Newbie Finance Minister Nhlanhla Nene has managed to hold the line on embattled power utility Eskom for now, despite its rampant costs resulting from its efforts to keep the lights on.
It was widely expected that further details about Eskom’s lifeline would be fleshed out in this week’s budget speech, but little extra information was divulged by the minister and nothing new was dished out for the utility in the form of cash, guarantees or even commitments.
This is despite Eskom’s diesel bill of more than R2-billion each month to run emergency generators, for which it is now seeking a private bank loan to fund in the absence of treasury assistance.
It does not mean, however, that Eskom’s woes were not top of Nene’s mind when he delivered his budget speech. As he prominently noted, resolving the “energy challenge” was a strategic priority for South Africa’s growth and development.
As Nene indicated in November last year, government has committed to support Eskom through a capital injection package of R23-billion and will be funded by a sale of state assets ensure “that there is no increase in government debt and no effect on the fiscal position”, Nene said.
This announcement was disappointing for many who had expected more detail. Exactly which state assets will be sold remains a mystery despite the fact that the first of three instalments will be paid to Eskom in June this year.
A subordinated loan of R60-billion remains, but in his speech Nene did indicate that this, and other subordinated debt, could be converted into equity that would strengthen the public enterprise’s balance sheet and enable it to borrow more.
As a result of the energy crisis, Nene has proposed a number of tax measures to promote energy efficiency: “a temporary increase in the electricity levy”, from 3.5c a kilowatt hour to 5.5c a kWh, “to assist in demand management”. This additional 2c will be withdrawn when the electricity shortage is over, he said.
A treasury official said this levy has been in place since 2013 and is charged to electricity generated from fossil fuels only.
Although it forms part of the electricity tariff, the proposed levy hike would not have to be approved by the national energy regulator, the official said.
This levy is managed by Eskom but the revenue generated goes directly into the fiscus and is used to pay for energy-efficiency incentives – such as the solar water heating rebate programme. A higher levy would be used to support further incentives for energy efficiency and reduce conventional power demands as a result, the official explained.
The income from the levy, the budget review says, will be used to expand an existing energy-efficiency savings incentive that rewards those who have implemented energy-saving measures with some tax relief.
Nene suggests this growth from 45c/kWh to 95c should also be extended to cogeneration projects and possibly enhancing the accelerated depreciation for solar photovoltaic renewable energy, which is already cost-competitive with conventional power.
But government said it will consult industry, the electricity regulator, Eskom and other interested parties.
“Through this levy government currently collects R7-billion per year,” said energy expert Chris Yelland.
“The additional 2c would make it a total R11-billion per year.” He said the levy would achieve its goal to discourage use, which means Eskom would sell fewer kilowatt hours and make less revenue. This would mean a hike in the electricity tariff for consumers.
Levy or not, Eskom will almost certainly be requesting a further tariff hike from the regulator.
As the budget review puts it: Eskom’s long-term financial position depends in large measure on improving the efficiency of its operations and ensuring that electricity tariffs reflect the cost of production.
Yelland was also sceptical about whether the levy would be returned to its current levels at any stage. “They say it’s until we have enough electricity. Well, that is pretty open-ended … governments come to rely on these revenues and don’t tend to just give them up.”
Kay Walsh, Deloitte’s executive lead in economics, said government’s encouragement for Eskom to move to cost-reflective tariffs was a positive development “as it is more efficient for consumers to face the true cost of electricity than for government to provide Eskom with implicit subsidies, in the form of equity, financial guarantees or loans”.
But Yelland said: “What I see here are a whole bunch of initiatives that result in a whole lot of increased prices. I don’t see they are addressing any of the fundamental issues, the structural issues.”
The budget review noted government is taking steps to address South Africa’s electricity constraints and looking at measures for short-term funding, maintenance and diesel supply concerns; speeding up the completion of the Medupi and Kusile power stations; and procuring additional cogeneration capacity of about 800MW over the next six months.
Other options under consideration include expanding the use of smart meters, “buying back” power from large industrial users and varying tariffs by time of use.
Additionally, the budget review said, government has released a request for proposals for 3 126MW of power from natural gas and is also in the process of procuring up to 2 500MW from independent power producers generating electricity from coal.