At the end of January, NERSA announced that Eskom will be allowed to implement increases of 12.7%, 5.36% and 6.19% in each of the next financial years – a sizable downward adjustment of the 36.14%,11.81 and 9.10% respective tariff increases the electricity provider had applied for. Furqaan Ahmed, Manager at Cresco Group prepared an analysis of the decision, supported by Shirley Salvoldi, previous Corporate Specialist Retail Pricing at Eskom turned Cresco Advisory Consultant.  Salvoldi says that NERSA’s decision could impact Eskom’s ability to achieve its objectives, and we may well see steeper increases in the years to come as the company looks to recoup the funds it requires. Lastly, more loadshedding may be on the cards should budget restructuring see less funding earmarked for diesel.

“NERSA must still provide the detailed reasoning for its decision, without which a full analysis cannot be properly unpacked. In the interim, Cresco has been conducting an analysis of MYPD6 and the future (beyond the MYPD6 period) Eskom price path scenarios for its clients. Ahmed says this involves calculating probable future increases based on underlying macroeconomic and political views, as well as capital expenditure projections. Cresco has used a scenario-based approach to consider outcomes including the changes when a Multi Market model (“Day Ahead Market”) may be introduced.

“At a high-level view, we believe the increases approved by NERSA appear to be on the low side. Compared to Eskom’s submission, NERSA reduced accumulatively the revenue asset base by R610b over the three-year period (on which a return is calculated), reduced depreciation and operating costs by R124b and increased the forecast sales (29 253 GWh). What this means for Eskom is still unknown, and whether the company can cover its interest debt due to the lower return remains to be seen,” adds Ahmed.

NERSA approvals for the next 3 years:

NERSA adjusted the Allowable Revenue (AR) which is an outcome of allowed costs plus return for each Eskom entity per period based on Eskom’s application. “This leads to lower tariff increases now, but Eskom’s submission figures were much higher, reflecting its projected needs for an efficient operation. It is therefore realistic to assume future increases might be steeper,” says Ahmed.

Ahmed notes that the National Transmission Company of South Africa’s (NTCSA) AR has largely been kept intact, and Regulated Asset Base (RAB) has been adjusted across all Eskom operating entities. “Eskom Generation’s RAB has had the largest adjustment while RAB for the NTCSA and Eskom Distribution remains largely intact. The NTCSA’s capex program was factored in, with quarterly reports now required due to past execution issues; costs are smoothed in the second and third years according to NERSA,” he adds. Ahmed also adds that while NERSA noted that funds for each entity will be ringfenced, there is a concern around how this will be managed within Eskom Holdings.

On loadshedding predictions, Ahmed points to possible additional pressure on the coal fleet, which could cause a strain on ultimate supply at hours where renewable energy production is low, given the dispatchable nature of the Open Cycle Gas Turbines (OCGT). “This is because Eskom relies on OCGTs to avoid load shedding. Primary Energy has been adjusted downward; this consists of NERSA reducing the OCGT load factor.

Salvoldi, who participated in previous price applications while at Eskom also noted a difference in approach between Eskom and NERSA. NERSA has increased the Sales volumes, which decreases the average tariff and increase (Tariff = Allowable Revenue/Sales). “It is not clear what grounds or facts NERSA has used to change Eskom’s own forecast, or whether this was a strategy to reduce the average price increase,” she says. This was justified by approval of coal costs as costs approved should result in higher production and based on NERSA’s expectation of 75% Energy Availability Factor (EAF). “However, without having seen the reasons for the decision, there is a concern around this as they are linking demand to supply, and Eskom may refute this because a reduction in demand would result in lower sales,” Salvoldi explains. Cresco’s projections show reduced sales volumes as more private sector Independent Power Producer (IPPs) achieve operations, with Eskom sales will being impacted.

Ahmed adds that another important observation that that no arrears debt has been approved. This reduces the tariff but puts pressure on Eskom’s financial position. “Eskom needs to increase efficiency of bad debt collection, but it is made difficult by the fact that a large portion of the bad debt is from municipalities of which Eskom has limited or no control. While it is accepted that bad debt must be managed, this is a systemic issue that also puts the future South African Wholesale Market (SAWEM) and Eskom Distribution’s ability to participate in the future wholesale market at huge risk”, he says.

Cresco has also observed that there has been no approved allowance for carbon tax, possibly because carbon tax applicable to Eskom is being reconsidered. This would still need to be substantiated.

Finally, there isn’t a finalised impact modelled on the Eskom Retail Tariff Plan and the tariff increase yet. “It appears unlikely that, given the timing, Eskom will update rates based on whatever NERSA approves in the tariff restructuring and for NERSA to approve these updated rates with the price increase timeously to meet the March 15 MFMA tabling in parliament date,” Ahmed says. Cresco assumes one scenario is that NERSA might approve principles for the tariff changes and request that Eskom to redo a cost of supply study using the MYPD6 numbers and resubmit this to NERSA. Using the MYPD6 numbers in the cost of supply study will result in changes to the weighting of all the rates,” he concludes.