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Media Centre  |  Submissions

COSATU Comments on Eskom’s Application for a 25.3% increase in electricity tariff (2015-2018)

15 June 2015


1.1 The Congress of South African Trade Unions (COSATU) welcomes the opportunity to make a representation to the National Energy Regulator of South Africa (Nersa) on Eskom’s application for the reopening of certain aspects of the Multi-Year-Price-Determination 3 (MYPD3). We have registered our concern in the past that NERSA tended to use venues that are out of reach for many stakeholders who cannot afford the transport costs to centralised venues for public hearings. Whilst Nersa had decentralised public hearings for the MYPD3, we are concerned that it has reverted to centralisation in relation to the public hearings for this application.

1.2 We note that Eskom’s application seeks to allow the entity an additional 12.61% increase in the price of electricity. In terms of Eskom’s submission, the 12.61% is made up of 10.10% increase that will enable Eskom to buy electricity from Independent Power Producers (IPPs) through the Short Term Power Purchase Programme (STPPP) and buy diesel to operate the expensive Open Cycle Gas Turbines (OCGTs). The remaining 2.51% would be used to recover the additional costs brought about by an increase in the environmental levy as announced by the Minister of Finance in his 2015/16 Budget Speech.

1.3 In July 2014 Nersa allowed Eskom to increase electricity tariffs by 12.69% in 2015 to recover “unforeseen costs” from the MYPD2 (i.e. costs that Eskom claimed to have incurred and Nersa hadn’t included in the MYPD2). In its 2015 application, “Reopener for selective items”, Eskom has added the 12.69% it has already been allowed to the additional 12.61% it says it requires for STPPP, OCGTs and environmental levy costs. So the total tariff application is 25.3% for 2015 till 2018. As we understand it, this is over and above the 8% increase Nersa allowed Eskom in 2013.

2. Reasons cited by Eskom for reopening the MYPD3

2.1 In its application, Eskom argues that in the financial year 2013/14 it has used “OCGTs extensively, which was unforeseen”, and expects that situation to continue in 2015. It further argues that it had not foreseen it would have to procure more power from IPPs. The extensive usage of OCGTs and STPPP was not included in the MYPD3 assumptions because it wasn’t foreseen that Kusile, Medupi and Ingula would not be ready to supply additional electricity as scheduled. The performance of the existing power plants has also deteriorated due to lack of maintenance and that has resulted in rotational load shedding since 2014.

2.2 This is what Eskom says on page 7 of the application: “....since the MYPD 3 application, various factors including the further deterioration of the Generation plant performance; unexpected significant events such as the boiler explosion at one of the Duvha units; the collapse on the Majuba power station silo; challenges with coal quality and delays in commissioning of new build stations have resulted in Eskom having to operate more expensive supply options like the usage of the OCGTs and looking for more short term supply options to close the demand gap. Even though the demand for electricity has not increased as assumed since the MYPD 3 decision, the challenges faced with the supply options have resulted in significant shortfalls”.

2.3 The former CEO of Eskom Tshediso Matona had indicated that at the heart of the challenge facing Eskom to keep the lights on was its failure, over a period of time, to maintain the plants. He said, just as the performance of the car would deteriorate if it is not maintained, so is Eskom’s generation plants. The question therefore is why should the electricity consumers, particularly the working class and the poor have to bear the brunt of Eskom’s inefficiencies?

2.4 Furthermore, Eskom management is to blame for delays in the commissioning of the new power stations. It is therefore unfair to punish electricity consumers for Eskom’s failures.

3. The impact of high electricity tariffs

3.1 Eskom indicates in its application that the Electricity War Room, which is headed by the Presidency, has advised it to apply for “re-opener” to cover the costs of OCGTs and STPPP in order to keep the lights on.

3.2 In 2012, Nersa approved Eskom’s application for the reduction of electricity tariff from 25.9% to 16%. This was after President Jacob Zuma had raised a concern in his 2012 State of the Nation Address about the negative impact of high electricity prices on the poor households and the economy generally. In its determination, Nersa quoted the President:

“There is an ongoing concern from business and communities about high electricity costs. I have asked Eskom to seek options on how the price increase requirement may be reduced over the next few years, in support of economic growth and job creation and give me proposals for consideration.
“We need an electricity price path that will ensure that Eskom and the industry remain financially viable and sustainable, but which remains affordable especially for the poor. However, to achieve sustainability, a pact will be required with all South Africans – including business, labour, municipalities, communities and all customers and suppliers”.

3.3 In the light of this, COSATU is surprised and disappointed that it is the same Presidency-led War Room that has now advised Eskom to apply for increase in electricity tariffs. The President had indicated he wanted to see the “price increase requirement reduced” but the opposite is happening. We note that Eskom acknowledges that government has committed to inject R20bn into Eskom. But Eskom says the National Treasury has indicated there won’t be any further equity injections to Eskom beyond the R20bn already committed. COSATU maintains that it is government’s responsibility to ensure financial sustainability of Eskom. Eskom is not a private enterprise but a state owned enterprise that has a huge developmental mandate.

3.4 COSATU rejects the National Treasury’s assertion that “significant tariff increases are critical to prevent higher levels of load shedding”. While the National Treasury acknowledges that “tariff increases will have a significant negative impact on the economy”, it argues that the “increases are justifiable based on costs and liquidity requirements of Eskom”. This is completely in contrast to what the said in his 2012 State of the Nation Address.

3.5 The 2015 iteration of the Industrial Policy Action Plan also identifies load shedding as a supply constraint for the manufacturing sector. But the “high municipal premiums on top of Eskom base charges” are equally a supply side constraint that needs an urgent attention.

