[Ferro-Alloys.com]HIGHER electricity tariffs are the most important element of the strategy to restore Eskom’s financial stability and the company is likely to make an early tariff application to the National Energy Regulator of SA (Nersa) for a new tariff structure.

 

Wednesday’s budget announced no additional measures to support Eskom other than the package put in place last October, which include a R23bn cash transfer to be made out of the proceeds of the sale of "nonstrategic" state assets.

 

Although Finance Minister Nhlanhla Nene had promised to provide details of what would be sold with his budget, Treasury says it will not disclose plans for fear of affecting the prices of assets that could be sold. However, officials said that, contrary to media and market speculation that it was, in the main, the government’s 13.9% stake in Vodacom that would be sold, they had not "put all their eggs in one basket".

 

Treasury chief director Avril Halstead said Treasury had done "a broad review" and was looking at a range of options. This could include the sale of property and some infrastructural assets as well as better leverage of government’s balance sheet to free up resources.

 

Mr Nene said that it was expected that the proceeds would flow to Eskom in two tranches: R10bn by June and R13bn by the end of the year. Mr Nene confirmed the stance he outlined in October that fiscal support for all state-owned enterprises "would have no net impact on the budget deficit".

 

While the R23bn cash injection would relieve Eskom’s cash flow problems and allow it to borrow more, in the medium to long term higher tariffs were required for financial sustainability. The budget review says that Eskom "would apply to the regulator for tariff increases that will move the price of electricity closer to its production".

 

To raise revenue from tariffs, Eskom has three options: to attempt to claw back costs retrospectively through the revenue clearing account; to request a reopening of negotiations around the existing multi-year price determination; or to bring forward the next round of the multi-year price determination.

 

While Eskom has successfully used the revenue clearing account to recover costs, with the effect that the tariff for 2015-16 rose an additional 5%, the retrospective method means future energy prices are uncertain.

 

Ms Halstead said that Eskom management favoured the last option as it would bring certainty to energy prices sooner and over a sustained period. The final decision was now up to the Eskom board.

 

The five-year price determination framework ends in 2017-18 and it is likely, though, that Eskom would make a new application a year early.

 

Mr Nene described the security and reliability of the energy supply as the most important structural challenge holding back production and investment in the economy.

 

In addition to the new generation possibilities outlined by President Jacob Zuma in the state of the nation address, the budget makes additional suggestions to manage the energy supply by dampening demand.

 

Heavy industrial users, which have special pricing arrangements with Eskom, will be taxed through an increase in the electricity levy from 3.5c/kWh to 5.5c/kWh. Treasury director-general Lungisa Fuzile said that the raised levy was "temporary" and was designed to encourage energy efficiency among users "where the price mechanism is blunted because of special arrangements". The increase would be phased out as electricity constraints eased and the anticipated carbon tax was introduced in 2016.

 

The budget review also suggested reintroducing power "buy-backs" from large industrial users — in which they are paid to cut demand when the grid is under strain — and varying tariffs according to time of use.