/ 16 April 2014

You will pay to bail out Eskom

Needing a pot of gold: Eskom's financial crisis provides an opportunity to relook at the way the parastatal is funded.
Needing a pot of gold: Eskom's financial crisis provides an opportunity to relook at the way the parastatal is funded.

Financially embattled Eskom has run to the government for additional funding to pay its spiralling bills. But the treasury has refused and said it will not fund the utility from its strained coffers, and the energy regulator couldn't help even if it wanted to.

Faced with a shortfall of hundreds of billions of rands, significant delays in bringing new power stations on line, the recent bout of load shedding, escalating costs and now serious talk of a requested bailout, Eskom is in trouble – with seemingly nowhere to turn.

The treasury has made it clear that its cupboard is bare: it does not have the funds to bail out the power utility. Its view is that the state-owned enterprise must fund its additional costs itself or turn to electricity users.

But the National Energy Regulator of South Africa (Nersa), an independent body meant to represent consumers in a tariff determination, is standing firm on its decision to grant a far lower electricity tariff increase than what Eskom applied for. In any event, its hands are tied for another year.

Cost pressures are owed partly to a funding gap of R225-billion over five years, which Eskom claimed was not covered when the regulator last year granted it a tariff hike of 8% a year and not the 16% it applied for.

This leaves a shortfall of R45-billion a year.

Additionally, unforeseen costs are mounting up. Among them are an R8-billion budget overrun in diesel costs to run open gas cycle turbines and escalating costs related to the construction of new power plants, including R2-billion paid in penalties to the mining company Exxaro under a coal supply agreement for the long-delayed Medupi power station.

The Duvha power station experienced damage to its boiler and feeder coal conveyor, which required trucks to supply the coal to keep it operating.

The utility has been forced to look at its own cost structure and implement cuts in the hope of saving R1-billion a year over five years. But it is small fry compared with the bills that continue to rack up.

The treasury has said it will not fund costs arising from risks not provided for in the regulator's tariff determination, such as "further delays in the bringing into operation of the first Medupi units or a decline in electricity usage".

It's hardly a surprising response in light of a budget deficit at 4.7% of gross domestic product and debt service costs expected to account for 10% of government spending.

"The government has no scope to give Eskom cash in the context of an expenditure ceiling that government has imposed as a matter of necessity," the treasury spokesperson, Jabulani Sikhakhane, said. "So electricity must either fund itself or must be paid for by those who use it, not taxpayers through general revenues."

Sikhakhane said the treasury had already given Eskom a R60-billion subordinated loan and R350-billion in guarantees – against which Eskom has so far raised R122-billion. The treasury believed this was sufficient to complete the building programme, provided there were no risks other than those provided for in the determination.

When the department of public enterprise was approached for comment, spokesperson Mayihlome Tshwete said that the sustainability of Eskom "is as much a concern for the treasury and the department of energy as it is for us. I don't think they would say anything as conclusive as that."

Tshwete said the treasury's response must be referring solely to the R8-billion budget overrun on diesel to keep open cycle gas turbines running – and the lights on.

Nersa said it stands by its tariff determination, although it has said its decision can be taken to the high court for a review.

An executive at the regulator said Nersa is monitoring Eskom's financials all the time but, even if a tariff adjustment was in order, "for the first two years of the MYPD [multi-year price determination], there is not much we can do."

The discussion between Nersa and Eskom is about the regulatory clearing account, which keeps track of projected and actual costs after the determination period to see whether Eskom experienced an underrecovery or an overrecovery. If the difference is large enough, it could lead to a higher tariff increase or decrease. The discussion currently pertains to the multi-year price determination period, which has passed.

Despite the regulator's insistence that it has no plans to raise the electricity price soon, the director of Economist.co.za, Mike Schussler, said Eskom's current dilemma will inevitably result in a tariff increase.

"That's the way the cookie is going to crumble," he said.

"I can't see this ending in any other way. It's a stuff-up. This is a monopoly that refused to buy anything from the private sector … [if it had] it could have averted this a long time ago."

Nersa's tariff decision followed representations from businesses that claimed they would suffer, or even go under, if Eskom was granted a 16% increase. But the 8% it granted Eskom raised the concerns of the Energy Intensive User Group.

"We won't say we weren't delighted by the 8% increase but it did raise some concerns and we do anticipate some increases coming," Shaun Nel, the executive director of the group, said. In its submission to the regulator, it said a 10% increase for five years would have been a fair balance.

Nel said the situation provided an opportunity to rethink the way the parastatal is funded. "We need to relook at Eskom's funding process significantly; we can't just fund every­thing out of the tariff."

Andrew Kinghorn, of Shava Mining Enterprise, said that Eskom's shortfall is likely to be between R50-billion to R100-billion a year.

Schussler said the increase needed to keep Eskom in business would likely be about additional five or six percentage points, raising the tariff to about 14%.

Eskom's dire situation may not come as a surprise to most South Africans but the fact that the utility has about R43-billion sitting in the bank, as stated in its interim report, might raise a few eyebrows.

But Doug Kuni, the chairperson of the South African Independent Power Producers' Association, said these funds were made available to Eskom to complete the new power stations and not to meet its operations and maintenance costs.

"They are three years late with Medupi, there are running delays with Kusile and Ingula and capital costs have increased horrendously," Kuni said. "In order to make up all the revenue to keep their operations running, they cannot dip into money for the new build …

"The new-build decisions were Brian Dames's decision as head of generation group and then chief executive and the chickens are now coming home to roost."

Kuni said that, although somebody will have to pay for Eskom's inefficiencies and cost overruns, any bailout would only be a temporary solution as South Africa is far from solving its energy supply problems.

"Do we throw good money after bad?" Kuni asked. "Where is the economic growth going to come from? When is the new capacity coming on line?" It's fatal for the economy, he said. "If there is failure to grow in kilowatt hours, there will not be any economic growth."

Mark Pickering, the managing director of Globeleq South Africa, said the governing party is paralysed when it comes to energy.

"Eskom's failure to manage itself and its programmes has fundamentally harmed the economy as a whole … [Additionally] there has not been sufficient momentum behind the ‘change' argument, or clarity of thought as to what we would change to," he said.

"We need to have the policy debate as to where we will take the sector and then fashion legislation. We now have 20 years of almost complete inaction on electricity sector policy."

Tshwete said the Nersa determination has had several implications for Eskom and it was too soon to say what the solutions might be.

"The same people celebrating the 8% increase are now saying it [Eskom's financial difficulty] is because it has been badly run," he said. "The challenges Eskom faces outdate the people who are there now; they go as far back as 1998.

"Eskom has been under immense pressure to keep the lights on; they have worked tirelessly to make that happen and it has happened at quite an expense."

Eskom did not comment at the time of publication.