Treasury's tariff veto blindsides Eskom

28 June 2015 - 02:00 By MARIAM ISA

Local consumers and businesses seem to be off the hook for the moment when it comes to electricity price hikes. The National Treasury has stipulated that any extra tariff hikes approved by the National Energy Regulator of SA must be deferred to next year, because municipal budgets have not made provision for them.News that the Treasury had issued a circular last month saying that further power price increases this year were out of the question emerged at public hearings this week, taking many by surprise - including acting Eskom CEO Brian Molefe, who said he had not been aware of the document.story_article_left1There are steps that could be taken to get around this obstacle - such as pushing a supplementary budget through parliament or imposing new tariffs on Eskom's direct customers only - but there is unlikely to be the political will to do so after howls of protest at the tariff proposal from industry and labour groups."The results would be catastrophic - it would push marginal miners out of business and have a negative impact on beneficiation," said Shaun Nel, the project director of the Energy Intensive User Group, which accounts for 38% of Eskom's sales.Chamber of Mines economics head Monique Mathys warned that the mining industry was at a "tipping point" as 60% of gold mines and 80% of platinum operations were already loss-making or marginal. The proposed hike could lead to the loss of up to 40000 jobs, in addition to those already taken into account, she said.Eskom is seeking approval from the regulator to increase tariffs by a total 25.3% in its 2015-16 financial year, including the 12.69% it has already been granted, to cover the R16-billion cost of operating diesel-fuelled generators and paying for short-term contracts with independent power producers.These measures are necessary to make up for the limitations that force Eskom to implement load-shedding - and Molefe maintained at the hearings that load-shedding was six times more expensive for the economy than tariff hikes. According to energy expert Chris Yelland, load-shedding costs the economy between R20-billion and R80-billion a month, depending on which stage it is at.In its report on South Africa on Tuesday, the International Monetary Fund warned that severe power shortages were now the biggest obstacle to economic growth, as they reduced activity, sapped confidence and discouraged investment.Higher tariffs and envisaged government support were needed to make Eskom financially sustainable, but should be complemented by cost containment, efficiency enhancements and governance improvements to minimise the impact on consumers and business, it said.block_quotes_start Eskom could use the R11.4-billion in savings associated with not burning the coal it had planned to use for its new Medupi and Kusile power stations block_quotes_endEconomists agree that until the power crisis is resolved, the economy will battle to grow faster than 2% a year - far too slowly to bring down the official jobless rate, which rose to 26.4% in the first quarter of this year, its highest since 2003.They also argue that additional tariff hikes are needed, and it would be better to bite the bullet now rather than later, as delays will simply raise the costs for the country.Eskom has a cash-flow problem, not a funding problem, which means it needs money up front to avoid further debt costs.But industry executives and business leaders believe the utility has other options - Eskom could use the R11.4-billion in savings associated with not burning the coal it had planned to use for its new Medupi and Kusile power stations, which are well behind schedule.story_article_right2The Treasury pledged in February to provide the state-owned utility with a R23-billion cash injection through the disposal of some non-core assets. The first R10-billion tranche was supposed to have been paid this month, but so far there has not even been an announcement as to what assets will be sold.Another damaging effect of the proposed tariff increase is that it would push inflation up higher and over a longer period, cementing the case for an early interest rate hike - also bad news for economic growth.But higher interest rates are seen as a foregone conclusion by most analysts, who expect the Reserve Bank to raise its key repo rate by 25 basis points to 6% at its next policy meeting next month, taking the prime lending rate set by commercial banks up to 9.5%.Barclays economist Peter Worthington expects inflation to breach the 3% to 6% target range in October, peaking at 7.7% in January or February next year. He predicts the bank will raise interest rates by 50basis points this year and 75points next year, partly in response to the start of a tightening cycle in the US, which will put pressure on emerging market assets...

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