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Green too expensive for Eskom

Mar 12 2017 06:02
Peter Luhanga

The troubled power utility can barely afford to comply with environmental compliance obligations, says public enterprises minister.

Eskom estimated that a total of R340 billion would be required to fully meet environmental compliance obligations. This would significantly increase the price of electricity – and it was unsustainable and unaffordable, considering the economic environment, Public Enterprises Minister Lynne Brown said this week.

Addressing Parliament’s Portfolio Committee on Public Enterprises about the performance and challenges facing six state-owned companies under her department, Brown said Eskom’s new Medupi Power Station alone faced an additional cost of R40 billion for flue-gas desulphurisation installation.

The coal-fired fleet, she said, was ageing and many stations were undergoing midlife refurbishments.

She said it was therefore only possible to allocate a fraction of the capital expenditure budget for power generation to emissions-reduction projects.

Also, she said, costs for Eskom’s emissions-reduction plan accounted for about 20% of the total third multiyear price determination capital expenditure budget – that is R8 billion of the total budget of R41 billion. This is after most of the capital expenditure costs of the emissions-reduction programme have been deferred to the fourth multiyear price determination capital expenditure period from April 2018 onwards.

In addition, she said, regulatory uncertainty regarding the National Energy Regulator of South Africa (Nersa) had an impact, too. Multiyear price determination decisions posed a significant challenge to Eskom’s revenues and the state-owned companies’ ability to meet debt payment obligations.

She said Nersa had approved only a 2.2% price increase in its latest determination, and the court case regarding the legal challenge on the Regulatory Clearing Account, which would allow Eskom to claim back unexpected costs, still remained unresolved.

Despite the challenges, Brown said, Eskom had continued to maintain a positive financial performance. The company posted a net profit of R4.6 billion in the 2015/16 financial year.

“Furthermore, the company is projected to post a profit for the financial year ending in March 2017,” said Brown.

“Eskom operates in a complex and highly regulated environment and the policy decisions determine whether the state-owned company will be operationally or financially sustainable. The challenges facing Eskom are the uncertainty regarding the role of the company in the future build programme, the adverse effect of the independent power producer programme, and high environmental compliance costs,” she said.

About SA Express airline, she said the company was facing serious challenges that were more structural than operational.

Its financial sustainability is faced with profitability and liquidity challenges, and a delay in raising loans since March 2015. The state-owned company is unable to fulfil its debt payment obligations.

“SA Express was expected to pay R150 million to the lenders by February 24, failing which, the guarantee provided by government would be triggered, requiring payment within 30 business days,” she said.

She said her department supported the state-owned company’s request to renegotiate with Rand Merchant Bank and Nedbank to pay them a reduced amount of R58 million, and pay the rest in instalments based on a proposed repayment profile supported by financial projections until January 2018.

On operational challenges, she said many of SA Express’ aircraft remained on the ground because of maintenance issues.

On Denel, she said the company remained a government flagship on how to implement a turnaround strategy and it held an important lesson for the state on how to optimise partnerships with the private sector.

“Over the past three years, Denel has posted profits. And the trend has remained upwards. In the 2015/16 financial year, the company posted a profit of R395 million,” she said.

Brown said Denel, for the first time, was ranked among the world’s top 100 global defence manufacturers.

About Alexkor, she said its business sustainability from diamond deposits was a challenge.

The business model needed to be revisited to diversify the business by venturing into other minerals options, including coal, as well as more downstream beneficiation.

On the SA Forestry Company, she said business sustainability was affected by tough traditional markets and an inability to access new markets because of a limited product offering.

Transnet remained an important company in the reindustrialisation of the South African economy through improving the performance of strategic corridors, Brown said.

Since 2007, Transnet had implemented an expansion programme that responded to South Africa’s industrialisation requirements, she said.

“All our state-owned companies within the portfolio of the department of public enterprises have thus far recorded a profit of R5.4 billion for the 2015/16 financial year. It is also important to note that the state-owned companies are creating direct employment for approximately 120 000 people.”

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