The National Electricity Regulator (NER) yesterday announced that
it has approved an average electricity tariff increase of 6,4% for
Eskom from January 1 2005, which translates into an average price
of 16 cents per kWh.
It is also 0,4% higher than the upper limit of South Africa's self-imposed inflation target band of 3% to 6%. It is, therefore, likely to attract some criticism, particularly as it comes at a time when President Thabo Mbeki has called for administrated prices to be contained.
However, the decision appears to have taken the need to build new power-generation capacity into consideration, and comes only one day after Cabinet endorsed a plan to raise power sector investment by R107-billion between 2005 and 2009.
This decision, said the NER, was based on an extensive scrutiny of Eskom's budgets for 2005, its latest audited financial statements for 2003, and the returns Eskom requires to meet the needs of future electricity customers, in a sustainable manner.
However, while the regulator said this increase was lower than what Eskom applied for, it could not give a figure for the overall increase requested by the utility.
NER spokesperson Nhlanhla Cebekhulu explained that this year Eskom's application was “very board”, as it applied for separate tariff adjustments in terms of distribution, transmission and generation.
To calculate the increases, the NER uses the rate of return (ROR) methodology, which is applied to arrive at the appropriate price rise for Eskom customers. The ROR methodology calculates the required revenue of the utility, which is equal to the costs to supply electricity, plus a fair rate of return on the rate base.
In deciding to award a lower increase, the NER is confident that it has managed to keep electricity affordable by putting pressure in Eskom's costs, in the interest of consumers and in the interest of keeping the economy competitive. The regulator also argued that it has provided Eskom with a reasonable rate of return so that it can sustain its current activities, and that it has ensured the sustainability of the industry by providing an environment conducive to attracting new investment.
“The positive effect will be passed on to all customers, including municipalities, that purchase bulk electricity from Eskom on behalf of their own customers. In reality, this means electricity customers will experience a substantially lower average increase, as the NER will claw back excess revenues earned in 2003,” the regulator said in a statement.
It also warned that Eskom's customers should be aware that their individual adjustments could differ from the effective average price increase of 6,4%, depending on the implementation of specific tariffs.
“Similarly, the price increases faced by customers served by municipalities may also differ from the 6,4% figure, as other factors, including tariff restructuring within municipalities, affect prices to these customers,” the NER added.
This year, significant changed in cost drivers underlie the 16-cent per kWh price level. Compared to last year's approved increase, the NER has allowed for an increase in operating expenses, which reflects an acceptance of Eskom's argument that increased demand has necessitated a change in maintenance regimes and costs, and significant increases in fuel costs. It also reflects the NER's views that Eskom's rate of return has to be adjusted to be in line with its monopoly, public utility status and its actual cost of capital.
In order to ensure that an appropriate framework exists to tackle the growth in electricity demand, the NER has allowed revenues for 152 MW of cost-effective demand-side management (DSM) investments in 2005. The regulator will increase allowed revenues for DSM if Eskom exceeds the 152 MW DSM target.
Thus, the NER has allowed Eskom's proposed expense and additions to its asset base to make provision for new generation capacity, as analysis has shown that, given Eskom's current financial position and approved price level for 2005, it will be able to finance the construction of new plants during 2005 and beyond, which maintaining appropriate financial ratios and credit rating needed to raise debt finance.
The NER has, over the last five years, consistently awarded Eskom price increase less than what it applied for.
It is also 0,4% higher than the upper limit of South Africa's self-imposed inflation target band of 3% to 6%. It is, therefore, likely to attract some criticism, particularly as it comes at a time when President Thabo Mbeki has called for administrated prices to be contained.
However, the decision appears to have taken the need to build new power-generation capacity into consideration, and comes only one day after Cabinet endorsed a plan to raise power sector investment by R107-billion between 2005 and 2009.
This decision, said the NER, was based on an extensive scrutiny of Eskom's budgets for 2005, its latest audited financial statements for 2003, and the returns Eskom requires to meet the needs of future electricity customers, in a sustainable manner.
However, while the regulator said this increase was lower than what Eskom applied for, it could not give a figure for the overall increase requested by the utility.
NER spokesperson Nhlanhla Cebekhulu explained that this year Eskom's application was “very board”, as it applied for separate tariff adjustments in terms of distribution, transmission and generation.
To calculate the increases, the NER uses the rate of return (ROR) methodology, which is applied to arrive at the appropriate price rise for Eskom customers. The ROR methodology calculates the required revenue of the utility, which is equal to the costs to supply electricity, plus a fair rate of return on the rate base.
In deciding to award a lower increase, the NER is confident that it has managed to keep electricity affordable by putting pressure in Eskom's costs, in the interest of consumers and in the interest of keeping the economy competitive. The regulator also argued that it has provided Eskom with a reasonable rate of return so that it can sustain its current activities, and that it has ensured the sustainability of the industry by providing an environment conducive to attracting new investment.
“The positive effect will be passed on to all customers, including municipalities, that purchase bulk electricity from Eskom on behalf of their own customers. In reality, this means electricity customers will experience a substantially lower average increase, as the NER will claw back excess revenues earned in 2003,” the regulator said in a statement.
It also warned that Eskom's customers should be aware that their individual adjustments could differ from the effective average price increase of 6,4%, depending on the implementation of specific tariffs.
“Similarly, the price increases faced by customers served by municipalities may also differ from the 6,4% figure, as other factors, including tariff restructuring within municipalities, affect prices to these customers,” the NER added.
This year, significant changed in cost drivers underlie the 16-cent per kWh price level. Compared to last year's approved increase, the NER has allowed for an increase in operating expenses, which reflects an acceptance of Eskom's argument that increased demand has necessitated a change in maintenance regimes and costs, and significant increases in fuel costs. It also reflects the NER's views that Eskom's rate of return has to be adjusted to be in line with its monopoly, public utility status and its actual cost of capital.
In order to ensure that an appropriate framework exists to tackle the growth in electricity demand, the NER has allowed revenues for 152 MW of cost-effective demand-side management (DSM) investments in 2005. The regulator will increase allowed revenues for DSM if Eskom exceeds the 152 MW DSM target.
Thus, the NER has allowed Eskom's proposed expense and additions to its asset base to make provision for new generation capacity, as analysis has shown that, given Eskom's current financial position and approved price level for 2005, it will be able to finance the construction of new plants during 2005 and beyond, which maintaining appropriate financial ratios and credit rating needed to raise debt finance.
The NER has, over the last five years, consistently awarded Eskom price increase less than what it applied for.
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