Load-shedding: The economy is running on fumes

The estimates of what load-shedding costs the economy may vary but, whichever number you choose, it appears to be cheaper to run the country on diesel than to turn the emergency generators off.

Despite this, the National Energy Regulator this week rejected an application to hike tariffs in order to foot Eskom’s growing fuel bills.

As the utility’s emergency turbines consume millions of litres of diesel a day in an attempt to keep the lights on, the diesel bill runs to R2-billion a month.

But Eskom says this is better than a potential monthly loss of as much as R80-billion to the economy as a result of power outages.

With this trade-off in mind, the parastatal requested a tariff hike to offset the unplanned costs of running the open-cycle gas turbines on diesel.

The turbines were intended to run for short periods – for two or three hours at a stretch – but have been running flat out for 12 hours at a time of late. The bulk of the requested tariff hike would have been used to pay for the diesel.

On Monday, the regulator rejected the application, not based on an assessment of the economic effect but rather because of a lack of information, preventing the regulator from making an informed decision. It said that, in the meantime, Eskom should find other ways to pay for the fuel.

The regulator said this week it had not imposed a cap on how often the turbines could be used, but the efficiency of their operation had to be established. In the previous multiyear tariff decision, the regulator said Eskom was not prevented from using the turbines as a last resort before load-shedding.

According to a department of energy document, the cost of “unserved” energy is calculated as gross domestic product divided by electricity consumption, and is considered to deliver a relatively conservative estimate.

In recent years, in South Africa, this would have amounted to R10 a kilowatt hour (kWh).

But other considerations, such as kilowatt hours lost in outages, and the energy intensity of a particular geographical area, which can vary between R35/kWh and R150/kWh, also need to be considered.

As a result, the department, in its 2008 integrated resource plan, calculated the cost of unserved energy as R75/kWh.

But energy analyst Chris Yelland has estimated it at R100/kWh, although the treasury’s estimate is significantly lower at between R9/kWh and R15/kWh.

Estimates are that load-shedding can cost the economy between R20-billion and R80-billion a month, according to Eskom.

“If these estimations are correct, then it is cheaper to buy diesel and have a guaranteed supply of 2 000MW from the open-cycle gas turbines than to have load-shedding,” Eskom’s spokesperson, Khulu Phasiwe, said. In most cases, the use of the turbines had prevented load-shedding, or at least, had reduced the severity of load-shedding.

Peter Attard Montalto, Nomura’s emerging markets analyst, said he agreed broadly with the case made for using diesel, but said the economic effect of the tariff increase would need to be considered on top of the cost of diesel. This, he estimated, could be an additional R3/kWh, making it R5.3/kWh in total.

Attard Montalto said he was more inclined to agree with treasury’s calculation and he estimated the economic effect of load-shedding would be about R10.50/kWh, including the secondary effects.

“Then you are still getting to an economic case where it makes more sense to use diesel,” he said, although he added: “As the economy adapts more to load-shedding, so the cost there converges with the cost of diesel scenario.”

Attard Montalto said the real crux of the matter for the energy regulator was that Eskom could cut costs elsewhere to pay for the diesel.

“That is a much more complex question. I think Eskom should be doing that but I think the company is so dysfunctional around cost control that there really is no choice but for a higher tariff.”

Dawie Roodt, the chief economist at the Efficient Group, said the acting Eskom chief executive, Brian Molefe, should not be leading the drive for tariff increases for expenditure on diesel.

“He is not the boss; he is the acting boss. How can someone in an acting position make a huge strategic decision unless you have a vision for a long-term strategy?”

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