Eskom’s balance sheet has been providing a subsidy to consumers over many years, but this is not sustainable anymore and has reached a breaking point, the state-owned power utility said on Monday evening. Eskom continues to share the rationale for its average annual electricity increase application of 15% for the fourth Multi-Year Price Determination (MYPD4) and Regulatory Clearing Account (RCA) balance application for 2018 made to the National Energy Regulator of South Africa (Nersa). Subscribe to Fin24’s newsletter here Nersa’s public hearings on the application continue and the latest one took place in Rustenburg for stakeholders in the North West.
“The main cause of the required price increase is the phasing-out of the current price subsidy, which does not preclude the subsidisation of specific targeted customer categories in future,” said Deon Joubert, Eskom’s corporate specialist for finance. “Eskom is cognisant of the potential impact of the increase in various sectors, but it finds itself in a very difficult financial position… however, an objective analysis indicates that its debt situation is mainly or more than 80% a function of having had to take responsibility for the build programme, without the electricity price responding as was required.” Eskom argued that, while higher tariffs are bound to dampen demand, a reluctance to raise prices towards cost-reflectiveness will deny Eskom the ability to fund investments and maintenance required to sustain an adequate security of supply.
“An inadequate security of supply has more negative repercussions to economic growth and social welfare than a tariff increase,” said Eskom. READ: Moody’s approves of Eskom’s 15% tariff hike application Looking closely at unit costs, a World Bank analysis concluded that Eskom’s unit costs are very low relative to other sub-Saharan Africa utilities, Eskom said in a statement. It found that Eskom’s unit cost was the 3rd lowest. “Similarly, Eskom’s average price is very low relative to other sub-Saharan Africa utilities – but they are all pricing their electricity at unsustainably low levels and are thus in – or heading to – significant financial difficulties,” said Eskom.
The report calculated that 81% of the gap between Eskom’s current price and its costs is due to under-pricing, Eskom said. In its presentation, Eskom looked at how its actual and projected electricity price from 2010 to 2024 compared to external references. “On analysis, it became evident that similar to Nersa’s future price path, the various MYPD price paths Eskom requested would plateau once prices reached levels reflective of prudent and efficient costs – which Eskom calculated to be midway between Nersa’s previous upper- and lower price boundaries,” said Eskom.