Nersa sub-committee recommends drastic increase in Eskom diesel budget

South African consumers may be in for another electricity price shock if national energy regulator Nersa approves the recommendation of its electricity subcommittee.

The regulator members will decide on Tuesday whether Eskom is entitled to recover 32% more revenue from electricity users next year and, if not, how big an increase it will allow. It will also announce by how much tariffs will increase in the subsequent year. Eskom applied for a further 10% increase.

Read: South Africa urgently seeks cash for Eskom to buy diesel

This comes as consumers are suffering regular power outages with the performance of Eskom’s power stations deteriorating all the time.

By late Monday afternoon the country had experienced 2 975 hours or 124 days of load shedding so far this year, according to the app EskomSePush.

To add insult to injury, Eskom has announced that it has already spent R11 billion on diesel, which is double its budget, and will stop further diesel purchases for the current financial year, which ends on 31 March.

Eskom uses diesel to generate electricity through its open-cycle gas turbines (OCGTs) to supplement its struggling generation fleet and can thereby spare the country at least two stages of load shedding.

The utility warned of more intense and more erratic load shedding as it ran out of money for diesel.

Public Enterprises Minister Pravin Gordhan subsequently announced that PetroSA will deliver 50 million litres of diesel to Eskom, but it is not yet clear who is going to pay for it.

Gordhan said his department, Eskom and National Treasury are working to find the money and it has been reported that Eskom asked for R15 billion to buy diesel, but Treasury has not said a word.

‘Not sustainable’

“Eskom has been given about a week of diesel but this isn’t a sustainable solution to a problem they have been flagging to government for years,” says Peter Attard Montalto, Head of capital market research at Intellidex.

“National Treasury will not give money for OCGTs and so the only viable route is likely to be cutting maintenance which means more load shedding in the future”

Moneyweb tuned in to Nersa’s recent electricity subcommittee meeting, and it was clear that few adjustments were proposed to Eskom’s R351 billion application, which translates to the 32% increase.

Court challenges

In the recent past Nersa has regularly limited Eskom’s revenue and tariff increases to much less than the utility had applied for, but Eskom has been successful with several court challenges to such decisions.

As a case in point, R14.2 billion must be added to whatever amount of allowable revenue Nersa determines that Eskom is entitled to in each of the two tariff years on Nersa’s table. This relates to an earlier, unlawful decision by Nersa to deduct an amount equal to government’s equity injection of R23 billion per year over four years.

Further recoveries will still follow in subsequent years to rectify Nersa’s mistake.

In its calculations Eskom included R15 billion for this recovery.

In addition, to recover from tariffs in FY2024, the subcommittee recommended the full R3.4 billion clawback in terms of the Regulatory Clearing Account (RCA) mechanism the regulator earlier awarded Eskom for the FY2020, as well as an unknown amount for FY2021. The subcommittee only disclosed that this will be much less than the R10.7 billion Eskom has applied for.

In its calculations Eskom only included R1.7 billion for FY2020 and nothing for FY2021 as Nersa’s decision on that was still outstanding when the application was finalised.

The committee further recommended no adjustment to the amounts Eskom applied for in terms of primary energy, international purchases, the environmental levy and carbon tax, and research and development.

It recommended that increases in Eskom’s staff cost and “other operating cost” be limited to CPI (consumer price index).

With regards to the OCGT cost, the committee argued that the regulator cannot approve a tariff that will necessitate load shedding and approved the 12% load factor for these plants.

This is a drastic change in stance as it approved only half of what Eskom had asked for for OCGTs in the current financial year, slicing the budget on that item from R6.5 billion to R3.7 billion and a load factor of 3.47%.

The committee at that stage argued that the use of OCGTs at that level is inefficient as their running cost is much higher than that of Eskom’s coal-fired fleet.

The regulator now seems to accept that the Eskom fleet will only run at an availability factor of 59% and will allow money for diesel so that the OCGTs can fill the gap.

The amount allowed for energy purchases from independent power producers (IPPs) will be adjusted to reflect the latest position regarding government’s risk-mitigation procurement round if the subcommittee’s recommendation is approved.

There’s more …

Another big ticket item, depreciations, as well as return, depends on the valuation of the regulatory asset base (RAB).

In this regard the court has bound Nersa’s hands after it found that the decision to limit the RAB for the current financial year to R550 billion as opposed to the more than R1 trillion Eskom submitted was irrational and unlawful. The court set the decision aside and ordered Nersa to reconsider it in compliance with specific guidelines.

Nersa full-time member for electricity Nhlanhla Gumede said in the subcommittee meeting that, in arriving at the recommendation, there was no deviation from the methodology, “except where it was explicitly provided for, even if it would have been logic[al] to do so”.

Attard Montalto said: “Nersa has run out of legal track to skew the tariff but equally a 25-30% increase that might be recommended by the subcommittee is unaffordable for the economy.

“The possibility of a political block here is still a risk.”