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Eskom’s 20% uses ‘impossible’ assumptions

Jun 11 2017 06:00
Dewald Van Rensburg

Eskom’s plans to ask for a 20% tariff increase for next year assumes higher economic growth than just about anyone expects – and assumes a physically impossible doubling of sales by renewable energy independent power producers (IPPs), despite Eskom actively fighting against their coming online.

It also assumes that Eskom will get rid of about ­­4 300 workers – 10% of its workforce – by March 2019 by not filling the posts left vacant when a member of staff retires.

These assumptions make the application likely to once again result in an enormous additional tariff request later on using the so-called Regulatory Clearing Account (RCA), which is a monitoring and tracking mechanism that compares certain uncontrollable costs and revenues with actual costs and revenues incurred by Eskom.

A confidential draft of Eskom’s planned application for next year’s tariff hike to the National Energy Regulator of SA (Nersa) made its way into the public domain this week. It spells out all the mechanics regarding how the utility came to the 20% figure.

Importantly for most consumers in the country, the application is actually for 27.29% from municipalities.

Eskom’s tariffs are set by establishing an “allowable revenue” to cover costs, which gets divided by the expected volume of electricity sales.

The five-year tariff determination from Nersa, which ends this year, had made hopelessly overoptimistic assumptions about growth and power demand.

When Eskom failed to sell the amount of power the tariff was designed around, it repeatedly asked to use the RCA to add more tariff hikes in the next few years to make up the shortfall in revenue.

This new application is only for one year, precisely because of “challenges faced by Eskom in making plausible projections”, reads the draft application.

The utility nevertheless seems to have knowingly inflated the revenue it will be entitled to – and the amount of power it will sell.

The application claims Eskom will in the next financial year buy power from all the projects in the Independent Power Producer Procurement Programme that have not yet been built.

Eskom’s application says it will more than double the power it buys from independent projects from 7 091 gigawatt hours in this past financial year to 17 828GWh in the year to March 2019.

For this, Eskom is asking for an additional R11 billion in allowable revenue – the largest cost element in the application.

Brenda Martin, the chair of the SA Renewable Energy Council, said this assumption was physically impossible.

So did University of Cape Town Professor Anton Eberhard, an expert on South Africa’s electricity sector.

“Even if about four IPPs are signed now, none will be producing by the start of the 2018/19 financial year,” he told City Press.

According to Martin, if all the outstanding IPP contracts were signed this month, they would only start delivering power at the end of 2019.

The renewables sector has been locked in a long battle with Eskom, which does not want more IPPs.

When it comes to the forecast for power demand, at least one major assumption is very wrong – Eskom is still using GDP forecasts that are hopelessly optimistic. The application, dated this April, assumes growth of 1.9% this year and 2.4% next year.

It claims this is an average of forecasts from Investec, the International Monetary Fund and its own internal team. However, it claims that Investec forecasts GDP growth of 2.2% this year – in reality, Investec’s chief economist in January predicted 0.8% growth.

By overestimating GDP, Eskom is almost automatically setting the scene for more RCA applications in future as demand falls short of forecasts.

The Supreme Court of Appeal this week ruled in favour of Eskom and Nersa in a case challenging the previous RCA, which was brought by a group of businesses in Nelson Mandela Bay.

The effect of this is that Nersa can now finally consider two RCA applications that Eskom had already submitted that ask for an additional R43 billion in revenue based on shortfalls in the 2015 and 2016 financial years.

Another RCA application based on the 2017 financial year could be made in the next month or two.

Eskom spokesperson Khulu Phasiwe emphasised that the document was not the actual request to Nersa, but was a preliminary one given to Treasury and the SA Local Government Association for feedback.

He said that the workforce reduction assumption relied only on attrition, not retrenchments.

“Over the years, we have had attrition of about 5% a year,” he told City Press. “No one will be fired.”

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