Eskom tariffs to rise sharply, but the utility wanted even more

Energy regulator Nersa has allowed Eskom to raise prices by less than what the embattled company estimates it needs, keeping pressure on its balance sheet while also adding to inflation strains.

Eskom, which Goldman Sachs Group calls the biggest single threat to South Africa’s economy, is surviving on government guarantees after cost overruns and delays in building new plants left it with ballooning debt. A lack of maintenance on ageing plants has led to rolling power cuts that damp economic growth and forced the state to pledge a bailout to help save the company.

Eskom can raise prices by 9.4% from 1 April, 8.1% next year and 5.2% the year after that, Nersa chairman Jacob Modise told reporters on Thursday in Pretoria. While that’s less than the 17.1% Eskom requested for this year, it can recover some unforeseen expenses for the past four years, bringing the total price increase to 13.8%.

Eskom had asked for increases of at least 15% for three years. Nersa granted it lower-than-requested tariffs after power prices climbed by more than double the inflation rate in the past decade. The utility is facing financial strain as a result of factors including weak demand, delinquent municipalities that don’t pay their bills and widespread allegations of corruption.

National treasury in February announced a R69-billion cash injection over the next three years to help the loss-making company service its debt, which exceeds R400-billion, and free up money for operations.

The higher prices will add to inflation pressures for the coming year, and may force the central bank to raise the assumptions in its outlook. It had assumed tariff increases of 9.7% for this calendar year, and 8.8% and 6% for the next two. Consumer inflation was 4% in January, the lowest in 10 months.

Yields on Eskom’s dollar bonds due on January 2021 fell the most since 20 February, when the bailout — South Africa’s biggest yet — was announced. They declined 39 basis points to 6.14% by 4.39pm in Johannesburg.  — Reported by Paul Burkhardt, (c) 2019 Bloomberg LP