By Dominic Brown and Jaco Oelofsen | Daily Maverick | 08 Feb 2023
Reducing primary energy costs and providing debt relief are low-hanging fruit in terms of solving Eskom’s tariff increase problem, but these measures will be short-lived unless there is a restructuring of Eskom’s financial model, including breaking from the user-pays principle. This article is Part One in a series of three that addresses South Africa’s energy crisis. The National Energy Regulator of South Africa’s (Nersa’s) approval of tariff hikes of 18.6% for 2023/2024 and 12.7% for 2024/25 for state-owned power utility Eskom has been met with outrage. South Africans are wondering how it is possible to pay much more for considerably less electricity. While it is hard not to be outraged, much of the anger is misplaced.
As Daily Maverick associate editor Ferial Haffajee points out, “without the 18.65% increase Eskom can’t survive”. Already, Eskom is facing a death spiral with insufficient resources to cover operating, maintenance and debt-service costs and investment in infrastructure. It comes as no surprise that Eskom applied for a substantial tariff increase. But there are options that can allow us to scrap this increase in the short term, and transform Eskom’s financial model altogether in the long term.
Reduce primary energy costs
According to Eskom, some of the main drivers of its requested tariff increase are a 9% increase in the cost of energy sourced from independent power producers (IPPs) and an increase in its primary energy costs, mainly due to rising diesel and fuel costs. These costs can be substantially reduced.
One option would be to renegotiate IPP contracts to reduce the price of the purchase power agreements of the contracts of Bid Windows 1 to 4. This would reduce the total input costs of IPPs, which account for more than a third of the total primary energy cost (R43.1-billion out of R138-billion), while only contributing 8% of total installed capacity.
- Grant Eskom a direct diesel procurement licence
The South African Revenue Service providing Eskom with a licence to procure diesel from wholesalers, as opposed to the current situation where it is forced to purchase from retailers, would save the power utility just under R6 per litre. Eskom still needs 200 million litres of diesel until March, the end of the financial year. Saving R6 per litre would allow a saving of R1.2-billion on diesel alone.
- Cap the coal price
The price of coal has also increased dramatically over the past 15 years, almost tripling in price, primarily due to increased demand for low-quality coal and black economic empowerment coal contracts. Placing a cap on the coal price would be an additional important step to reduce Eskom’s operating costs. The energy crisis is a national emergency that more than warrants drastic measures.
In addition to rationalising Eskom’s primary energy costs, another option is to provide Eskom with debt relief. Just servicing its debt alone costs it R35.4-billion in the previous financial year (2021/2022). R8-billion of this was paid to public entities, primarily the Government Employees’ Pension Fund (GEPF), which has R81-billion of Eskom’s total liabilities. The GEPF has more than R2.2-trillion in accumulated reserves and is 110% fully funded (able to pay out the current and future pensions of all members).
A moratorium could be placed on the repayment of this debt service without any additional risk to the pensions of the beneficiaries of the GEPF. The Public Investment Corporation has offered partial relief already by rolling over R13-billion of Eskom’s debt that had to be repaid in January this year. This is an important first step, but much more must be done.
Restructuring Eskom’s debt is another urgent requirement that can be easily met. The national government needs to take on up to two-thirds of Eskom’s debt, as mooted by the finance minister in the Medium-Term Budget Policy Statement announced in October last year. As long as this does not come at the expense of social spending and investment in the rest of the economy, it can be a critical measure offering substantial relief to Eskom’s financial position.