Cape Town — Public Enterprises Minister Alec Erwin has warned that Eskom's proposed 60% tariff hike is just the tip of the iceberg, and that electricity prices would have to double in the next two or three years if the utility is to maintain its financial stability.

Erwin's defence of Eskom's proposal to the National Electricity Regulator of SA (Nersa), that tariffs rise by a nominal 60%, flies in the face of opposition from the ruling African National Congress (ANC) and outrage from the Congress of South African Trade Unions and opposition parties.

Economists have also warned of the harmful effect of such a sharp tariff spike on the inflation rate. But Erwin said it was better to begin the increases at once than hit consumers with one heavy blow later.

Erwin's stand reaffirmed the government's support for Eskom's proposed tariff increase, which is necessary, it says, to cover inputs such as coal and diesel, which now cost 25%-30% more than budgeted for.

Eskom has asked for its approved 14,2% tariff hike for 2008-09 to be increased to 53%, or a nominal 60%.

"In a very short period, in two or three years, we are probably going to have to double the price of electricity on average. How do we do that? Should we not do it in bigger chunks and quickly? It makes sense to do it that way," Erwin said in reply to questions in the National Council of Provinces yesterday.

"We are proposing that it will be better for everybody to take those costs now rather than wait until 2009 and probably have a 100% increase."

Erwin indicated that middle and upper income households would bear the brunt of the price hikes as measures would be introduced to protect the poor and small businesses.

Eskom executives will also suffer from the energy crisis as Erwin said it was "most unlikely" they would receive bonuses this year as stated objectives had not been met. Last year, the utility's bosses received many millions of rands in bonuses -- a source of grievance to consumers suffering from unreliable electricity supply.

Eskom would probably make a loss in future, Erwin said.

He explained the proposed increase in terms of Eskom's need to pass on to the consumer input costs for coal and the diesel used for open-cycle gas turbines. Nersa made allowance for these "pass through" costs in its tariff determinations, he said.

In the previous two years, Eskom absorbed R7bn of under-recoveries on fuel. If it does not get its requested tariff increase the shortfall will amount to an extra R5,3bn, excluding the more than R2bn required for demand-side management initiatives. The total shortfall would be more than R7bn.

" If we delay until the next cycle of price increases we are going to have a very big increase," Erwin said. "We are going to have the cost of the coal and the diesel which would have been incurred right through two financial years" and would also "have to factor in the financing".

"It makes sense to begin the price increases now. The original planning was that the regulator would start next year. In view of the experience we have had, we believe we should start this year with the price increases."

Erwin also warned that if Eskom was not able to recoup its costs, its financial situation would deteriorate so badly it would not be able to raise capital for its build programme. This would have to be halted, resulting in an even worse energy crisis. Eskom has budgeted to spend an estimated R343bn over the next five years on new power stations.

In terms of its proposal made to the regulator a "very low" increase would be imposed on the poor.

"So it will be the more affluent households that have greater scope for electricity saving -- if they don't save they will pay more," Erwin said.

The effect on the poor was one of the ANC's main concerns but it also said last week it considered it "unfair" that Eskom had proposed tariff hikes when it had "not demonstrated any ability to deal adequately with the power crisis".