Transcript BUSA Response to ESKOM application

Response to the Eskom Revenue
Application
for the Multi Year Price Determination
for the period
2010/11 to 2012/13
(MYPD 2)
Presentation
by Business Unity South Africa to the
National Energy Regulator South Africa
(NERSA)
Midrand
On 21 January 2010
Embargoed until 13:00
Contents
•
Introduction
•
Prevailing economic conditions
•
Impact of the tariff increases on the economy
•
Policy certainty to encourage private sector participation
•
BUSA proposals on tariffs and funding of Eskom Conclusion
Contextualising the application within the current
economic conditions
•
Significance of contextualising the Eskom application within the
prevailing economic conditions.
•Negative economic growth in 2009 –1.9% GDP expected in 2009
•Projected growth of 2% in 2010 respectively.
•Rising unemployment with a further million people losing
employment in 2009.
•
Unfavourable business conditions
•Collapse in private sector demand and confidence.
• Significant decline in private sectors driven fixed capital formation
expected to continue in 2010.
•
Deterioration in government finances
•Lower revenue due to declining tax revenue
•Widening government deficit
•Increased public borrowing programme
•
These economic realities necessitate a strategic approach to the
discussion on Eskom Tariff Application.
Impact of the 35% increase on the economy
•35% price increase would lead to CPI rising by 1.2%.
•Pass through effects will also affect food prices and other input costs
in the economy. Inevitably leading to higher interest rates that
otherwise would have been.
•Available data also suggests GDP reduction of between 0.5- 1%
depending on firm level responses.
•Limitation of household buying power further curtails demand
driven economic growth
•Greatest impact felt at firm level performance where a 35% increase
will increase costs significantly, thus forcing firms to consider drastic
cost cutting initiatives for survival.
Costing the impact of the 35% increase on the
economy
•A leading gold mining company would pay an additional R300 Million
per annum based on the 35 % increase. The impact is similar in other
leading industrials which are the backbone of the economy.
•A basic calculation based on Eskom Annual Financial Statements suggest
that the tariff increase would raised an additional R18.2 Billion for the
utility for the first year.
•The cost to the economy far exceed this amount, with deadwieght loss
up to R80 Billion expected due to reduction of corporate profits,
employment and negative impact VAT and corporate tax receipts.
•On a worst case scenario the impact on employment could be up to 200
000 job losses across sectors.
•Overall a 35% increase in tariffs could delay economic recovery from the
recession
Energy security in economic development
•
Energy security is integral to economic development for South
Africa.
•
Government as the policymaker must play the lead role in
determining energy policy that will encourage private sector
investment and development. This will enable the achievement
of economic development goals.
•
Approach must consider strategic issues which are important to
ensuring security of supply and the sustainability of the electrical
generation & distribution simultaneously with the consideration
of the pricing matters.
•
Finalisation of the Integrated Resource Plan is expected to
provide details of South Africa’s energy plan.
•
Finalisation of Integrated Energy Modelling and integrated
energy master plan now crucial.
Improving the regulatory environment – unfinished
business
• A strategic discussion on the appropriate regulation of the electricity
market is critical as part of the discussion on long-term challenges.
• Progress must be made towards the signing of any PPA’s which will indicate
that the enabling environment for IPP’s is now conducive.
• Clear policy directive on renewable energy, co-generation and non-Eskom
coal and gas based generation.
• The resolution of issues pertaining to DSM funding and the efficient
management of the process are important .
• A decision on the implementation of the Energy Conservation Scheme
including; Power Conservation Programme (PCP), the Energy Trading
Scheme and the Energy Growth Management Scheme.
• Augmentation of the funding for the National Solar Water Heater scheme
Funding Principles
• BUSA proposes a National Consensus between Government, Organised
Industry and Labour, and Eskom on future Capex funding policy.
• BUSA proposes lower increases in terms of a short term strategy and a
longer term electricity price path during which the EPP can be
implemented, and which is considered to be viable for all of the parties
concerned
• BUSA’s view is that the Shareholder should provide further equity
injections, to support its investment in Eskom through the current
expansion.
• BUSA believes that the above combined with a clear cost management
approach will enable Eskom to access debt from the capital markets.
BUSA Proposal
• A pricing path of progressive increases of 25%, 25%, 22.5%, 12.5% & 10%
still has the effect of nearly doubling prices over five years.
• Additional government guarantees of R27 Billion over five years can
unlock additional R10 Billion per annum borrowing. This opportunity must
be explored.
• For Eskom to purchase as much power by way of imports and to enable
IPP’s, and Cogeneration options.
• For the state to agree to cover the costs of and boost the DSM
programmes with the Environmental Levy, in order to curtail demand.
• The Levy to form part of revenues if applied to Environmental
improvements.
BUSA proposal
• BUSA projections show that a series of price increases such as to bring the
average tariff to a level where the Long Run Marginal Cost is reached can
be achieved within a five year period.
• At this average electricity price level Eskom will be able to raise its own
capital and without regular Shareholder contribution.
• The long term Debt/Equity ratio which is recommended by BUSA for
Eskom is between 100% and 200%. At the higher end of the ration range
some of the debt may need to be subordinated.
BUSA proposal
• Eskom’s expenditure growth in the Existing Business is high.
• BUSA financial model shows that if expenditure growth (outside of
maintenance) could be reduced by 1% p.a. without affecting security of
supply, this could generate savings of R5.6b in the period up to the end of
March 2015.
• The challenge to the Regulator is to maintain an oversight of Eskom’s
activities which ensures that public monies are well spent.
• To this end a detailed interrogation of the budgeted and actual
expenditure is required.
• Industrial Development Policy for electricity is desperately needed to
assist competitiveness of domestic industry.
• This is particularly necessary in so far as electricity costs are concerned for
labour intensive industries and export oriented/import replacement
industries.
Conclusion
•
Energy security integral to post crisis economic recovery
efforts
•
Requirement for greater policy certainty on DSM and energy
efficiency
•
Finalisation and implementation of policy on IPP and
Cogeneration
•
Finalisation of IRP and work on Integrated Energy Master
plan urgent.
•
Proper review of funding models – must strike a balance
betweentariffs, debt and shareholder injection.