20100122
allafrica

Johannesburg — ESKOM's proposed 35% tariff hikes every year for the next three years could cost SA 200 000 jobs and delay the economy's recovery from recession, Jerry Vilakazi, CEO of Business Unity SA, warned yesterday.

On the second-last day of public hearings on the proposed tariff increases, business groups and companies poked holes in Eskom's argument for the rises to help fund its R385bn expansion.

While the hikes would bring in R18,2bn in the first year, the cost to SA would far exceed this, and the economy could lose R80bn, Vilakazi said.

A 35% hike could lead to consumer price inflation rising 1,2%. "And the pass-through effects would hit food prices."

This, he said, would come after last year's negative economic growth and 1-million job losses.

Ian Langridge, chairman of the Energy Intensive User Group, said Eskom needed to change its funding model and sell an existing power station instead of a mere stake in the still-to-be-built Kusile power station, as planned.

Langridge said procurement for Eskom's Medupi and Kusile power stations was done at the peak of the market, and the costs were too high, making them unattractive to private investors.

He said prospective private investors were likely to be interested in Eskom's older, more established power stations rather than Kusile, which was still under construction.

" The offer will have limited uptake due to the fact that construction risk has already been managed by Eskom, and potential bidders cannot apply their expertise to enhance their capital return," he said.

Langridge said investment in Eskom's older power stations could be a preferred option for investors if the market became more attractive.

"It is difficult to imagine that an investor will invest in a power station that was procured at the peak." But an existing power station, with a good track record, presented an attractive opportunity for investment in good assets.

Greg Kinross, president of CIC Energy, was also sceptical about Eskom securing private equity partners for Kusile in the next three years.

"The risk of not securing a partner for Kusile during (this period) ... is very high," he said. It was unlikely that an investor would enter into material contracts in which it played no part in negotiating.

Investors would also be reluctant to assume Kusile's coal supply, environmental and water supply risks, he said.

Steel and Engineering Industries Federation of SA (Seifsa) council member Guy Harris said: "No investor in their right mind will look at a minority stake at an unproven asset."

Kinross also questioned the wisdom of granting Eskom high tariffs. "Eskom is raising tariffs now, to finance capital to build capacity for electricity that will only be generated in the future. Today's users will be subsidising tomorrow's, at great current cost to the economy," Kinross said.

Eskom would over-recover its operating costs if the 35% increase was granted, and only a 25% hike was needed, he said.

CIC Energy is the developer of the Mmamabula energy project in Botswana. The project includes a 1320MW coal plant. Of the electricity from the plant, 75% will be sold under a still unsigned long-term power purchase agreement to Eskom.

Kinross said delaying or downsizing all or part of Kusile would reduce Eskom's cash-flow requirements "significantly".

He said there was likelihood of Medupi, the other new power station, and Kusile being delayed beyond the dates estimated in the multiyear price determination.

According to Eskom, the first unit of Medupi will be commissioned in 2012, while Kusile is scheduled for commissioning in 2014. Kinross said a delay in the commissioning of the power stations would aggravate the energy crunch, requiring Eskom's existing plants to run harder. Such a delay would also cause the capital costs of the two power stations to soar.

Chris Meares, MD of Progress Ceramics, told Nersa yesterday that his company was on the brink of closure because of, among other things, the rising electricity costs. He said he had retrenched employees in the past year. "The future of my business is on a knife edge."

While it was possible to change his company's business model and reduce reliance on electricity, doing so required "massive" investment. "It is not that easy to change your business model in the face of a crisis like this," he said.

Meanwhile, ratings agency Standard & Poor's yesterday confirmed Eskom's local currency rating at A- and its foreign currency rating at BBB+. According to Eskom, the move brings to an end the uncertainty created by the agency's previous placing of the power utility on credit watch.

Eskom acting chairman Mpho Makwana said he was "satisfied" that the rating reflected Eskom' s critical role in the economy, and recognised Eskom's progress in stabilising its credit profile.

Today will be the last day of the Nersa hearings. The regulator is scheduled to make a determination on Eskom's application next month.