Nersa hasn’t even given Eskom a CPI increase

Energy regulator Nersa sliced almost R30 billion off Eskom’s allowable revenue for 2021/22 and left it with an increase of 3.49%, which is way below the current inflation rate of 5.7%.

Eskom applied for R279 billion but Nersa set its allowable revenue at R250 billion, compared to R233 billion in the current financial year.

A further R14.4 billion was added in relation to legacy recoveries and court rulings. This brings the average increase that consumers will pay to 9.61%.

While consumers gave a sigh of relief for dodging the 20.5% total increase Eskom applied for, the Nersa decision leaves serious questions around Eskom’s already flimsy sustainability.

Nersa on Thursday (February 24) announced its determination of Eskom’s tariffs for the new financial year starting April 1. Electricity users who buy directly from Eskom will pay more from that date, while those who buy from municipalities will see their bill increased from July 1.

The utility consistently argues that its tariffs are not yet cost-reflective and are inadequate to cover its debt service cost. Eskom is buckling under a R400 billion debt burden and its hopes that government would take over about half of that seem to be in vain.

In his maiden Budget Speech on Wednesday (February 23), Finance Minister Enoch Godongwana said National Treasury is working on a long-term solution. Eskom should sell some assets to raise some of the funds it needs, he said. At a press briefing prior to the speech, Godongwana indicated that such asset sale is a precondition for the anticipated major debt relief.

He provided for R88 billion of assistance for the utility over the next three years.

Professor Anton Eberhard, senior scholar at the University of Cape Town’s Futures Lab, tweeted in response that that is not enough.

SA power utility @Eskom_SA doesn’t generate enough cash to service interest & principal repayments on its debt which amount to ca R60bn pa over next few years. Something has to give. Either consumers face huge tariff hikes or tax payers will have to pay more, or likely both /2

— Anton Eberhard (@AntonEberhard) February 23, 2022

It’s extraordinary that South Africa continues to kick a debt relief & refinancing solution for @Eskom_SA down the road.
I guess it keeps management on its toes. The utility’s unbundling will eventually force a solution to be found for its power generation legacy debt /3

— Anton Eberhard (@AntonEberhard) February 23, 2022

Eskom is considered a major risk for the South African economy and government clearly stated that it will not allow it to fail. It has R350 billion of government guarantees at its disposal and is utilising a large portion of it.

In the meantime it has been deferring critical maintenance due to liquidity pressure while supply regularly outstrips demand resulting in rotational load shedding.

Nersa is yet to publish the reasons for its decision, but disclosed that it made major adjustments to the amounts Eskom applied for in relation to depreciation, return on capital, primary energy, arrear debt and operating cost.

The depreciation adjustment of almost R26 billion comes after Nersa rejected Eskom’s revaluation of its asset base to R1.2 trillion, up from R855 billion in the current financial year.

The prescribed methodology provides for valuation at replacement value and uses the concept of modern equivalent plant. Nersa argued that such plant should operate at an availability factor of 85%, while Eskom provided for 62% from its own fleet in this application.

Nersa adjusted the value of the regulatory asset base accordingly, which informed the reduced depreciation cost.

The regulator further argued that Eskom should collect its outstanding debtors instead of expecting paying customers to pay through increased tariffs.

Read:
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Full-time regulator member for electricity Nhlanhla Gumede said the regulator met with, among others, Minister of Cooperative Governance and Traditional Affairs Nkosazana Dlamini-Zuma about the R44 billion municipal arrears – and that government as a whole should work to resolve this problem.

Eskom and Nersa have been at loggerheads regularly over the past few years over electricity tariffs. Eskom has taken the last five tariff decisions made by Nersa on review and has been largely successful.

The utility said on Thursday night it needs to understand the impact of Nersa’s decision on its sustainability.

“The Eskom Board will deliberate further before deciding on how to continue to sustainably provide electricity to the extent possible in the context of this revenue decision. In addition, Eskom keenly awaits the reasons for the decision that will provide further details on how the revenue determination was arrived at,” Eskom stated.