10 August 2007
editorial
Johannesburg — ON TUESDAY, Eskom will turn the first sod at Medupi, as it starts construction of the first new base-load coal-fired power station to be built in SA for more than 20 years.
That's to be followed by a second one, and later by at least one new nuclear power station, as Eskom positions itself to generate the power SA will need as its economy grows in coming decades. The Eskom board has already approved generation projects worth R204bn. Add R40bn or so on transmission and distribution and we're looking at a build programme that's likely to total more than R250bn over the next decade or two.
The big question is who pays, and how. And at this stage Eskom's controversial suggestion is that its customers should bear much of the cost through tariff increases. It has applied to the National Energy Regulator (Nersa) for a tariff hike of 18% next year and 17% in 2009, instead of the 5%-6% increases Nersa agreed to only last year. Eskom says if it gets these increases now, it can go back to more normal, inflation-linked increases later. But if not, it will need a 30% hike in 2010.
One can't help wondering whether Eskom is going in with a big demand in the hope of winning something smaller -- rather like a trade union adopting a bargaining position as it goes into wage negotiations. But now that Eskom is at last investing in the capacity SA needs, tariffs clearly will have to be raised to levels where they more closely match the cost of providing electricity using new, rather than old, assets. Eskom argues its average tariff is only half the cost of replacing its assets. It is planning to finance its build programme from its own cash flow and by raising debt, on local and international markets. But debt, too, has to be serviced out of cash flow. So tariffs are central either way.
Nersa has promised a decision on tariffs by December 20, and it will hold public hearings on Eskom's application. But uncertainty about whether the regulator will indeed grant Eskom's wish has already led to ratings adjustments by two of the international ratings agencies. Fitch has changed Eskom's outlook from stable to negative, signalling it could downgrade it depending on the regulator's decision. Moody's has affirmed Eskom's A1 rating, one notch better than Moody's A2 rating for SA itself, but has lowered its "baseline credit assessment" from 7 to 8. The worst BCA rating is 21, so that's still high. But Moody's is also concerned that Eskom's credit profile could deteriorate. Eskom's ratings are extremely high so a slight downgrade is no great disaster. All it might do is make it a bit more expensive for Eskom to borrow on the market. Fitch also points to the role of Eskom's shareholder, the state, which will probably also have to offer "tangible support" in some form to finance the build programme.
But it's inevitable that tariffs will have to be increased in real terms, not only to finance the capex but also, importantly, to curb demand, given that SA's unusually low tariffs have meant that there's little incentive to use electricity efficiently. But why the rush? There is no question that an 18% hike will have a significant impact on inflation. It's likely to add at least 50 basis points to next year's inflation rate. Reserve Bank governor Tito Mboweni warned last week that if tariff increases of this magnitude were granted, the bank might well have to respond with higher interest rates.
In the long term, Eskom's investment in expanding its capacity should cut the costs of doing business and help curb inflation. So some short-term inflation may be justified, to bring tariffs closer to where they should be. But SA's too-low electricity tariffs have come about over a long period. We don't have to fix the problem in just a year or two. The increases must be smoothed over several years to contain the impact on inflation and prevent interest rate increases that could cramp SA's economic growth.
Be the first to Write a Comment!
Copyright © 2007 Business Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
