ESKOM needs restructure not 25% tariff increase

ESKOM’s structural problems are wider and deeper than the collective pockets of South African electricity consumers.  Imposing an additional tariff increase on electricity consumers is not an equitable solution.  Objections to NERSA to ESKOM’s proposed 25% tariff increase address the issues of:

1 The lack of affordability of the tariff increase & implications for households and the economy.

2 The principle of consumers being asked to `rescue’ the badly managed ESKOM.

3 A lack of trust in the centralized energy supply model for South Africa which focuses on big build including proposed nuclear, rather than decentralized regional power solutions.

4 NERSA’s role as an independent energy regulator acting in the interests of the consumer.

Eskom is applying for the 25% increase as it requires the cost recovery of R32.9 billion for Open-Cycle Gas Turbines (OCGTs) and another R19.9 billion for the Short Term Power Purchase Programme (STPPP) and a 2.51% increase in the environmental levy by ZAR0.02c per kWh.

For a detailed motivation of why ESKOM should not receive a 25% electricity tariff increase read the objection (below) of the Far South Peninsula Community Forum to Mr Thembani Bukula, head of the electricity division at NERSA. 

The Far South Peninsula Community Forum represents in excess of 85 000 people. Approximately 40% of our Far South community are unemployed or work in poorly paid positions and require subsidized electricity to meet essential needs of lights for security and education and boiled water for health.  In addition we have many retired citizens whose pensions are not keeping pace with inflation – never mind ESKOM’s tariff demands.

NERSA approved an electricity tariff increase for municipalities effective from 1 July 2015 of 14.25% which is well above the CPI. The resulting municipal electricity increases are eroding the available funds for other essentials for lower to middle income homes AND are placing small to medium businesses at risk at a time when most South Africans are facing economic pressure on many fronts.

By juggling tariffs the local authority, City of Cape Town, managed to provide some buffer for the economically vulnerable on the Lifeline tariff which was only increased by 8%. This means that other electricity consumers will have to make up the short fall.  It also means that the revenue target of 10% from electricity sales which the City, and many local authorities in South Africa, uses to cross-subsidize other services is unlikely to be reached. Now ESKOM is calling on us all to absorb an additional 10 – 11% increase within the same 2015/16 financial year. We support the statement of the South African Local Government Association (SALGA) in their official response to ESKOM “This is deemed unfair, unaffordable and unjustified.” ¹

These comments are made with appreciation for the fact that the world is in an energy transition and the era of cheap electricity is over.  That said we believe that our current electricity supply problems are largely caused by bad planning and management, bad energy procurement decisions and political interference in both electricity planning and management.  Delayed new build, delayed maintenance and decisions such as the large scale of new power generation including proposed nuclear are examples of political interference.  While it is reasonable to pay for the cost of supplying electricity, it is unreasonable to be held ransom by an inefficient energy monopoly.  While ESKOM and our government are to be acknowledged for speeding up the electrification of over 3 million homes since 1994. This huge benefit will have little value if people cannot afford to pay for electricity.

1 Unaffordability of ESKOM electricity:  

 1.1 Each tariff increase results in increased energy efficiency and provides new cost incentives for people with the means to install alternative energy systems. The resulting drop in consumption by the very consumers who are currently best able to afford ESKOM electricity places an unfair burden on the rest of the population. Local authorities are already experiencing a decline in revenue as a result of customer’s efficiency measures and alternative generation. The decline in revenue from consumers `who can pay’ reduces the funds available to local authorities to provide subsidised tariffs to economically vulnerable households.

COSATU speaking for a large sector of South Africa’s working class citizens reminds us that: “The Energy Regulation Act enjoins Nersa to act in the public interest even as it strives to ensure the sustainability of the electricity industry.  In our view, working in the public interest means that the regulator must work in the interest of the overwhelming majority of our people: the workers and poor.  Making determinations in the public interest means not increasing electricity tariffs in a manner that would remove the majority of our people, who have been denied access to electricity for many years, from the grid. ²

SALGA asserts that implementing ESKOM’s selective reopener will result in an even higher level of non-payment and electricity theft. Both of these will negatively affect municipalities and will in turn lead to more distributing municipalities defaulting on their bulk electricity payments to Eskom.

ESKOM does not appear to have done a study to weigh-up the impacts of evening peak load shedding vs the dramatically increased tariffs they are asking for.  This should surely be part of their motivation for keeping the expensive Open-Cycle Gas Turbines operational during evening peaks?  Both are painful – which is less so?  What we do know is that once the prices go up, they will never come down.

It is likely that higher tariffs won’t actually deliver the anticipated higher revenues. Higher tariffs are however likely to result in many negative impacts on citizens, on business and result in a drop in confidence and respect for the authorities involved in electricity supply.

2 Principle of consumers needing to `rescue’ a power utility that is badly managed.  

It is in all of our interests for ESKOM to be able to provide reliable, safe and affordable electricity.  However, this cannot be at any price.  Telkom and now possibly also Postnet are learning the hard lessons of poor service coupled with uncompetitive prices which is resulting in people choosing cellphones and private postal delivery.  With load shedding and dramatically increasing tariffs, ESKOM is teaching us how to wean ourselves off ESKOM electricity.  For poorer people, this comes at huge health and safety costs as they are forced to revert to paraffin, coal and wood for heating and cooking.  The falling costs of alternative energy and battery storage are wooing higher income households and business to reduce their reliance on ESKOM.

