Call to smooth out power hikes

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City Power does not owe Eskom R1.08 billion, the subsidiary said.

Cape Town - Large electricity price increases over the past five years have been necessary and Eskom needs to earn a profit – but its current application for a huge price increase and the regulator’s price determination for the next five years is “probably meaningless”, says energy expert Professor Anton Eberhard.

Eskom has asked for a price increase to 128 c/kilowatt-hour by 2018 – a nominal increase of more than 600 percent over 2007/8 prices.

Eberhard, based at UCT’s Graduate School of Business and a member of the Planning Commission, also said that Eskom was only “half the story” of the electricity price, as just less than 50 percent of South Africans got their electricity supply from the power utility.

“Municipal electricity supply is the other half, and Nersa (National Energy Regulator of SA) is not regulating these tariffs effectively,” he told the Cape Town Press Club yesterday.

The electricity pricing system was not working, and the government needed to assist Nersa to craft an acceptable price path over the medium term, he said.

This would include electricity prices remaining internationally competitive while allowing Eskom to cover its operating and maintenance costs (including fuel) and to meet its long-term capital costs.

“In other words, we need a smoother electricity price path that approximates the levelised cost of electricity production.”

Also, the electricity generating sector needed to be restructured as outlined in the Energy Policy White Paper and in the Independent System and Market Operator Bill before Parliament.

“We need an independent system and market operator that facilitates the procurement of IPPs (independent power producers), against which Eskom costs could be benchmarked, as well as ensuring that Eskom power stations migrate to medium- to long-term contracts at fixed prices,” Eberhard suggested.

Transparency

“Over time, portions of these contracts could be exposed to bids in an electricity market.

“Such a system will bring greater price and cost transparency, and will impose greater cost discipline in Eskom’s financial management.”

Eberhard explained that, historically, electricity prices had been kept below sustainable levels – and below levels required to finance new electricity generation capacity.

In 1990, the average price had been below 8c/kWh, and during the 1990s, annual price increases had been below inflation.

“If 1990 electricity prices had increased each year by the rate of inflation, they would have reached current levels more or less this year – that is, we would have experienced a smooth and steady price path over the past two decades,” Eberhard said.

All of Eskom’s “so-called profit” remained in the utility and was used to fund its capital expansion programme, he pointed out.

“I think everyone would agree that Eskom should cover its operating and maintenance, and fuel, costs through the (electricity) tariff,” he said.

The alternative was government intervention, “which essentially means taxpayer subsidies for electricity, even for industry, which is neither equitable nor economically efficient”.

But there were legitimate questions that could be asked about whether Eskom was financially efficient and prudent, he added.

Eberhard pointed out that over the past six years, the electricity prices had always been different to those requested by Eskom and initially determined by Nersa, before revisions.

“Clearly neither Eskom nor Nersa is able to forecast accurately Eskom’s prices,” he said.

The power utility’s cost controls and financial management had probably been “less than optimal”, he added.

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