Eskom, we need answers

By Mohamed Fayaz Khan

The fact that the electricity industry is a shambles is well-documented, understood and often ridiculed. The current price of electricity is not sustainably viable and significant capital is required to expand our base-load generating capacity to ensure that we do not again experience energy interruptions. The present situation was primarily a result of mistakes/indecisiveness on both the part of the national government and Eskom. My point is simple. We NEED to move on! Now is the time to address the dire situation we find ourselves in and formulate a recovery process as a nation.

Eskom recently submitted its proposed revenue application for the three-year period 2010/11 to 2012/13, titled MYPD2 (Multi-Year Price Determination). The “2” at the end of MYPD2 signifies that this is the second such revenue application. Essentially Eskom requires considerable funding in the next few years and has provided the public with two possible options on how it should increase the price of electricity from 33c/kWh to 88c/kWh over the next three years.

Option 1 is so absurd that I am mentioning it purely for information. It involves a 146 % increase in the first year (from 33c/kWh to 75c/kWh) and two increases of 12 % thereafter. Even Eskom mentions the severe impact that such an increase in one year would have on the country and therefore recommend Option 2. Other than to shock, I cannot see another reason why Eskom would have even bothered mentioning this option in their proposal.

Option 2, the one recommended by Eskom, is based on the smoothing of the price increase over the three-year period ie a 45% electricity price increase for the next three years! This option actually results in shortfalls of cash to Eskom, to the tune of R32.7 billion in year 2 of the MYPD 2 period. Eskom assures us that various options would be explored to address the funding shortfall eg additional guarantees by government. Personally, the fact that that was the only example cited on how the expected shortfall was to be funded in the executive summary of the MYPD 2 proposal did not inspire confidence in the rest of the plan.

The pricing proposal primarily provides the assumptions and projections used to determine the appropriate price level that has to be established and does to some extent explore the effect that this would have on the economy and the country. This effect, however, needs to be expressed and communicated by the citizens of this country. Nersa has scheduled public meetings to discuss the proposed tariff increase in January 2010 and I urge you all to attend. If you are unable to attend, write to Nersa and express your concerns, ideas or opinions. I am not advocating a childish flurry of emails, letters or phone calls demanding that the Eskom board be sacked or that the increase must not be higher than inflation etc. Nersa has a legislated duty to ensure the security of supply and a sustainable electricity industry and will not take such requests seriously. Briefly reading the proposal, I found people may want clarity on the following issues:

What protection would there be for pensioners from this proposed tariff increase?

How would charities/orphanages already crippled by the recession continue to operate with the proposed tariff increases?

What is the future of the Universal Access Plan (electrification for all South Africans)? Although electrification connections are funded by the department of energy, electricity consumers would be funding the increased capacity required to supply power to these additional homes.

The effect of the termination of the Coega aluminium smelter project on the assumptions made in this proposal. An agreement was negotiated to provide for the long-term purchase of up to 1355 MegaVolt Amperes of electricity. Since this deal was officially terminated in October, what effect does this have on the capacity requirement forecast?

Based on the above, is the strengthening of the transmission infrastructure to the Eastern Cape still economically viable?

Should Nersa first sanction an independent audit of Eskom to ensure that there are no inefficiencies that could be contributing to the operational costs at Eskom?

The report on coal procurement at the heart of the recent Jacob Maroga saga (written by energy consultant Susan Olsen) states that Eskom’s coal procurement problems could be fixed in less than 18 months. The leaking of the report to the media became a matter or racism, but regardless, should the recommendations on how to rectify the problems that exist not be re-visited?
As part of the capacity expansion plan costs, mention is made of the return to service of Camden power station, which according to the 2009 annual report is already complete.

Why is the environmental levy of 2c/kWh considered if it was already incorporated in the last tariff increase? Furthermore, what does government intend to do with the projected R15 billion in tax revenues that it would obtain as a result of the imposition of this levy over the next three years? I believe that the money should be ring-fenced and used to either support renewable energy projects or effective demand side management initiatives.

I believe all of the above to be valid points that Nersa, Eskom and government should consider when making this decision and am certain that there are many more viewpoints/suggestions that need to be considered. I urge you again to constructively become a part of the solution to this crisis.

I would like to now unpack some of the shortcomings that I find in the present proposal, and I need to start with the continuation of the mantra regarding how Eskom is committed to fighting climate change. According to the proposal, one of the six principles adopted by Eskom in defining its role is: “A sustainable economy, not harmful to the environment and committed to climate change mitigation strategies.”