ESKOM’s motivation for the 25% increase is based on assumptions that were made around the commissioning dates of Kusile, Medupi and Ingula and the expected performance ( in spite of known maintenance backlogs) of the current generation plant.  All these expectations were not met.  As a result no provision was made for the extensive running of OCGTs and the continuation of the STPPP agreements.  That is a lot of bad management decisions for an electricity service as critical to citizen welfare and economic wellbeing as reliable energy generation. Rating agencies which have downgraded ESKOM for future loans are essentially another vote of no confidence in ESKOM’s management and decision-making abilities.

In addition, ESKOM also has a very bad track record of debt collection from its consumers.  “The whole country’s municipalities have an unsettled debt of R4.6bn combined,” reported Eskom spokesperson Khulu Phasiwe on SABC News online on 7 May 2015.

ESKOM is managed by a Board elected by the Government Departments of Energy and of Public Enterprises.  Was the board and all these responsible departments asleep to the extent that ESKOM is now in such a crisis?  Based on this collective poor performance, government rather than the citizens need to foot the bill.  To this extent, National Treasury has awarded ESKOM a 20 billion bale out.  According to ESKOM this is not sufficient!  In their application to NERSA, ESKOM states: “The Government has clarified to Eskom that further equity injections to Eskom are not possible in the short to medium term.”   The FSPCF believes that this decision of Treasury and the Government needs to be reviewed.  The Times of 11 June 2015 reports that Finance Minister Nene tabled two bills last week that would provide immediate and short term support for ESKOM.  Figures quoted were R23-billion and R60-billion.  While we do not know the details, we trust that these funds will remove the need for the additional tariff increase requested by ESKOM.

It is pertinent to raise here the issue of the increase in Environmental levy from 3,5c/kWh to 5,5c/kWh which is part of ESKOM’s reasoning for a tariff increase.   We would not like to support ESKOM’s exclusion from paying the levy, considering that 95% of ESKOM’s electricity is coal generated.  Perhaps, the levy could instead be used to help fund contracts to those Short Term Power Purchase Programme partners who provide energy from sustainable sources.

3 A lack of trust in the centralised big generation energy supply model

The world’s electricity supply model is changing in response to the increasingly affordability of renewable energy coupled with smart technology to better manage supply and demand.  The role of energy utilities is also changing with the switch from big capital intensive centralised energy generation to decentralised regional power generation. The traditional understanding of baseload is also shifting as smart meters help utilities to match time of generation with time of use.  Strides in battery technology are helping to ease the transition away from traditional base load requirements.  Sure this technology is still being developed to improve reliability – but it is happening – elsewhere in the world.

In South Africa we appear to be stuck in the old mind set of big capital intensive inflexible power generation with plans to shift from coal to nuclear.  This is not the place to go into details about the need to restructure ESKOM so that it focusses on distribution with partnerships with IPPs and municipalities who owner-manage localised power generation. It is however the place to say that with the alternatives of cheaper renewable energy, the path of more big capital intensive power generation is a path to unaffordable tariffs and potentially stranded over-capitalized power generation plants.

It is relevant to note here, that a part of the funding model for the new nuclear power stations that the government seems determined to build is an increase in electricity tariffs ahead of the nuclear build process to help finance the R1-trillion build programme. (Report to the Parliamentary Portfolio Committee on Energy, 2 June 2015 by the DDG of Energy Mr Z Mbambo)  This thinking is a big worry as it seems that big generation is being decoupled from affordability.

4 NERSA’s role as an independent energy regulator acting in the interests of the consumer.

NERSA’s role in attempting to ensure both a viable electricity service and affordable electricity is an unenviable role at this time.  However we do not believe that in wanting to keep the lights on, NERSA should support ESKOM’s request for an unaffordable additional tariff increase.

It seems that NERSA has not historically had any official / legal say in the kinds of new generation or the likely cost consequences.  Perhaps this is not NERSA’s brief?  However if NERSA is to be truly independent and act effectively on behalf of the electricity consumers of South Africa, perhaps NERSA needs to be involved in the decisions about new generation. More important would be an independent review of what kind of electricity utility model would best serve the needs of citizens and the economy of South Africa.  Our current model is not working.  ESKOM’s problems are far bigger than a shortage of generation – the problems are systemic.  Determining fair cost of supply tariffs is not going to address the bigger systemic problem.

Kim Kruyshaar for the Far South Peninsula Community Forum. 15 June 2015

Sources:

¹ SALGA comment to ESKOM and included as a legal requirement in ESKOM’s application for a 25% tariff increase to NERSA. (MYPD 3 Re-opener for selective items (2015/16~2017/18) 30 April 2015 Publishable Version)

²  http://www.cosatu.org.za/show.php?ID=6767#sthash.Ykx3iPBY.dpuf

 

Residential Electricity Tariffs for Cape Town effective 1 July 2015 read here: http://greenaudits.co.za/cape-town-residential-electricity-tariffs-2015-16-explained/

 

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