Eskom keen on tariffs moving with fuel costs
June 20, 2008
By Justin Brown
Johannesburg - Eskom wants the power to change electricity prices in tandem with the price of the fuel it uses to power its stations, similar to the way the local price of petrol changes every month to reflect global crude oil costs.
Jacob Maroga, Eskom's chief executive, said he was keen on a "flow-through mechanism" that would adjust prices in line with a basket of crude oil prices.
He declined to say how often the utility would like electricity prices to change, or under what circumstances an annually set price should be reviewed.
The National Energy Regulator of SA (Nersa) on Tuesday said it would develop a "flow-through mechanism" that would take into account "unforeseen changes in primary energy costs and other costs".
Yesterday Nersa chairman Collin Matjila said: "The mechanism must also take into account the efficiency of costs; the prudency with which the costs are incurred; Eskom's measures to control these costs; and its ability to predict such costs at the time of the application."
Before Eskom won approval to expand its capacity in 2004, electricity prices were set once a year by the energy regulator.
However, Eskom brought an extra application in 2005 when Nersa set energy prices for the three years to April 2009.
In April last year and March this year it again applied for extra increases due to escalations in expansion costs, sharp rises in fuel prices and bad planning.
As a result, electricity tariffs will increase by an average 27.5 percent for the year to next March, up from Nersa's initially approved 6.2 percent.
Maroga declined to say if Eskom expected to break even in the year to next March.
In April Eskom claimed in its application for a 60 percent tariff hike that it would make a pretax loss of R7.9 billion this financial year if it had to rely on the 14.2 percent tariff hike it had already been granted.
At the time Eskom said it barely broke even in the 12 months to March due to higher coal and diesel prices. These results have yet to be released.
Maroga said the utility's failure to secure a 60 percent increase this year would not cause it to halt or slow development on any of its projects.
However, he said the approved tariff increase would only cover Eskom's running costs; the capital for its expansion still needed to be paid for.
Eskom spokesperson Fani Zulu said the government had yet to clarify the terms and timeframes for R60 billion in state funding announced in February, so the utility could not yet calculate whether it would break even this year.
Nersa asked the government to accelerate its lending under the state loan to R12 billion a year for five years. The government plans to forward only R6 billion in the year to March.
Matjila said the call was aimed at maintaining Eskom's credit rating.
Standard & Poor's (S&P;) said this year's 27.5 percent hike in electricity tariffs, as well as expectations of increases of between 20 percent and 25 percent in the following three years, was "supportive of Eskom's credit quality".
Maroga said the R60 billion loan would help fund Eskom's five-year, R343 billion expansion, which includes R49 billion in the year to next March.
Eskom would finance the expansion from government funding, energy tariffs and borrowings, he added.
However, Maroga declined to give a breakdown of the additional funding required.
S&P; said the tariff increase was "only one component of the overall funding plan for Eskom's capital expenditure.The government is yet to confirm the structure, size, and timing of its capital injection into Eskom, which will complement the tariff increase."
The rating agency said it expected to resolve Eskom's "credit watch with negative implications" soon after details of the state's capital injection were confirmed, which "should occur within the next month".
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