The tariff application which Eskom has submitted to the National Energy Regulator of SA (Nersa) is the product of a careful balancing act and it touches on some choices that are for SA to make, rather than for Eskom alone.

A secure supply of electricity is essential if SA’s economy is to grow and develop, and that can be assured only if Eskom and the electricity industry are financially sustainable, which means tariffs must reach a level where they cover the full cost of supplying electricity. At the same time, however, our application has had to take cognisance of the effects of tariff increases on the economy and particularly on poor households.

In an ideal world, tariffs would be rising by no more than the inflation rate, so one of the questions asked most often is why Eskom has applied to Nersa for increases that are higher than inflation. Electricity prices were below cost-reflective tariffs for a long period, with no new capacity built for more than 20 years - so we have to catch up as a country and our application attempts to do that, but over a five-year period as opposed to the previous three-year period.

Eskom applies to the regulator for revenue to cover its costs, which are made up of five fundamental components: primary energy (mainly coal, 33% of the revenue requirement), the cost of buying power from independent power producers (7% of the revenue requirement), other operating costs (including staff costs and repairs and maintenance, 26%), depreciation to pay back the capital invested in the assets and provide equity to support the financing of future new capacity (17%), and a return on assets to pay the interest costs on the debt and to provide a return to the shareholder, which currently is reinvested in the business (17%). The depreciation and the return are areas where the tariff has been suppressed in recent decades, and the increase in these components is where there is a catch-up in the proposed revenue requirement. This will ensure a balance sheet that can support the borrowing needed to finance investment in new capacity.

The two components of the tariff that should ideally be at inflation-level increases are primary energy and operating costs. Coal is the largest single operational input cost involved in producing electricity, accounting for almost a quarter of the total revenue Eskom has applied for over the proposed five-year, multiyear price determination (MYPD3) period.

Electricity tariffs are regulated. However, the price of coal is not. Though Eskom has seen coal costs increase by an average of 18% over the past three years of the previous tariff period, our application for this next period caps coal cost increases at 10% over the next five years - still well ahead of inflation. Curbing them would require some tough choices. It would be possible only through a pact with the coal industry to ensure more efficient and cost-effective deliveries over the next five years, striking a balance between domestic needs and exports without threatening coal mines’ financial viability.

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