The electricity industry regulator, National Energy Regulator for South Africa (NERSA), announced earlier today that Eskom’s price increases from next month will average 16%, not the 25.9% increases that had previously been approved.
This is a significant reduction, and will have immediate benefits for businesses and households.
Effectively, the Shareholder is sacrificing a return of over R8 billion, which money is being returned back into the economy, particularly to cushion households, communities, small, medium and micro enterprises (SMMEs) and community innovation in form of social economy.
Our call is that the windfall must be passed down to consumers and households through a national economic development and labour council (NEDLAC) social compact to get commitment from social partners.
Today’s interaction is meant to give to the South African public the rationale for the decision and what this means for the economy.
This was a concerted effort by government and Eskom to lessen the impact of higher electricity tariffs on consumers and the economy particularly in the context of declining global trade.
We wish to assure the South African people that this is done without compromising Eskom’s ability to keep the lights on, while maintaining its financial viability.
You will recall that President Zuma, in his State of the Nation Address 4 weeks ago, made a public plea for Eskom to seek options to reduce its price increase requirements over the next few years in support of economic growth, job creation and easing pressure at household level.
This has not been an easy request to meet, but we are making steady progress.
Today’s announcement is the start of what we hope will be an agreement stretching over several years to lessen the impact of price shocks on the economy while ensuring Eskom’s long-term sustainability, giving better market signals and creating certainty.
This longer-term context is important, and I will return to it later. Let us look at how Eskom and government achieved the lower price application that NERSA approved today.
Government is concerned about the effects of high electricity prices in building a resilient economy, growing business and communities. Consequently, working with Eskom, we are examining various options for the third multi-year price determination period or MYPD3, as it is known, beginning in 2013.
Eskom’s tariff application for that period will be submitted in the near future. NERSA will seek comments from interested parties via a public consultation process before making its decision.
Eskom, supported by government, is seeking to achieve cost-reflective tariffs - the price at which it sells electricity must cover the cost of producing that electricity.
The 25% price increases of the past two years were part of this journey. It is essential that future increases enable Eskom to get to cost-reflective tariffs. This is necessary to stabilise Eskom’s financial position and enable it to earn the credit ratings it needs to continue to secure funding for the new power stations necessary to drive the economy and improve living standards in years to come.
Eskom and government also looked at the final year of the three-year MYPD2 determination, which comes into effect on April 1.We devised a potential solution which would benefit consumers from next month, while forming part of a longer-term proposal that will be put to NERSA in the MYPD3 application and opened for public discussion.
Government, as Eskom’s sole shareholder, is allocated by NERSA a shareholder return when Eskom generates revenue as it has done recently. This is not the same as a dividend, which is paid out in cash to shareholders. This is an allocation in Eskom’s accounts which could be paid out at a later date.
Eskom has not paid dividends in recent years, as all revenue has been retained and reinvested in the business to help fund the capital expansion programme to build new power stations and related infrastructure. Government has agreed to defer this revenue for a year, allowing a large part of the tariff reduction which comes into effect at the start of next month.
This sacrifice of revenue is a reflection of government’s commitment to sustain the current economic activities in a global environment where there is a decline in industrial activities and demand for goods and services. Another part of the reduction comes from the Regulatory Clearing Account, as based on the current regulatory model, which account contained a small over-recovery which would have been factored into tariffs for the MYPD3 period.
We decided to add that into the application for a price reduction in the final year of MYPD2. The third element is the fact that electricity demand has reduced from the levels predicted in 2009 when the MYPD2 tariff proposal was formulated. The fourth element is very important - it is whether Eskom can manage financially and operationally with significantly reduced revenue.
Can it maintain its power stations, build new ones up to the completion of Kusile and keep the lights on while maintaining its financial ratios and its standing with international rating agencies? After considerable research by Eskom in consultation with the shareholder he answer to that is yes.
This is due to its much healthier financial and operational position, largely as a result of MYPD2 tariff increases, to a careful re-phasing of its funding requirements and elements of its capital expenditure programme and to operational efficiencies achieved.
The combination of these factors gave Eskom the confidence to apply to NERSA for a sizeable reduction in the 25.9% increase that had already approved. As I emphasised earlier, this affects more than one year, as Eskom is looking at a longer-term price path, the details of which are still being finalised and will be open for public debate after Eskom’s MYPD3 application has been submitted.
Eskom’s proposal for consultations about the next Multi-Year Price Determination (MYPD3) will feature aslower transition to cost reflective tariffs to assist the economy, and will ask for tariff certainty over a longer period than three years.
We have also proposed a country pact, including the introduction of a mandatory Energy Conservation Scheme if the current voluntary scheme does not yield the expected outcomes, primary energy cost containment, introduction of Independent Power Producers (IPP) tariffs, a separate funding model for future expansion beyond the current new build programme.
Its tariff proposal will aim to maintain an investment grade rating for Eskom. In this regard, the department shall lead a delegation next week to interact with the ratings agencies on this new announcement and the price path going forward. The support for the poorest among us, through the provision of a certain amount of free electricity every month, together with tariff structures designed to protect the poor, will be maintained.
A multi-year price path has multi-year implications, for Eskom and for consumers. In return for lower electricity prices than had originally been envisaged, all South Africans will have to reduce electricity consumption by developing an energy-saving culture.
As with its programme to keep the lights on, Eskom cannot do this alone. For a lower price path to be sustained, the whole nation is going to have to subscribe to the country pact proposed by the President.
Until Eskom’s new power stations are all on line, we must all collaborate to reduce demand wherever possible, and make it a habit to use electricity wisely and efficiently.
However, even long after the new power stations have fully been commissioned, our energy usage culture must change and change forever!
Finally, despite Eskom’s tariff increases over recent years, South Africa continues to have the second lowest electricity prices in the world.
That is an achievement of which we can be proud and we intend to maintain given the current economic circumstances and in order to continue to make our economy competitive.
I thank you.
For media enquiries contact:
Mayihlome Tshwete
Cell: 072 869 2477
E-mail: Mayihlome.Tshwete@dpe.gov.za
