The widespread negative reaction to the National Energy Regulator of SA's (Nersa's) decision to allow Eskom a 31.3 percent interim electricity tariff increase is unsurprising.

Asking for big tariff increases at a time when the economy is taking strain is not going to win Eskom admirers. Last week's increase follows last year's average 27.5 percent tariff rise.

Other than the government, Eskom's shareholder, hardly anyone has approved of the decision. Criticism of the tariff hike is not misplaced given that the economy is not in the best of shape. Mining is an example: the Chamber of Mines says the mining sector buys a basket of goods and services whose costs are rising by double-digit figures while commodity prices are low.

"This means that a number of mining companies are battling for survival and extra costs have added to the burden of the pressures they face in the short term," the chamber's assistant adviser for techno economics, Dick Kruger, says.

The chamber has gone to the extent of requesting the government to delay the introduction of the 2c/kWh environmental levy "until such time that conditions are more conducive".

Negative effect on the economy

Business Unity SA (Busa) says it is concerned about the negative effect of the increases on the economy. "Busa is therefore concerned at the serious cost implications for business and consumers at a time when the Reserve Bank is reluctant to cut interest rates more rapidly, partly because of the upward pressure that rising electricity costs have on inflation," the body says.

There are signs that when Eskom makes its tariff application later this year it will ask for an even bigger increase than the 31.3 percent interim hike that is so unpopular.

But are South Africans ready for the rapid price increases? There is talk of a "smooth" rise in tariffs, but the reality is that given Eskom's multibillion-rand capital expansion programme, it needs an immediate injection of finance.

Thembani Bukula, Nersa's head of electricity regulation, says that, in the current financial year, given its balance sheet, Eskom can raise about R30-billion to add to the R30-billion which is part of a R60-billion loan from the government. The utility must still find R27-billion to meet its capital expansion programme's financial obligations. There are no prizes for guessing who will fill the gaping hole.

Eskom put the brakes on

If Eskom is going to stick to its building programme, hard questions have to be asked about where the R27-billion will come from. The alternative is for Eskom to slow down the programme. The danger with this is the relatively low reserve margin. Eskom has put the brakes on water, rail and wind projects but is unlikely to tamper with plans to increase base load capacity through the building of the Medupi and Kusile coal fired power stations. Not surprisingly, these two power stations account for a big portion of Eskom's capital expansion programme.

Eskom says there is a significant shortfall on funding the R385-billion capital expansion programme. In the 2005-06 financial year, the shortfall was 23 percent (R4-billion). This is expected to soar to 65 percent (R54.3-billion) in the 2011-12 financial year. Except for the 2005-06 financial year, government financial support and debt have over the years consistently come short of Eskom's capital expenditure requirements. Until the 2007-08 financial year, Eskom could finance the programme through debt and its own reserves.

Perhaps the eagerly awaited funding model for the build programme will shed light on how Eskom will proceed with its massive programme and still avoid spikes in electricity prices. The funding model will be ready in September. It will pave the way for Eskom to apply for the second three multi-year price determinations. That application will give an indication of the extent to which consumers will have to dig in their pockets to keep the capital expansion programme on track.

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