Question NW3149 to the Minister of Public Enterprises

Reply:

(a)

The average Eskom electricity price in 2007/8 financial year was 19.4c/kWh and in 2017/18 financial year it is around 85c/kWh. In nominal terms it represents an increase of 339% over the 10 years. The annual rate of inflation over this period averaged around 5.9%, therefore in real terms the current average price reflects an increase of 148% over the ten years.

It was widely reported in the media ten years and more ago, that Eskom’s price at that stage did not reflect the long run sustainable price. In essence the price mostly reflected fuel and operating/maintenance cost, with very little provision for the cost of the assets. This was mainly due to two reasons: firstly, a 24-year period of annual decreases in real terms in the price of electricity, taking it to a level that was the lowest in the world by a significant margin.

Secondly, the fact that the newest existing assets at that time were already around 16 years old and the average age of the assets much older. Therefore, the cost components of depreciation and cost of capital were inherently low – however at that stage Eskom’s average price had over the 24 years drifted down to a level that did not even reflect the full cost of that relatively low capital.

It is recognised that in the long run the capital-intensive nature of electricity generation and transmission implies that the capital cost usually comprises more than 50% of the total cost of electricity; however in 2007 it was very much lower than that. In addition, with the commencement of the build programme, it became evident that international prices for new power plant had nearly doubled in real terms over the preceding ten years. Hence media reports at the time quoted independent electricity experts that Eskom’s average price will have to treble over the next ten years, to enable Eskom to access the capital required for the new investments – therefore, for Eskom to be able to raise the debt and thereafter to honour the debt commitments in terms of repayment of debt principal and payment of debt interest.

At an average of 85c/kWh including transmission and distribution, Eskom’s current price translates to around 6.3c/kWh in US$ terms – far lower than any comparable international price for a coal-based system, including transmission and distribution, which generally starts at around 9.5c/kWh and higher. Eskom’s average price is therefore still quite competitive internationally and would still be so even after the requested increases, which are required because Eskom’s current 85c/kWh still does not fully reflect a level of prudent and efficient cost, as confirmed by any credible international comparison.

Clearly, electricity intensive industries would prefer lower prices. However if the price is below any credible international reference based on efficient cost, then it implies someone else would have to pay the difference. In the short term the annual revenue shortfall could be temporarily made up with additional borrowing, however in the longer term someone would have to pay to enable such borrowed capital to be repaid, including the interest. Economic theory and modelling conducted by independent specialist economic consultancies have confirmed numerous times that the overall economy would be worse off in terms of growth and job creation if the approach is followed to provide electricity at below its true efficient cost, with the shortfall being made up by the central fiscus thus by taxpayers.

(b)

No. Having engaged with the Departments leading in economic policy, planning and assessment; electricity is one of the various factors that potentially have adverse downstream impact on economic development. However, a thorough assessment into the wellbeing and development of the economy requires that a comprehensive assessment be done by the relevant Department(s) and must consider the impact of rising labor costs, electricity, lack of investment, and the structure of the economy among other factors.

Remarks: Reply: Approved / Not Approved

Mr. Mogokare Richard Seleke Ms. Lynne Brown, MP

Director-General Minister of Public Enterprises

Date: Date: