion, but another 32 000MW will be needed by 2030. How is South Africa going to pay for projects that will run into trillions of rands?

Eskom's current programme is testing its ability to raise the money for the rest of the programme. The utility's debt will peak at R350-billion in the next three years to pay for Medupi, Kusile and Ingula.
That will cost R27-billion a year in interest for at least a decade to pay it off.

The government has issued R350-billion in guarantees to enable Eskom to secure financing.

The recently postponed release of Eskom's latest multiyear price determination suggests frantic number crunching is going on behind the scenes. The delay, granted until the end of this month, was requested by the government to enable Eskom to "model additional scenarios". But media reports suggest Eskom is seeking a double-digit percentage hike in tariffs.

Transparent breakdown
Energy-intensive users are calling for a "more accurate and transparent breakdown" of costs, particularly because of the threat of further steep increases.

Professor Anton Eberhard from the University of Cape Town's Graduate School of Business and a member of the National Planning Commission said that the funding of new generating capacity, whether it is built and financed by Eskom or by independent power producers (IPPs), and the implications this has for tariffs are all interlinked.

Eskom has already incurred considerable private debt, which is constraining its ability to raise further loans against its balance sheet. On the other hand, IPPs could access alternative sources of funding. The renewable energy independent power producer procurement programme is testament to this: about R120-billion would be raised in the first three bidding rounds, Eberhard said. The entrance of IPPs will also make it possible to begin benchmarking Eskom against competitors.

He said Eskom could raise capital relatively cheaply, but that does not mean it executes capital projects efficiently and cost-effectively. Being able to measure Eskom's performance will have an impact on tariffs. "If we have efficient benchmarks, we can regulate Eskom more effectively," Eberhard said.

It will be harder for Eskom to ask the regulator for high tariff increases to cover unreasonable cost escalations, he said.

Expansion costs
His research shows that, since the 1970s, tariff increases in real terms are now rising at much higher levels than the historical mean, even higher than at the peaks when the country was investing heavily in new power stations.

The rise in commodity prices is likely to be a contributing factor, but the question is whether Eskom has been managing capital expansion costs effectively.

Besides raising private debt, another option is the equity markets. It has been done in Kenya, where the state utility's transmission and generation functions are split into two separate businesses. Each listed a portion of their shares on the Nairobi Stock Exchange, he said.

But one has to be careful about privatising Eskom as a whole, given its current market power. It would make more sense to sell some of its power stations to create more competition, which has been considered in the past, although it is unlikely in the current political context.

"What is more likely to be discussed now is the extent to which the government could offer further guarantee support, over and above what it had already provided Eskom," he said.

Another option is the formation of joint venture companies to build power stations. They could be in partnership with private companies, or even with other state companies, such as China's, Eberhard said.

He said that the IRP2010 should be constantly updated. It is already out of date and does not reflect new information on gas, for example. "One immediate improvement would be to make it clear that IPPs can wheel across the grid and sell directly to large customers, including municipalities, rather than Eskom being the single buyer."

Transmission assets
But the government and Eskom are dragging their heels over reforming the electricity sector. They asked Parliament this week to delay the Independent Systems and Market Operator Bill until January next year so they can better understand the financial implications it will have on Eskom. At the core of the matter is whether its transmission assets should be transferred to the new entity along with systems operations functions.

Eskom said that the loss of its transmission assets will hurt its balance sheet and have a negative impact on its debt covenants and credit rating, hampering its ability to raise funds. It could also risk the security of supply, given the close working relationship between the systems operator and its generation business.

But, Eberhard said, the creation of an independent systems and market operator, or better still, a transmission system operator, is critical. It will establish a neutral, central place for the planning, allocation, procurement, contracting and dispatching of power and facilitate the entry of new players.

Including transmission in the systems and market operator is very important, he said. Investors have to be confident that they will have comprehensive and equal access to the grid.

He did not accept that Eskom's argument that stripping the utility of its transmission assets will have severe financial and operational implications for the utility. "Transmission makes up a very small portion of Eskom's total asset base and the argument that it will impact negatively on their debt covenants and credit rating are simply not credible," he said.

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