Rapid price hike is not Eskom's only option
October 23, 2009
By Justin Brown
The government must do all in its power to preserve the country's standing as a low-cost producer of bulk power. Like water, energy is a basic commodity both for ordinary citizens and industrial users.
Keeping power cheap maintains the standard of living of local households and keeps the country attractive to local and international investment.
South Africa has been able to provide cheap power for many years, largely because of its abundant coal resources.
But the attractiveness of local power will be destroyed if Eskom's proposal to more than triple power prices between next April and April 2012 is approved.
Within two days of the announcement of the power hikes plans, the country lost the $3.25 billion (R24bn) aluminium smelter that Rio Tinto Alcan was going to build in Coega when there was enough surplus power to develop the 1 350 megawatt plant.
Even after a more than 30 percent increase in prices, NUS Consulting Group found in a June survey of 14 developed countries that South Africa's average price of electricity was 4.9 US cents (36.2c) per kilowatt-hour (kWh).
However, if there are three 45 percent increases between April and April 2012 then South Africa's price of energy will rise to an expensive R1.01/kWh.
That price of power today would see South Africa's ranking crash to 13th out of 14 countries surveyed, with only Italy having more costly power at R1.19/kWh. At present, Eskom's average cost of producing a kilowatt of power is 26c an hour.
A glaring gap in the utility's application to the national energy regulator is that it does not specify what the unit cost of power from its new stations will be.
This brings into question its calls for power tariffs to be "cost reflective".
Eskom will only know the average cost of producing power at its new stations when the stations are at full and stable production. The 4 764 megawatt Medupi station is set to be commissioned by August 2015 and the Kusile station is due to be fully operational by October 2016.
Even with these new stations, Eskom still has old stations that produce power cheaply. From an efficient producer one would expect new stations with better technology and methods to produce power more cheaply than the older facilities.
The extent of the increase that it is seeking will make all investors, both local and international, think twice about putting up projects in South Africa.
Barbara Hogan, the Minister of Public Enterprises, had said there was "no alternative" to more than tripling power prices without even saying if any alternatives had ever been considered.
However, there are two obvious options.
The first is that the power utility slows down its expansion programme to a level that takes into account its cash resources, the loan and guarantees the state has provided and the borrowing that its financial position can handle.
Funds from these three sources would amount to at least R254bn. This is a substantial amount. Its growth plans have been pursued in a great rush and a slowdown in the programme could be quite healthy.
The second alternative would be for the state to add to its R60bn loan to the power producer and raise its R176bn debt guarantees. Credit rating agencies say that the state has the capacity to increase its Eskom debt guarantees. Other options include independent power producers and selling off equity in Eskom or its projects.
This would allow the utility to continue to expand. It would also allow for local power tariffs to remain competitive.
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