Eskom is targeting a tariff of 97.51c per kilowatt-hour in five years’ time. This is almost double the average price of 50.27c per kilowatt-hour that it currently charges and means that hard-pressed consumers could be facing average annual increases of around 15 percent for the next five years.

Eskom’s target price for 2017 compares with its 2008 tariff of 19.40c per kilowatt-hour. If the National Energy Regulator of SA (Nersa) approves the annual increases needed to achieve Eskom’s 2017 target, it will mean a hike in electricity costs of 400 percent in the 10 years between 2008 and 2017.

The 15 percent annual increase consumers face over the next five years compares with the Reserve Bank’s consumer inflation rate target of between 3 percent and 6 percent.

Chris Logan, a corporate analyst who has been studying Eskom, told Business Report that the increase would have a devastating effect on individuals and industries for which electricity costs represented a large portion of their total costs. Logan said that Eskom was extremely inefficient and should be forced to sell some of its power stations if it required funding for its capital expenditure programme.

He also argued that in view of the recent global coal prices, Eskom should be considering a reduction in its tariffs instead of a substantial increase.

Eskom spokeswoman Hilary Joffe said that Eskom was due to submit its application for the next multi-year price determination to Nersa next month. That application would cover a three-year period to 2016.

This year the tariff increase was reduced from the previously agreed 25 percent to 16 percent after the Department of Public Enterprises decided to forgo a dividend of R8 billion from Eskom.

Consumers may take some comfort from the fact that Eskom’s five-year plan assumes that it will be considerably more profitable by 2017.

The present tariff of 50.27c per kilowatt-hour exceeds operating costs of 41.28c by just 9c. By 2017 Eskom is targeting operating costs of 71.39c per kilowatt-hour, implying a surplus of 26.12c per kilowatt-hour.

This surplus is expected to be used to fund its ambitious and essential capital expenditure programme.

Cornelis van der Waal, an analyst at Frost & Sullivan, said that an increase of about 15 percent was in line with his expectations and that while labour and general operating expenses had been the significant factor up to now, in future the bigger consideration would be the need to fund capex.

Logan noted that the extent of Eskom’s profitability in any one year reflected its power as a government-backed sole supplier of energy, rather than any improvement in efficiency and cost control.

He pointed out that operating costs had more than doubled since 2008 while the actual volume of electricity sold had increased from 224 366 gigawatt-hours (GWh) in 2008 to 224 785GWh this year.

A breakdown of Eskom’s total operating costs reveals that primary energy costs, which are essentially coal, increased by 153 percent in the four years to 2012, when the volume of electricity sold was virtually unchanged. In addition, employee benefits increased by 76 percent with the number of employees increasing from 35 404 in 2008 to 43 473 in 2012.

The average total cost for each employee increased from R313 000 to R500 000 over the same period.

Business Report