3.6 Accordingly, COSATU reiterates its views expressed in its submission on Eskom’s MYPD3 application that the high electricity tariffs have, among others, the following negative impact on the economy:
• Destroys prospects for SMEs;
• forces low income consumers to substitute electricity with dirty energy;
• huge arrears (as people fail to pay their bills), disconnections and illegal reconnections; and
• reduction in the use of electric appliances with knock-on effect on the economy as the demand for electric appliances decline.

3.7 COSATU notes that since the 2008 electricity crisis, the tariffs have been increased sharply as follows:

• 27.5% for 2008/09;
• 31.3% interim increase in 2010;
• 25% for 2011/13; and
• 8% for 2013/18

3.8 Now there is this 25.3% increase Eskom has applied for. In 2008 the average electricity tariff was about 20c/kWh before the sharp increases stated above. In terms of MYPD3, the average electricity tariffs will be about 89c/kWh by 2018. This represents a massive 345% increase already between 2008 and 2018, without this request by Eskom.

3.9 COSATU represents millions of underpaid ordinary workers who can barely afford these outrageous increases in the prices of basic services. The increases in prices of basic services negates the good work the democratic government has done since 1994 in rolling out electricity and other basic services to millions of working people who had been excluded to these services by the evil system of apartheid. The 50kWh monthly free basic electricity government has been providing to poor households is not enough to cushion the poor from these electricity price increases; thus forcing them to use dirty and dangerous sources of energy for cooking.

3.10 As we said in our submission on MYPD3, “Steep electricity tariffs will have a negative impact on the objectives contained in the beneficiation strategy, industrial policy action plan, new growth path and government’s infrastructure development programme. We have no doubt that high electricity prices will result in job losses, push up prices of basic commodities, including food, and with inflation rate increasing the SARB will raise the repo rate and thus further pushing workers and the poor deeper into poverty”

3.11 Already, the South African Reserve Bank in its May 2015 Monetary Policy Committee Statement has indicated that headline inflation was expected to increase beyond the target range early next year due to “mainly further possible electricity price increases”.

3.12 COSATU notes that the South African Local Government Association has already raised its concerns about the negative impact of further electricity tariff hikes. In the context of high rate of unemployment at 36%, with more than 50% of South Africans living in poverty, and with the economy having grown by a mere 1.3% in the first quarter of 2015, any increase in the electricity tariff would compound this terrible state of affairs. The working class has already been slapped with an increase in the marginal rate of personal income tax by a 1 percentage point while the corporate income tax rate, which has been declining over the last ten years or so, has been left intact.

3.13 COSATU is also concerned that since the introduction of the multi-year-pricing system for Eskom, it has been easy for Eskom to get a further increase before the end of the multi-year-price determination period. We briefly illustrate this worrying trend below:
• In 2006 Nersa allowed Eskom 5.9% increase in electricity tariffs. In 2007 Eskom applied for the revision of that determination and submitted 18.7% application. Nersa approved 14.2% increase.
• In 2008 Eskom applied for a second revision and submitted a 60% increase application. Nersa approved 27.5% increase.
• In 2009 Eskom applied for an interim increase of 34% and Nersa approved 31.1% increase.
• In 2010 Nersa approved an average increase of 25% for three years of the MYPD2. Eskom had applied for a 35% increase. In 2014 Nersa allowed Eskom an increase of 12.69% to recover the “unforeseen costs Eskom incurred during the MYPD2”.
• In 2012 Eskom applied for a 16% increase for the MYPD3 and Nersa approved 8%. Now Eskom is reopening the MYPD3 and is applying for 12.61%.

3.14 This trend has the potential of creating a credibility crisis for Nersa’s multi-year price determination system. This is why COSATU agrees fully with Professor Anton Eberhard when he says “The MYPD was meant to create certainty; [but] it has achieved the exact opposite....Neither Eskom nor Nersa appear to be able to predict or assess costs accurately”

4. Conclusion

4.1 COSATU doesn’t support any further burden on the working class and the poor through high electricity tariffs. The precarious South African economic conditions characterised by high levels of unemployment and poverty doesn’t need a hike in electricity tariff.

4.2 We should not forget that the country is in this state of affairs in relation to electricity supply because of bad policy decisions of the late 1990s when government intended privatising Eskom and didn’t allow the entity to invest in electricity generation infrastructure. The working class and the poor cannot be made to pay for such errors committed by government which wanted to follow the advices of the World Bank and the International Monetary Fund.

4.3 COSATU does recognise that the collapse of Eskom will be disastrous for the development of the country. Government, as a shareholder, has a responsibility to fund Eskom and ensure that allocated funds are spent efficiently.

4.4 Eskom, through genuine and sensitive approaches should recover the debts owed to it by municipalities and businesses. It is also unfair for municipalities to fail to pay Eskom while putting a huge mark-up on top of the electricity tariff, making electricity unaffordable for many poor households. We want Eskom to abandon completely the arrangement of charging low electricity tariffs to intensive electricity users like smelters.

4.5 The other challenge compromising Eskom’s financial position is electricity theft. Eskom once claimed that about 7% of electricity is stolen through illegal connections. There are also syndicates in the municipalities and Eskom that issue huge kilowatt hours of electricity if they are given a bribe. Property Week Newsletter has reported that Johannesburg Metro was losing R22 million due to corrupt scams like this.
The newsletter reported that some businesses and well-to-do residents’ databases were changed to show they were on prepaid meters when in fact were on the conventional metering system. These people either pay nothing or pay far too little for the electricity they consume. Eskom and government must stamp out this corruption.

4.6 COSATU therefore submits that there are alternatives to addressing the challenges facing Eskom without burdening the working class and the poor.