The National Business Initiative last month revealed the results of its third annual Carbon Disclosure Project and Eskom topped the list with reported emissions of 220 million tons of CO2. Sasol came in second with 61 million tons. Considering that the total emissions estimated for South Africa is 440 million tons, I think it is safe to therefore assume that Eskom is, in fact, “harmful to the environment”.

Before I am labelled a “greenie” or “tree-hugger” who does not understand the constraints on the South African electricity industry and how cheap electricity has enabled our economy to flourish, let me state that I understand why it is impossible to consider using renewable or nuclear energy to increase our base-load generating capacity. The associated costs would be even more unrealistic than the current proposal.

Like the politician who pledges to combat climate change by reducing his carbon footprint before departing in his three-car, high-speed motorcade, let us start being honest about what we are doing. You are not committed to climate change if you intend building two new coal-fired power stations with a combined output of 8700 MW to include in our generation pool. Neither should pumped storage be considered progress in renewable energy because conventional power will still be utilised to return the water to the upper reservoir during times of low demand.

A possible solution that would have mitigated the effects of climate change and kept costs at similar, if not lower levels, would have been increased spending and greater focus on demand side management (DSM). To prove my point, I would like to quote from the current proposal:

“The capital cost of the DSM programme over the three years equates to an average cost of R5.8 million/MW (R6.213 billion for 1073MW in savings) which is significantly lower than any supply side option.” (pg45 MYPD 2 Application)

The existing proposal calls for an increase in DSM spending from R800 million currently to R2.8 billion in the financial year 2012/2013. Is this sufficient? Are CFL globes, low-flow shower-heads and a R2 000 subsidy on a R15 000 solar geyser the only options for effectively reducing our energy consumption? Historically, South Africans have never been very efficient users of electricity. There must therefore exist many options to introduce further energy savings on the grid. Effective reduction in demand may negate the need for an expansive supply side option.

I am also concerned about the two new planned coal-fired power stations. Examining the possible costs associated with accepted cabinet positions on climate change as listed in Annexure 2 of the MYPD 2 proposal, I wonder whether, factoring those future costs into account, the addition of so much more coal-generated power is economically viable. I refer primarily to the proposed CO2 tax of R250 per ton which is rumoured to start at R100 per ton and then ramp up. On our existing emissions, that would mean an additional R22 billion a year increasing to a potential R56 billion a year. Add to this the proposed CO2 emissions cap, carbon capture readiness and the scarcity of water caused by climate change and even renewable options and active DSM suddenly start making a lot more sense financially.

The existing proposal represents a simple and unimaginative solution. It is simply a case of determining the cheapest way of alleviating the crisis and getting the electricity consumer to fund this cost. The ideas presented for consideration in this article are by no means representative of a complete solution that would alleviate the current crisis and come with their own associated risks. They, amongst others, should however be considered in an effort to keep the increase required to a minimum.

Another aspect that the proposal is not taking into account is the increased theft of electricity that would invariably be caused by the proposed price increases. More staff/ funding would in fact be required to control this and I do not believe that this has been adequately factored into in the current proposal. The proposal is a considerably large document and I would welcome the confirmation that the factors mentioned above are indeed taken into account, but the proposal is difficult enough for engineers in the industry to make sense of, let alone the average citizen. In such an application, assumptions need to be made regarding the proposed growth in sales, the GDP trend, foreign exchange rates and the demand for electricity going forward. Perhaps, these are some of the assumptions that should be realistically reconsidered when assessing the validity of this proposal. One of the assumptions that I could not understand, admittedly because of my lack of finance experience, is how the proposal could assume that CPI and PPI would remain low (5.7% and 6.7% respectively), when the price of electricity would be increasing so considerably. Surely, manufacturers/retailers would start charging considerably more for their products in light of the increased production/operational costs.

It is my opinion that the present proposal put forth by Eskom to Nersa represents a solution to the crisis, but I believe that this proposal is one that is being made primarily with Eskom’s interests in mind. I do not doubt that Eskom is taking into account the effect that this decision would have on the South African economy, if not the economies of Africa. Eskom is functioning as a company that has to ensure its viability and value to its shareholder, the South African government, and even while doing so, are projecting a R30 billion shortfall at the end of the third year of the proposed MYPD. This is a national crisis and is one that should be tackled as a country. Nersa has a requirement to ensure the sustainability of the electricity supply to the country and would not be able to merely grant an electricity price increase that would be viewed as favourable by the South African public. All I hope is that national government, industry, Nersa and Eskom revisit this proposal after all the stakeholder input has been consolidated and propose a plan that is brave, innovative and sustainable to all.

Mohamed Fayaz Khan is an electrical engineer presently employed in the electricity distribution industry. He is a strong believer in renewable energy and enjoys participating in informed debates.