Eskom set to claw back costs from consumers


SOUTH Africans may see a hike in electricity tariffs next year of between two and five percentage points above the 8% increases they are already facing after the National Energy Regulator of South Africa (Nersa) on Wednesday granted Eskom a partial recovery of costs.

Eskom is facing intense cost pressures as a result of delays and budget overruns on its two new coal-fired power stations, Medupi and Kusile. A shortage of power is forcing Eskom to run its ageing coal power stations and diesel-fired open-cycle gas turbines hard to avoid load-shedding.

While bad news for users, the price increases are not expected to have a significant effect on general inflation but there would be serious indirect effects, economists said on Wednesday.

The Reserve Bank increased interest rates by 50 basis points in January, and by 25 basis points this month. The Bank may have to raise its inflation forecasts for next year. It forecast average inflation for next year at 5.9%.

The Bank said it expected inflation — currently 6.6% — to return to within its targeted 3%-6% band during the second quarter of next year provided there were no “further shocks to the system, particularly from possible higher tariff increases being granted to Eskom by Nersa from 2015”.

Last year, Nersa allowed Eskom to raise tariffs 8% a year for the five years to 2018-19, rather than the 16% it requested.

Eskom applied under the Regulatory Clearing Account (RCA) mechanism for a cumulative R18.4bn of costs it was not able to recover on the tariff allowed between 2010 and 2013. Nersa has allowed Eskom only R7.8bn, less than half of its request.

When Nersa grants Eskom a tariff increase, it is based on the utility’s forecast of revenue for the next few years. The RCA allows Eskom to apply to claw back amounts it under-or over-recovered during the preceding tariff determination period.

Nersa communications head Charles Hlebela said the adjustment would be implemented by way of a higher tariff from April 1 next year. It was impossible to say at this stage what the extent of the tariff adjustment would be, though it would certainly be an increase, he said.

It had also not been decided whether it would be a once-off adjustment. Eskom spokesman Andrew Etzinger said the calculations still had to be done.

“Eskom welcomes the decision regarding a balance in its favour,” the utility said.

Nersa said it had allowed Eskom to recover only on spending that passed efficiency and prudency tests. It would allow the costs of running the open-cycle gas turbine stations that resulted from changes in the diesel price, but their increased use was reviewed to see if it was prudent. Mr Hlebela said the amounts disallowed by Nersa would be set out in the reasons for the decision.

Nomura International economist Peter Attard Montalto said Nersa’s ruling would be followed by an authorisation of tariff increases, which he expected would be two to five percentage points above the current 8%.

“Assuming a five percentage point extra increase (a 13% overall increase), it would add an additional 0.2 percentage points onto headline consumer price inflation from July next year, rising probably to around 0.3%-0.4% over a year, including second-round effects,” Mr Montalto said.

Solidarity Research Institute senior economic researcher Paul Joubert said when consumers or businesses paid higher prices for the same product it meant they had less to spend on other items.

For consumers, that meant less to spend on items such as savings for retirement. For businesses, it was likely to result in cutbacks on items such as labour or, in the longer term, capital investment.

Although an increase of 2%-5% above the expected 8% electricity tariff hike next year would not add much to general inflation, it was harder to estimate the indirect effects, Mr Joubert said.

“Higher than expected electricity tariffs mean inflation will be higher than what is currently forecast and that will support the view for a continuation of monetary policy tightening,” Renaissance Capital economist Thabi Leoka said.