Price increases much higher than inflation are expected for many years to come.
It is well known that the price of electricity in South Africa has been too low for years. The generation capacity crisis in 2008 prompted a review of Eskom’s build programme and associated funding plan. The original expectation was that there would be a short-duration adjustment to bring prices to the correct level, and thereafter electricity prices increases would follow inflation. But the adjustment did not develop in line with expectations, and price increases much higher than inflation are expected for many years to come.
Eskom’s original multi-year price determination (MYPD 2) application, lodged with the National Energy Regulator of South Africa (NERSA) on 30 September 2009, was for an annual increase of 45% p.a. for 2010, 2011 and 2012. Preceding this, there had been a 27% Eskom price hike in 2008, and a further hike of 31% in 2009.
At that time, then Eskom CEO Jacob Maroga stated that achieving cost-reflective tariffs in accordance with the electricity pricing policy of the Department of Energy (DoE) would require a massive once-off increase, but to soften the impact the increase would be phased over three years. According to this rationale, he indicated that from 2013 Eskom price increases would then only be further increased in line with inflation.
But Eskom’s initial application met with widespread opposition and criticism, and the MYPD 2 electricity price application was revised downward in November 2009 after discussions between Eskom, the National Treasury and the South African Local Government Association (SALGA).
The revised Eskom application submitted to NERSA proposed a reduced tariff increase of 35% p.a. for the three-year MYPD 2 period. But a fact generally overlooked is that the application also included a further price increase of 13% p.a. for each of the following two years (2013 and 2014).
The downwardly revised application also included a number of specific provisos, including:
Delaying the construction programme of the Kusile coal-fired power station
Delaying the 100 MW Sere wind farm and 200 MW of concentrating solar power plant
Re-phasing of certain other new-build projects and contracts
Introduction of more IPP options in later years (after the MYPD 2 period)
Finding a 30% to 50% private equity partner for Kusile
Removing from Eskom’s responsibility the funding of the next coal-fired power station (Coal 3) and the nuclear build programme
Excluding Coal 3 and the nuclear programme from MYPD 2 would not necessarily mean that these will not happen, but more likely that the costs will simply be shifted to future MYPD periods. So the vision of tariff increases in line with inflation after the MYPD 2 period faded, with the revised Eskom price trajectory now indicating increases of 27% 31%, 35%, 35%, 35%, 13% and 13% for the years 2008 to 2014.
In early 2010, NERSA accepted the delayed and revised build programme proposed by Eskom for the MYPD 2 period, but only approved a 25% p.a. price increase for 2010, 2011 and 2012, opting for an even more gradual phasing in of the minimum level of price hikes needed to keep the utility in a position of financial health.
Many consumers breathed a sigh of relief, but a fact that received little attention at the time was the indication by NERSA that the 25% p.a. increases allowed for 2010, 2011 and 2012 would now likely continue after 2012.
In the meantime, Eskom’s funding burden has worsened. It has not been able to find a 30% to 50% private equity partner for Kusile, and the utility will now be providing this funding through interest-bearing debt raised on the back of increased government guarantees.
In addition, many customers and the general public do not yet realise that even after 2014 the vision of inflation related increases has been deferred to some undefined date well into the future, and that price increases well above the inflation rate will still be around for many years to come.
Electricity demand does not stop growing in 2015, and nor does the need to replace the aging fleet of Eskom coal-fired power stations. Projects that were excluded from MYPD 2 such as Coal 3 and the nuclear programme, or equivalents with the same capacity (including renewable energy), will have to form part of the future energy mix.
Work has already started on the Eskom MYPD 3 application, but as yet no indication of proposed electricity price increases is available. MYPD 3 will, however, be based on the national integrated resource plan for electricity, IRP 2010, which covers the electricity generation capacity portfolio and plan for the next twenty years. Although IRP 2010 has still not been finalised and gazetted, the draft is based on various assumptions and projections, and provides a useful indication of the way in which electricity prices are likely to go after 2013.
Irrespective of which scenario is considered, the projected electricity prices in the draft IRP 2010 show annual increases well above inflation up to 2021, and it would appear that the golden era of Eskom price increases at or below inflation will only arrive thereafter.
It should also be noted that the current IRP 2010 draft document may still be subject to revision. Its projected price increases are based on several assumptions, and there are many areas of uncertainty which could cause prices to increase above those projected.
These include a higher than anticipated economic growth, energy intensity and electricity demand, failure of new renewable energy generation plans to timeously deliver on their promise, unexpectedly high increases in the price of coal, increased environmental protection measures such as carbon capture and storage systems at existing power stations, and the introduction of a carbon tax.
But assuming that all these uncertainties do not materialise, take heart! Electricity prices should level off in about ten years time. Highlight 2021 in your diary as the dawn of a new era of Eskom price increases in line with inflation. Maybe…