Recent electricity price hike proposals put to the National Energy Regulator of SA (Nersa) had been characterised by a “pick a number… any number” approach, which indicated that the regulator and Eskom were unable to forecast prices appropriately because of cost and financial management inefficiencies, a member of the National Planning Commission argued last week.
Eskom’s cost controls and financial management “have been less than optimal”, but the state-owned electricity monopoly needed to earn a profit and large electricity price increases over the past five years had been necessary, commission energy expert Anton Eberhard said.
Addressing the Cape Town Press Club in the wake of the Nersa hearings in the city on Eskom’s pricing proposal, Eberhard, who is a professor at the business school at UCT, said Eskom’s proposal of annual 16 percent hikes until 2018 had come under “unprecedented scrutiny… which is a good thing”.
However, large electricity price increases over the past five years had been necessary. The mistake prior to that was setting power prices below sustainable levels “especially the levels required to finance new generation capacity”.
More recently, increases amounted to “massive spikes”, which could have been avoided if price rises had been smooth over the years, he said.
One had to take into account inflation, but even in real terms prices were low “and went lower in the 1990s” as annual increases were below inflation, he said.
In 1990 a kilowatt-hour (kWh) of electricity had cost 8c. By 2007 the average price had risen to just less than 20c/kWh. Now, six years later, the average electricity selling price was 61c/kWh.
Eskom was proposing an increase in electricity prices to R1.28/kWh by 2018.
“Thus over the 10 years from 2007/08 electricity prices are projected by Eskom to increase by more than 600 percent in nominal terms,” he noted.
The “pick a number… any number” approach had characterised price determination proposals in the past few years. In 2007/08 the original Nersa determination was for a 5.9 percent increase. Eskom applied for a revision to 18.7 percent and the regulator approved 14.2 percent. Eskom then proposed a 60 percent hike and Nersa “eventually agreed” to 27.5 percent.
Last year, the third year of the multi-year price determination period, Eskom initially suggested 45 percent, but applied for 35 percent. The regulator agreed to 25 percent. Then Public Enterprises Minister Malusi Gigaba said it was too high and suggested 16 percent, with which the regulator agreed.
The lesson to be learnt was that “we need to smooth the electricity price over time, rather than follow [Eskom’s capital] investment cycle”.
The government needed to assist Nersa in crafting an acceptable price path over the medium term, one in which prices remained internationally competitive “while ensuring that Eskom can cover… costs plus meet its cost of capital over the long term”, Eberhard said.
He said there would be times when the government would need to provide “extra guarantees and even equity injections” and others “when it took returns out”, which it could put in a dedicated capital development fund.
Ways were also needed to strengthen the regulation of municipal top-up charges.
As envisaged in the Independent System And Market Operator Bill before Parliament, the country needed an operator that facilitated procurement from independent power producers against which Eskom’s costs could be benchmarked “as well as ensuring that Eskom power stations migrate to medium- to long-term contracts at fixed prices”.
Over time, portions of these contracts could be exposed to bids in an electricity market. Such a system would bring greater price and cost transparency and impose greater cost discipline on Eskom’s financial management.
Colen Garrow of Meganomics said Eberhard had a point about Eskom’s inability to carry out appropriate costing. When Eskom picked a figure of a 25 percent price hike and later tempered it to 16 percent, this in itself had a negative impact, he said.
It was evidence that the entity could not do its costing calculations efficiently. Market players already factored in the higher prices in many goods and services. “Many may have put up their prices already,” he warned, noting that this had a ripple effect throughout the economy.
He said fears of high prices that did not materialise were damaging to the economy.