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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<str<strong>on</strong>g>The</str<strong>on</strong>g> argument that the introducti<strong>on</strong> <str<strong>on</strong>g>of</str<strong>on</strong>g> IPPs would result in lower tariffs<br />
is the most robust since it has been proven that increased competiti<strong>on</strong><br />
in the electricity supply industry <str<strong>on</strong>g>of</str<strong>on</strong>g>ten results in lower prices but this is<br />
not always the case since IPPs also face a higher cost <str<strong>on</strong>g>of</str<strong>on</strong>g> capital<br />
Opti<strong>on</strong> Argument Criticisms and Implicati<strong>on</strong>s<br />
Allow IPPs to sell to<br />
a independent<br />
system operator<br />
39<br />
Deloitte<br />
• <str<strong>on</strong>g>The</str<strong>on</strong>g>re are several reas<strong>on</strong>s<br />
that introducing IPPs<br />
lowers the price path. <str<strong>on</strong>g>The</str<strong>on</strong>g>y<br />
are proven to manage their<br />
CAPEX and OPEX more<br />
efficiently than SOEs, their<br />
speed <str<strong>on</strong>g>of</str<strong>on</strong>g> implementati<strong>on</strong> is<br />
faster and lastly, as<br />
opposed to <strong>Eskom</strong>, they<br />
are unable to earn a return<br />
<strong>on</strong> work under c<strong>on</strong>structi<strong>on</strong><br />
• By allowing <strong>Eskom</strong> to<br />
complete committed and<br />
new nuclear build plans<br />
and with IPPs delivering<br />
the remainder <str<strong>on</strong>g>of</str<strong>on</strong>g> new build<br />
, it is possible to maintain<br />
the price in between the<br />
justifiable range <str<strong>on</strong>g>of</str<strong>on</strong>g><br />
75c/kWh to 85c/kWh.<br />
Exploring the<br />
policy opti<strong>on</strong>s<br />
available<br />
• IPPS are unlikely to enter the electricity supply industry until tariffs are<br />
cost-reflective and provide the incentive for them to do so.<br />
• It is <str<strong>on</strong>g>of</str<strong>on</strong>g>ten argued that IPPs deliver power at least cost and lowest risk. In<br />
practice there is wide variati<strong>on</strong> in the outcomes <str<strong>on</strong>g>of</str<strong>on</strong>g> IPP projects but there<br />
are many projects that are viewed as a success by investors and their<br />
host countries alike. (Woodhouse, 2005).<br />
• While IPPs in a competitive envir<strong>on</strong>ment may manage capex and opex<br />
more efficiency than <strong>Eskom</strong>, they would also face a higher cost <str<strong>on</strong>g>of</str<strong>on</strong>g><br />
capital which greatly increases the cost <str<strong>on</strong>g>of</str<strong>on</strong>g> supply in the capital intensive<br />
electricity supply industry and this may <str<strong>on</strong>g>of</str<strong>on</strong>g>fset any potential reducti<strong>on</strong> in<br />
capital and operating costs due to improved efficiency.<br />
• Allowing a return <strong>on</strong> works under c<strong>on</strong>structi<strong>on</strong> (WUC) is a comm<strong>on</strong><br />
practice that has been widely adopted by regulators in countries<br />
including the UK, Australia and the US. Although it implies that some<br />
revenue is collected before the asset is operati<strong>on</strong>al, it is compensated<br />
for by reduced revenue over the rest <str<strong>on</strong>g>of</str<strong>on</strong>g> the operati<strong>on</strong>al life <str<strong>on</strong>g>of</str<strong>on</strong>g> the asset<br />
resulting in a similar present value <str<strong>on</strong>g>of</str<strong>on</strong>g> the total future revenue stream.<br />
• Regardless <str<strong>on</strong>g>of</str<strong>on</strong>g> whether there is an independent system operator or<br />
<strong>Eskom</strong> acts as a single buyer, the final electricity tariffs c<strong>on</strong>sumers’ face<br />
will be a blended rate, so while <strong>Eskom</strong>’s tariffs may be lower due to the<br />
avoided capital expenditure, the blended tariff would include the IPP<br />
tariffs which will presumably be cost-reflective. (Joubert, October 2011).<br />
©2012 Deloitte Touche Tohmatsu Limited. All rights reserved.<br />
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