Eskom: Funding Gap of R50 billion Exists Even with the Requested Increases

Eskom has wrapped up its tariff application presentation to stakeholders at public hearings around the country conducted by country’s energy regulator NERSA today. Eskom has confirmed its requirement of an average annual electricity increase of 17.1%, 15.4% & 15.5% for three years under the fourth Multi-Year Price Determination (MYPD4) and a Regulatory Clearing Account (RCA) balance of R20bn for year 5 of MYPD 3.

An inflation-based revenue growth, as suggested by a number of stakeholders, would unfortunately push Eskom closer to the brink since a funding gap of R50 billion exists even with the requested increases.

Mr Calib Cassim, Eskom’s Chief Financial Officer reiterated that Eskom had presented a fully compliant tariff application, a fact that was confirmed by the regulator in October 2018 upon receipt of Eskom documents: “It is important to note that NERSA conducts an analysis for compliance with the Minimum Information Requirements for Tariff Applications (MIRTA), as well as the Multi-Year Price Determination (MYPD) Methodology and we received confirmation from the regulator confirming this fact. In addition, Eskom provided facts and evidence under oath to motivate its application for efficient and prudent revenue. We trust that NERSA will make a decision that balances the sustainability of Eskom with the impact on consumers according to agreed timelines to create certainty and avoid driving Eskom into further financial distress.”

The requested revenue is crucial to ensure that Eskom restores operational efficiency and delivers on its mandate of supplying reliable electricity. The current financial situation is unsustainable and presents a risk to security of supply and Eskom’s going concern status.

Debt has grown nearly ten-fold over the past ten years even while prices increased five-fold indicating that price of electricity is too low. It must be noted that Eskom has looked into cost efficiencies from its operations but that alone is not enough to return it to financial sustainability.

There is a need for the regulator and the shareholder to play their part in restoring Eskom’s finances, the former by ensuring that we move closer to a cost-reflective tariff and latter through shareholder support including a solution for municipal arrear debt. In line with the Electricity Regulation Act, the MYPD methodology and prudency guidelines, Eskom has provided details on prudent and efficient costs, details of its dire financial situation and extent to which it has been subsidising the electricity consumer for many years.

In addition, the context of its operations where it is running a fleet that is past midlife with an average age of 37 years, which is also compounded by challenges of embarking on a build programme without enough time for planning. NERSA will review these costs with comparison to relevant recognised benchmarks, and provide comprehensive reasons. It needs to be clarified that NERSA prudency guidelines require the prevailing circumstances and environment to be considered. The norm is a comparison to what a reasonable operator would undertake in similar circumstances.

Cassim indicated that Eskom is sensitive to the impact that electricity increases have on vulnerable customers including the poor and identified distressed industries, “We have actively encouraged exploring policy options with government to protect identified vulnerable sectors, a matter that has become urgent. We are encouraged that NERSA has already approved two short-term incentives that addressed distressed industries successfully. There is a need to tie-up these interventions with South Africa’s industrial policy and economic development strategy to ensure sustainability for all.”

Author: Bryan Groenendaal

Source: Eskom Media Desk

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