Picture: THINKSTOCK
Picture: THINKSTOCK

CAPE TOWN — The National Energy Regulator (Nersa) has granted Eskom a 12.69% rise in electricity prices for next year, double the rate of inflation, a development economists believe is just a taste of things to come.

The price hike is bad news for both consumers and business, and is likely to put a damper on an already struggling economy. Inflation is expected to average 6.2% for the year, the Reserve Bank said last month.

State-owned power utility Eskom has significant challenges on both the financial and electricity supply fronts. It faces a R225bn funding shortfall for the five years to March 2018 and cannot generate enough cash to service the debt it needs to pay for the completion of new power stations.

Last month the government announced a financial rescue package for Eskom, the details of which are expected to be announced by Finance Minister Nhlanhla Nene on October 22.

Rating agency Standard & Poor’s (S&P) said it would make a decision on Eskom’s debt, which could see it cut to junk status, after these details were disclosed. The Treasury has said only that the rescue plan will include a capital injection and an increase in state-guaranteed debt.

On Friday Nersa said it would allow Eskom to raise electricity prices 12.69% in April, to help it recover R7.8bn in unbudgeted costs. The increase is 4.7 percentage points above the 8% tariff increase originally agreed to for the year to March 2016.

Last year Nersa only allowed Eskom to raise tariffs 8% a year for the five years to 2018, rather than the 16% it requested.

But in July it found that Eskom’s costs exceeded projections for the three years to 2013, paving the way for higher tariffs.

Pan African Investment and Research Services chief economist Iraj Abedian said the increase in electricity prices would be "bad news all round" for businesses and households. Describing Eskom as a "broken" organisation, he said years of double-digit electricity price rises were in the offing, yet there was no guarantee this would solve Eskom’s deep problems.

"Eskom has not got the capacity to plan its capital spending (and) its operational inefficiencies have caught up with it," he said.

Nomura International economist Peter Attard Montalto said the only way to sustain Eskom was to significantly increase electricity prices in the years ahead, perhaps by as much as 20%-25%. However, political pressure would be likely to ensure price increases did not rise more than 15%.

Econometrix chief economist Azar Jammine said only if Eskom were to increase tariffs about 13% a year over the next five years would it generate sufficient revenue to cover a R225bn shortfall.

"I wouldn’t be surprised to see this rate increase being repeated in the following four years (after next year). To be fair, if we are to get over this energy crisis we do have to increase tariffs," he said.

Former deputy CEO of Business Unity SA Raymond Parsons said: "It is again bad news ... (and) comes at a vulnerable point in SA’s business cycle, with low growth, inflation at the upper end of the target range and the economy becoming less competitive."

Manufacturing Circle CE Coenraad Bezuidenhout said SA’s electricity prices were relatively low by global standards, but were increasing at rates far faster than competitors such as Brazil’s.

The hike announced by Nersa was "regrettable" as it would have a "severe impact" on manufacturers, already hard hit by escalating labour costs and low demand for their products. "Manufacturers will be less able to make use of beneficial factors like the weak rand to boost exports and it will undermine the economic strength of the country," he said.

Eskom chief financial officer Tsholofelo Molefe said Nersa’s decision would contribute to the group’s sustainability but did not go far enough. "This provides a limited reprieve to Eskom’s challenges and financial sustainability and further interventions would be necessitated," she said.

In August Eskom asked Nersa to approve recovery of R18.4bn, but got only R7.8bn for 2015-16.