The Economic Impact of Electricity Price Increases on ... - Eskom
The Economic Impact of Electricity Price Increases on ... - Eskom
The Economic Impact of Electricity Price Increases on ... - Eskom
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However each <str<strong>on</strong>g>of</str<strong>on</strong>g> the opti<strong>on</strong>s presented by industry representatives<br />
suffer from c<strong>on</strong>siderable drawbacks. <str<strong>on</strong>g>The</str<strong>on</strong>g> first opti<strong>on</strong>, lowering <strong>Eskom</strong>’s<br />
ROA is not c<strong>on</strong>sistent with the fundamental principles <str<strong>on</strong>g>of</str<strong>on</strong>g> an effective<br />
pricing regime – tariffs that are ‘cost-reflective’ tariffs and promote a<br />
financially sustainable electricity supply industry.<br />
Opti<strong>on</strong> Argument Criticisms and Implicati<strong>on</strong>s<br />
Lower <strong>Eskom</strong>’s<br />
return <strong>on</strong> assets<br />
(ROA)<br />
37<br />
Deloitte<br />
• A return <strong>on</strong> assets<br />
sensitivity analysis<br />
indicates that this is <strong>on</strong>e<br />
variable which can be<br />
easily adjusted to change<br />
the trajectory <str<strong>on</strong>g>of</str<strong>on</strong>g> the<br />
electricity price path.<br />
• Dropping the allowed<br />
ROA from 8% to 6%<br />
drops the electricity price<br />
by 10c/kWh while still<br />
allowing <strong>Eskom</strong> to<br />
effectively manage its<br />
balance sheet.<br />
Exploring the<br />
policy opti<strong>on</strong>s<br />
available<br />
• <str<strong>on</strong>g>The</str<strong>on</strong>g> ROA comp<strong>on</strong>ent should be designed to ensure the sustainability<br />
<str<strong>on</strong>g>of</str<strong>on</strong>g> <strong>Eskom</strong> by providing for sufficient revenue to maintain and upgrade<br />
existing infrastructure and investment in new capacity when required<br />
(Danilyuk, 2009).<br />
• <str<strong>on</strong>g>The</str<strong>on</strong>g> allowed return <strong>on</strong> assets is not determined arbitrarily but must be<br />
referenced to the utility’s actual risk-adjusted weighted average cost <str<strong>on</strong>g>of</str<strong>on</strong>g><br />
capital (WACC).<br />
• If the ROA is set below the true risk-adjusted cost <str<strong>on</strong>g>of</str<strong>on</strong>g> capital, the<br />
resulting tariff is not cost-reflective, will not allow <strong>Eskom</strong> to recover the<br />
full cost <str<strong>on</strong>g>of</str<strong>on</strong>g> its assets or provide incentive to invest further. IPPs facing a<br />
higher cost <str<strong>on</strong>g>of</str<strong>on</strong>g> capital also have little incentive to invest.<br />
• Tariffs that do not reflect the true cost <str<strong>on</strong>g>of</str<strong>on</strong>g> electricity supply lead to a<br />
misallocati<strong>on</strong> <str<strong>on</strong>g>of</str<strong>on</strong>g> nati<strong>on</strong>al resources and to mismatches between<br />
electricity supply and demand (Vedavalli, 1989).<br />
• To assume that equity costs less than it actually costs implies that the<br />
shareholders (the state and taxpayers) would be subsidising electricity<br />
prices. (Joubert, October 2011).<br />
• In additi<strong>on</strong> as noted in secti<strong>on</strong> 2.6.1.2 for the current MYPD2 period<br />
NERSA did not in fact calculate <strong>Eskom</strong>’s allowable revenue <strong>on</strong> the<br />
basis <str<strong>on</strong>g>of</str<strong>on</strong>g> its published methodology. NERSA determined the<br />
“reas<strong>on</strong>able margin or return” <strong>on</strong> assets to 8.16%, but instead awarded<br />
<strong>Eskom</strong> a real (pre-tax) Weighted Average Cost <str<strong>on</strong>g>of</str<strong>on</strong>g> Capital (WACC) <str<strong>on</strong>g>of</str<strong>on</strong>g><br />
0.08%, 2.8% and 4.2% for the three respective financial years. This is<br />
because <strong>Eskom</strong> is currently still transiti<strong>on</strong>ing to more cost-reflective<br />
tariffs and a massive <strong>on</strong>e-<str<strong>on</strong>g>of</str<strong>on</strong>g>f price adjustment would be politically<br />
unviable.<br />
©2012 Deloitte Touche Tohmatsu Limited. All rights reserved.<br />
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