The board of National Electricity Regulator (NER) meets today to
consider new tariff proposals from State-owned electricity utility
Eskom.
It is believed that the group will argue for above inflation increases in a bid to improve its overall rate of return ahead of a partial privatisation process, scheduled to begin next year.
It has been speculated that Eskom will request a tariff hike of between eight and nine percent as it moves to edge toward a 20% return level.
However, the board meeting also comes at a time when there is strong pressures from government and consumer groups to stem price increases as inflation continues to rise.
It also follows the release of a stable 15,4% producer price inflation (PPI) figure for September, which would have risen to around 16% had it not been for a lower electricity component.
Indeed, the electricity component declined by around a percent as electricity prices fell an annual 15,3% due to a change in the Eskom pricing structure.
NER CE Xolani Mkhwanazi tells Engineering News Online that the board will attempt to balance both the need for ensuring a fair return to Eskom and the call to keep electricity prices under control.
“We will look at Eskom’s costs of doing business and wok out what we believe is a fair return for the organisation.
“Last year we settled on a rate of return for Eskom of 10% which led to a tariff increase of 6,2%.
“We will do the same this year,” Mkhwanazi explained, adding that the NER will want to settle on a fair return for Eskom rather than the “best return”.
It is anticipated that the HER will consider an after tax return of between ten percent and 14%.
Traditionally, the NER has not granted Eskom’s full tariff-increase request: in 2001, for instance, Eskom requested an increase of 8,5% and received 6,2; and the previous year it requested 7,2% and received 5,5%.
However, there are powerful elements in government that have been hinting that Eskom tariffs need to be increase ahead of competition.
Writing earlier this month, Minerals and Energy Minister Phumzile Mlambo-Ngcuka forecast that electricity prices in South Africa, which are among the lowest globally, will come under upward pressure in the medium term, and that this pressure could be mitigated only by the introduction competition.
In the article written under the heading 'Why is the Restructuring of State Assets a Benefit for the country?', Mlambo-Ngcuka claimed that Eskom's electricity prices are below sustainable economic values and do not cover the full cost of production.
"Therefore, irrespective of whether restructuring proceeds or not, prices will come under upwards pressure in the medium to long term as a result of the need to finance further investment as surplus capacity runs out and prices adjust to become more cost reflective," she says.
The Minister added that restructuring for competition would reduce the upward pressure on prices by increasing pressure for improved investment and operational efficiencies.
South Africa, Mlambo-Ngcuka writes, has enjoyed low and declining (in real term) prices for the past decade or more. A closer examination of the cost-structure in the industry shows that low prices are due to a combination of factors:
- Cheap coal: Almost all of South Africa's electricity is produced from cheap low-grade coal. The unit cost of coal has been declining over the past decade, contributing to the overall cost reduction during this period.
- Aging assets: Much of South Africa's power generating assets are now 15 years old or more. Due to inflation, depreciation charges on these historical assets are considerably lower than depreciation on new assets. Unit depreciation expenses have been reduced by 25% since 1990, contributing 10% of total cost reductions.
- Declining debt: Because of declining investment, Eskom has been in a position to progressively reduce its debt burden, thereby significantly lowering interest costs on its income statement. Unit finance costs have reduced by 77% over the past decade, contributing three quarters of the total reduction in costs at Eskom.
It is believed that the group will argue for above inflation increases in a bid to improve its overall rate of return ahead of a partial privatisation process, scheduled to begin next year.
It has been speculated that Eskom will request a tariff hike of between eight and nine percent as it moves to edge toward a 20% return level.
However, the board meeting also comes at a time when there is strong pressures from government and consumer groups to stem price increases as inflation continues to rise.
It also follows the release of a stable 15,4% producer price inflation (PPI) figure for September, which would have risen to around 16% had it not been for a lower electricity component.
Indeed, the electricity component declined by around a percent as electricity prices fell an annual 15,3% due to a change in the Eskom pricing structure.
NER CE Xolani Mkhwanazi tells Engineering News Online that the board will attempt to balance both the need for ensuring a fair return to Eskom and the call to keep electricity prices under control.
“We will look at Eskom’s costs of doing business and wok out what we believe is a fair return for the organisation.
“Last year we settled on a rate of return for Eskom of 10% which led to a tariff increase of 6,2%.
“We will do the same this year,” Mkhwanazi explained, adding that the NER will want to settle on a fair return for Eskom rather than the “best return”.
It is anticipated that the HER will consider an after tax return of between ten percent and 14%.
Traditionally, the NER has not granted Eskom’s full tariff-increase request: in 2001, for instance, Eskom requested an increase of 8,5% and received 6,2; and the previous year it requested 7,2% and received 5,5%.
However, there are powerful elements in government that have been hinting that Eskom tariffs need to be increase ahead of competition.
Writing earlier this month, Minerals and Energy Minister Phumzile Mlambo-Ngcuka forecast that electricity prices in South Africa, which are among the lowest globally, will come under upward pressure in the medium term, and that this pressure could be mitigated only by the introduction competition.
In the article written under the heading 'Why is the Restructuring of State Assets a Benefit for the country?', Mlambo-Ngcuka claimed that Eskom's electricity prices are below sustainable economic values and do not cover the full cost of production.
"Therefore, irrespective of whether restructuring proceeds or not, prices will come under upwards pressure in the medium to long term as a result of the need to finance further investment as surplus capacity runs out and prices adjust to become more cost reflective," she says.
The Minister added that restructuring for competition would reduce the upward pressure on prices by increasing pressure for improved investment and operational efficiencies.
South Africa, Mlambo-Ngcuka writes, has enjoyed low and declining (in real term) prices for the past decade or more. A closer examination of the cost-structure in the industry shows that low prices are due to a combination of factors:
- Cheap coal: Almost all of South Africa's electricity is produced from cheap low-grade coal. The unit cost of coal has been declining over the past decade, contributing to the overall cost reduction during this period.
- Aging assets: Much of South Africa's power generating assets are now 15 years old or more. Due to inflation, depreciation charges on these historical assets are considerably lower than depreciation on new assets. Unit depreciation expenses have been reduced by 25% since 1990, contributing 10% of total cost reductions.
- Declining debt: Because of declining investment, Eskom has been in a position to progressively reduce its debt burden, thereby significantly lowering interest costs on its income statement. Unit finance costs have reduced by 77% over the past decade, contributing three quarters of the total reduction in costs at Eskom.
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