CEO Blog

by Johan van den Berg, CEO of SAWEA

Johan van den Berg is the CEO of the South African Wind Energy Association, the Chair of the South African Renewable Energy Council and the African Private Sector Focal Point for the Africa-EU Energy Partnership. A barrister, he has spent eighteen years in dispute resolution; environmental mediation; climate change avoidance/emissions trading and renewable energy in Southern Africa. He is a member of the Ministerial Advisory Committee on Energy.

THE RATEPAYER, THE TAXPAYER AND THE HOT POTATO OF RISING ELECTRICITY COSTS

It is within this context that Eskom’s application to the National Energy Regulator for a “selective reopener” of the 2015 – 2017 MYPD3 price path, in order to claw back some ZAR 50 billion in additional expenses, caused such shock and deep concern.  If allowed, the additional price hike would have seen electricity prices at 97c/kWh in two years, as a minimum - and this escalation would be hard-coded into the base from which future price escalations take place.

In submissions to NERSA, interested parties with superb analytical skills dissected the Eskom application and subjected it to much criticism. There was a concern that the “selective” nature of the reopener might lead to an over-adjustment in Eskom’s favour. This point if correct (as it seems to be) is beyond debate: it should not happen. On matters of principle and pointedly, it has been underlined that the bulk of the additional expense was due to Eskom’s own mismanagement of its new-build and maintenance programmes. This now causes, amongst other things, the excessive use of Open Cycle Gas Turbines at very high cost, and concomitant diesel costs in excess of ZAR 10 billion per annum. The argument then continues to ultimately conclude that NERSA is the protector of the electricity rate payer and in the execution of its mandate can only pass through such expense that has been prudently and efficiently incurred.

For purposes of this discussion, let us assume this approach to be correct.

Implicit in this debate and the strong emotions that surround it is the helplessness that South Africans feel as they get subjected to an increasingly volatile and expensive electricity system over which they have very little control. Eskom practically is still a vertically integrated monopoly.  For most, there is little choice other than to pay what Eskom (plus the municipality, where applicable) charges - or be plunged into darkness. It is liberating to be able to state that as a collective, we’ll pay for reasonable costs, but not unreasonable ones. Therefore also the sense of relief at the fact that NERSA is there to protect us - and that it has now decided not to allow Eskom to claw back these additional expenses.

The sobering reality is that whatever Eskom spends, we as the collective have to repay. Whether Medupi costs ZAR 150 billion or ZAR 300 billion, someone has to pay. Usually and most logically, it is the rate payer. The electricity price gets adjusted until it is high enough to recoup the expense. Over the 30 – 40 year lifetime of the coal power plant, the initial cost to build it and subsequent cost to run it are recovered from the electricity tariff. Now, these costs are reaching levels where consumers feel electricity becomes unaffordable – therefore the anger and relief. 

So what would happen if this expense cannot be footed by the ratepayer? What then? Well, that initially is the misfortune of Eskom’s shareholder. The adverse consequences of imprudent and/or inefficient expenditure is visited upon the shareholder, who has to invest money to keep the enterprise afloat. Eskom’s shareholder is the South African Government through the Department of Public Enterprises. In this very budget period, Government has invested some ZAR 23 billion into Eskom to keep it afloat. But this money comes from the tax payer. Indeed, several adjustments were made in this year’s national budget to raise tax revenue in order to pay this amount to Eskom.

It is clear then that, as a collective, South Africans are liable for all Eskom’s expenses, no matter if they are prudently and efficiently incurred or not - and irrespective of what the amount may be. Indeed, by some estimates the interest at Medupi runs at ZAR 30 million per day. This is the cost of each day the plant is late. This is the cost of each day of industrial action where no work is done. And even if we all go off-grid and never use the power from Medupi, the South African collective will still have to pay for it. There is no independent pot of money from which “the government” can fund these expenses, despite wishful utterances that “there must be another way to fund Eskom.”

The constellations of rate payers and tax payers respectively are not exactly the same, but they both can be said to be the South African collective. While rate payers pay the cost of electricity, there is a direct correlation between its production cost and its selling cost. The more expensive it is, the less people will ultimately use. The economy will migrate towards a position where the electricity price is reflected in the price of goods requiring electricity to be made. The electricity cost will be “priced in”. This is not true if the tax payer pays for electricity: the link between cost and use is lost and a distortion occurs in the economy.

What to do? There is a general and specific answer. In general, if power is procured from Independent Power Producers, the risk of cost over-runs and delays fall on the private sector entity. The South African Collective agrees to fund only the payment for electricity delivered at a certain price and an agreed escalation for a twenty year period. We know exactly what we’re in for. 

Specifically, wind energy is now procured at costs that are below the average selling price of electricity (ZAR 0.62/kWh in REIPPPP Round 4). The time when this cost will below the average production price of power is likely to be only 2 – 3 years away. Thus, for perhaps 16 of their 20 year lifetimes, the wind plants being procured now will subsidise and lower the cost of electricity in the country. In the first years, the wind power will come at close to zero cost through the avoidance of OCGT use and avoided load shedding.  Indeed, last year wind power saved the country ZAR 300 million and can thus be said to have cost less than nothing. 

While Eskom continues to operate at electricity selling prices that are non-reflective of their actual costs, we’ll continue to pass the hot potato of Eskom fiscal deficits around and under-appreciate the true value of additional wind power built by Independent Power Producers. Cost reflectivity today is significantly higher than the electricity price reflects. If this were not so, we’d be likely to accelerate the building of wind farms and to expand our ambitions on the ultimate size of our wind industry.

Certainly we need to curb imprudent and inefficient spending immediately and move to models that can prevent this in future – but there is little point in pretending that unnecessary, historical expense did not occur. Once incurred, sadly, these costs are for the account of the South African collective and there is no way to avoid paying them. The   logical entity to pay is the electricity rate payer, not the tax payer. The sooner this happens, the sooner health and logic will be restored to our electricity system. Indeed, if we practice “pay as we go” with a cost reflective electricity price, we’d likely be far more vigilant about how our money is spent.