Eskom updates key assumptions in the revenue requirement for FY 2024 and FY 2025
15 September 2022
As a result of a court order issued in July 2022, the National Energy Regulator of South Africa (NERSA) is in the process of consulting on Eskom’s Multi-Year Price Determination (MYPD) 5 revenue application for FY2024 and FY2025. In accordance with NERSA MYPD methodology, Eskom is required to provide any updates on changes in conditions and environments that impact various cost elements of the revenue requirements. The total revenue as applied for in June 2021 - R335bn (FY 2024) and R365bn (FY 2025) remains the same. Changes are made within the cost items as required with an off- set in the return on assets.
The key changes include the following from the previous update (January 2022):
Increases in Eskom primary energy costs – combination of costs related diesel price increase and volume increase
Removal of arrear debt related costs – in line with NERSA decision for FY 2023, where other customers do not contribute to gap created by non-paying customers
Removal of carbon tax related costs – due to announcement by Minister of Finance of impending legislative changes to postpone carbon tax liability to beyond FY 2025
Increases in independent power producer (IPP) costs – mainly due to increased emergency IPP procurement
Slight increase in sales volumes
Further reduction in average energy availability factor for Eskom power stations of 59%
The following assumptions have not changed from original application
Operating costs
Depreciation
Value of regulatory asset base
Capital expenditure
The price increase being applied for is 32.02% for FY 2024, and the decision will be implemented on 01 April 2023. The key contributors include:
Depreciation of 10.67% - due mainly to an incorrect regulatory asset base valuation by NERSA in its FY2023 its decision, (substantially in the generation business),
Eskom primary energy of 7.85% (of which the majority, 6.09% is due only to increase in diesel and fuel oil prices as well as volume increase in OCGT fuel)
IPP cost increase of 9.05% (due to further energy being sourced from IPPs including emergency procurement)
The price increase for FY2025 being applied for is 9.74% with IPPs contributing 5.39% to this.
In addition, proposals are made for the recovery of part of the incorrectly deducted equity support from FY 2020 to 2022 (under MYPD4) as well as the regulatory account balance decision for FY 2020. These refer to prudent and efficient expenditure being recovered four to six years later.
The Supreme Court of Appeal has ordered that the remaining R59bn of the incorrectly deducted equity be added to the allowable revenue decisions for each year, starting on 01 April. R15bn each in FY 2024 to FY 2026 and R14bn in FY 2027. The proposal is to allow these recovered amounts to be targeted towards the return on assets for the transmission and distribution network businesses. It also allows for the further migration towards cost reflectivity for the Eskom network businesses. Focus can then be shifted to the generation business in subsequent years.
Eskom has submitted proposals to NERSA to restructure tariffs during August 2022. The translation from the allowable revenue to tariffs that will better reflect the unbundled costs and fixed vs variable costs is included. This ensures that customers are more aligned to the actual costs they impose on the system.
This also addresses the key aspect of certain customers using the electricity system as a battery and back-up. It is critical that in making strides to cost reflective revenue levels, we don’t miss the opportunity to make similar step changes in FY2023 relating to the tariff structures and unbundling.
More information on Eskom’s update of the FY 2024 and FY 2025 revenue application can be found on Eskom’s website:
https://www.eskom.co.za/wp-
Issued by Eskom Media Desk, 15 September 2022
