Recovery of revenue differences is a matter of timing

24 February 2020

At the closing session of the National Energy Regulator of South Africa’s (NERSA) public hearings held in Midrand today, Eskom dealt with elements of its Regulatory Clearing Account (RCA) application paying particular attention to the costs of coal and open cycle gas turbines to keep the lights on. In addition, questions that had been raised by the NERSA Board panel members, as well as stakeholders in previous sessions, were also addressed.

Eskom’s General Manager for Regulation, HashaTlhotlhalemaje reiterated that the RCA application was in line with the approved Electricity Regulation Act, the multi-year price determination (MYPD) methodology and NERSA’s guiding principles including precedence set by the Regulator’s decision on the 2014 RCA application. “NERSA determined Eskom’s efficient revenue should be R190 billion for the 2018/19 financial year, which needed to be recovered over a volume of sales determined by NERSA. However, the sales were lower than those determined by NERSA, resulting in Eskom not recovering the allowable revenue in the NERSA decision where it granted Eskom a 5.2% (3% for Eskom and 2.2% for independent power producers). The MYPD methodology elegantly addresses the process to ensure that the NERSA decision is respected. The methodology requires the recovery of the full variance in revenue related to the difference in sales.”

MsTlhotlhalemaje also addressed the issue of governance lapses at Eskom and their impact on the price of electricity, “We understand that there are questions about the impact of governance failures at Eskom and would like to reassure all stakeholders that we are committed to comply with the guidance set by the Regulator that once the extent of the governance failures or amounts associated therewith have been fully quantified, these will be taken into account,” said Tlhotlhalemaje. This is in line with the decision made by NERSA during 2019.

Finance Business Partner for Primary Energy, Snehal Nagar explained the impact of NERSA’s decision to disallow costs for Primary Energy in the 2019 financial year when compared to the 2018 financial year, “NERSA disallowed almost 20% of the coal burn cost for which Eskom applied for. The lower price determination did not consider Eskom’s existing contractual obligations and various factors that were included in Eskom’s application. NERSA instead applied the FY2014 RCA decision as its base and escalated this using a Mining PPI index which is not reflective of coal price/coal cost movements. Compared to Eskom’s application, Eskom’s coal costs were approximately 8% higher than the amount applied for, because of the stock recovery programme to augment coal stocks that were below the grid code requirement.”

On the use of OCGTs, Eskom indicated that it used OCGTs more than what NERSA had allowed as the generation system performance deteriorated from 75% of availability at the beginning of FY2019, to around 65% by the end of that year. General Manager for the System Operator Bernard Magoro says, “The power system is managed in real time based on available capacity versus demand. In the year relating to the application, you will note that we depleted the allowed allocation for OCGT usage by July 2018, which left Eskom with a decision to either use OCGTs to minimise loadshedding, or implement heavy loadshedding to the detriment of the economy. It is important to note that OCGTs are used as a last resort before implementing loadshedding, subject to availability of diesel fuel.”

Corporate Specialist at Eskom, Deon Joubert, illustrated that all the IRPs since 2010, which are government policy documents, indicate that the price path to ensure that the industry remains financially sustainable is far higher than where the price of electricity is currently. “The price level reflected by the Integrated Resource Plan (IRP) from the 2010 to the 2019 iteration implies a revenue gap worth R67 billion in this one financial year of 2020, and cumulatively over R300 billion over the period since the start of the MYPDs.  This has left Eskom with no option but to raise debt in order to plug the gap between where the price is and where it should be to cover the prudent and efficient cost,” said Joubert.

Thus this revenue variance addresses a timing variance. Due to the time value of money not being included, a long recovery period is not reasonable. Eskom therefore proposes that R13.5 billion of the R27 billion (50% of RCA balance application) be liquidated in the 2022 financial year (last year of the MYPD 4) and the remainder in the first year of the MYPD 5 period. Eskom had to increase its debt levels due to the delay in recovering efficient costs.

Issued by Eskom Media Desk, 24 February 2020