The Economic Impact of Electricity Price Increases on ... - Eskom

<strong>The</strong> second option, retaining historic cost accounting practices, would
in all likelihood give rise to more rapid electricity price increases over
the next few years. Lowering the target for renewable energy would
result in lower tariffs but at the expense <strong>of</strong> the environment.
Option Argument Criticisms and Implications
Don’t revalue Eskom’s
assets
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Deloitte
• One <strong>of</strong> the more controversial
changes in the pricing
methodology has been the
reweighting <strong>of</strong> historical assets to
reflect long run marginal cost <strong>of</strong>
electricity. By 2025, the amount <strong>of</strong>
new build capacity in the system
would effectively raise the
average value <strong>of</strong> the assets to
replacement cost.
• By simply following the natural
progression, the price path is
lowered significantly.
Less Renewables • 33% <strong>of</strong> the new build plan is
committed to renewable energy
technologies and almost all to
carbon neutral technologies
• From 2022 there is also a
significant amount <strong>of</strong> OCGT
capacity added to balance out
uncertainty regarding renewable
feedstock.
• <strong>The</strong> high capital costs for
renewables combined with high
operating costs for OCGT inflates
tariffs and increases uncertainty
regarding security <strong>of</strong> supply.
• A slower transition to renewables
would allow for a lower tariff and a
more thorough evaluation <strong>of</strong> the
efficiency and reliability <strong>of</strong>
renewable technology
• Ironically (as noted in section 2.6.1.1), the historic cost method gives rise to higher initial
revenues (and therefore higher prices) than the depreciated replacement cost method
during a period when large investments are undertaken. <strong>The</strong>refore if NERSA retains the
historic cost approach to asset valuation, tariff increases, as Eskom expands its build
programme in the next few years, will in all likelihood increase more rapidly than if it adopts
the depreciated replacement cost method. In addition all the drawbacks <strong>of</strong> the HC
approach in the context <strong>of</strong> the electricity supply industry (as outlined in section 2.6.1.1)
would continue to apply in future.
• It is also important to note that while NERSA have in principle adopted the depreciated
replacement cost approach to asset valuation it has not yet been fully implemented. Tariffs
currently remain well-below levels that reflect the true depreciated replacement cost <strong>of</strong>
Eskom’s assets because NERSA will only allow Eskom to transition to cost-reflective tariffs
over a number <strong>of</strong> years so as to avoid a one-<strong>of</strong>f adjustment (and massive price shock). In
the ‘MYPD2 reasons for decision document’ NERSA implied that to achieve this transition
it is phasing in 3 components <strong>of</strong> the tariff formula – the ROA, the value <strong>of</strong> the asset base
and the depreciation charge. (Joubert, October 2011).
Exploring the
policy options
available
• A slower transition to renewables would result in lower electricity prices to the extent that
electricity produced from renewable technologies costs more than from conventional
technologies. However this may not be true if the external environmental costs <strong>of</strong>
conventional coal-fired power stations are factored in.
• It is government policy to apply multi-criteria to the evaluation and choice <strong>of</strong> technologies
for future electricity infrastructure planning, not only the criteria <strong>of</strong> lowest cost. (Joubert,
October 2011). Environmental sustainability in electricity pricing is recognised as a
objectives <strong>of</strong> the South African government in the <strong>of</strong>ficial electricity pricing policy, “<strong>The</strong>
production and transport <strong>of</strong> electricity should be done in a sustainable way and be mindful
<strong>of</strong> the impact on the environment.” ( DME, 2008).
• Environmental costs may soon be internalised through the introduction on taxes on carbon
and other greenhouse gas emissions both domestically and internationally.
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