Busa calls for inflation-linked Eskom hikes until power market is restructured

Busa calls for inflation-linked Eskom hikes until power market is restructured <> *Photo by* Dylan Slater BUSA’s Martin Kingston
Business <> Unity South Africa <> (Busa) has urged the National Energy <> Regulator of South Africa <> (Nersa) to suspend its methodology for setting power <> tariffs and to grant Eskom <> only inflation-linked increases until the electricity supply industry <> has been restructured.
In a presentation during the Gauteng leg of a nationwide public hearings process, Busa’s *Martin Kingston <> *said that, while the principles of the methodology were sound, “it may be appropriate to suspend it until such time as the electricity supply industry <> is restructured, especially as tariff setting is open to manipulation until return on the regulatory asset base (RAB) is fully recognised”. ADVERTISEMENT
Eskom <>’s operating model, the business <> body argued, was not fit for purpose and the utility should be restructured. “This cannot be done in isolation of a restructuring of the whole electricity industry <>,” Kingston argued.
Busa envisaged a “comprehensive” reconfiguration of the sector in the longer term. Nevertheless, it saw a functional, rather than legal, separation of Eskom <>’s generation, transmission and distribution units as a possible short-term remedy and a precursor to full legal separation. ADVERTISEMENT <>
President *Cyril Ramaphosa <>* established a task team in December to assess ways of addressing Eskom <> sustainability problems.
The task team presented a plan for splitting the utility into its component parts to the African National Congress’s January lekgotla and Ramaphosa is expected to make a pronouncement on the utility’s restructuring imminently, possibly during his State of the Nation address on Thursday night.
In a fully restructured energy <> supply industry Busa said independent power <> producers (IPPs) should no longer supply power <> to Eskom <>, but rather compete with the utility. In addition, small-scale embedded generation projects <> would be encouraged.
Busa also express discomfort with “last minute changes” introduced by Eskom <> to its submission. The adjustments increased the size of the hikes being sought by the utility during the three-year horizon of the fourth multiyear price determination (MYPD4) period, which would run from April 1, 2019, to March 31, 2022.
Initially Eskom <> requested three yearly hikes of 15%, but has since revised its request to 17.1%, 15.4% and 15.5%, primarily as a result of a downward revision to its sales forecast for the period.
The utility also made adjustments to its production plan for the period, including: the shutting of 12 additional units at the Hendrina, Grootvlei and Komati coal <> power <> stations; a further lowering of the expected energy <> availability factor (EAF) from its coal <> fleet for the MYPD4 period; and revisions to the scheduled introduction from new capacity from the Medupi and Kusile projects <>.
“We are concerned that consumers have been given insufficient opportunity to interrogate fundamental last minute changes,” Kingston said.
Busa was equally concerned with Eskom <>’s treatment of the RAB-related recoveries, suggesting that tariff setting was “open to manipulation”.
The organisation noted that Eskom <>’s RAB had been revalued from about R700-billion previously to R1.25-billion and the remaining life of the assets have reduced, with a significant impact on return on RAB and depreciation.
“We urge Nersa to perform an independent review of the revaluation. In the interim, a revaluation should be disallowed.”
Eskom <> warned of losses of about R20-billion for 2018/19 and 2019/20 even in the event of receiving the hikes it was currently seeking and cautioned that its going-concerned status would be imperilled without substantial increases.
CFO Calib Cassim <> also described calls for an inflation-linked hike as unrealistic.
He noted that Nersa had already approve a 4.41% hike for 2019/20, following its adjudication of Eskom <>’s Regulatory Clearing Account applications in 2018. In addition, full cost recovery against current and future IPP contracts would add a further two percentage points to the 2019/20 increase.
“Therefore, in reality, we are already at the top of the inflation target, without giving Eskom <> a single increase for its own cost of operations <>.”

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