How Molefe will convince Nersa to hike Eskom tariff

JUNE 23, 2015

In its MYPD 3 Selective Reopener application hearing starting on Tuesday, Eskom’s acting CEO Brian Molefe will argue that an increase in tariffs will shorten load shedding and improve overall generation stability.

In the below presentation to be shown on Tuesday morning, Molefe will urge the Energy Regulator (Nersa) to give Eskom an additional R11bn per year to power its open cycle gas turbines (OCGTs), R5.8bn funding per year for short-term contracts with independent power producers (STPPP) and further funds for an increased environmental levy.

'Eskom cannot wait'

“Eskom is applying for the recovery of efficient costs relating to OCGTs and STPPP for the next three years,” the presentation reads. “Eskom cannot wait for an RCA process to recover these costs due to the financial challenges facing the organisation.

“This expenditure will contribute towards Eskom creating space to do necessary maintenance whilst mitigating the impacts of future load shedding,” it says.

“[Eskom] requires an adjustment 10% linked to the extraordinary costs to limit load shedding.

"Eskom is convinced that the only way to restore plant reliability is to put emphasis on proactive maintenance, which includes refurbishment," Molefe will explain. "If this is done, availability should improve, but if outages continue to be deferred in order to keep the lights on, availability can be expected to deteriorate further."

‘New build assumptions did not materialise’

Molefe will explain that Eskom’s next generation new build assumptions in the MYPD application did not materialise, as can be see in the below graph. Medupi's Unit 6 will only contribute 800 MW commercially by August (it does currently contribute between 500 MW and 800 MW intermittently), Molefe told media recently, while the only other plant delivering power is Sere -  100 MW.

“Energy assumed to be delivered by each coal unit ... is approximately 4 500 GW hour per unit per year,” it reads. “This energy had to be replaced by other supply sources.”

Viable to use expensive OCGT

“Due to operational and financial challenges facing Eskom, allowance by Nersa for recovery of higher OCGT and STPPP costs is essential to allow Eskom to continue to utilise these supply options to help mitigate the impact of load shedding and contribute to space for generation maintenance,” Molefe will tell Nersa.

“Under the circumstances, [it is] still viable to use [the] expensive OCGT (approximately R2.75 to R3.00/kWhr depending on fuel price) when compared to cost of unserved energy estimated by National Treasury to be between R9 to R15/kW hour.”

“[It] contributes to improvement of industry towards sustainability,” he will explain.

Treasury's viewpoint

According to Eskom in the presentation, National Treasury's viewpoint on the matter is:

- Eskom’s weak financial position and resulting downgrade of Eskom’s credit rating is recognised

- Only option for healthy financial position and minimise load shedding is increasing tariffs

- Need immediate adjustments to assist with current liquidity challenges, and begin strengthening towards a financial sustainability

- Cost of load shedding is R9 to 15 per kWh

- Only increases for 2015/16 year supported. Further tariff increases once substantial information towards ‘cost-reflective’ or long-run marginal cost tariff level is

- Support Nersa in-principle approval of STPPP costs for 2015/16

- In-principle support by government for OCGT’s to prevent loadshedding. Must motivate for exact levels.

RELATED: ENERGY EXPERT ON WHY ESKOM SHOULD NOT BE GRANTED ANOTHER TARIFF INCREASE

---News24wire