RA ENGINEERING NEWS | December 8–14, 2017 9
A
major topic of discussion during recent
public hearings into Eskom’s 2018/
revenue application was whether a
further double-digit tariff hike could trigger
a “utility death spiral”, whereby rising tariffs
and utility costs spark an exodus of energy-
intensive customers from the network, leaving
the remaining customers with ever-escalating
power bills.
The Energy Intensive Users Group (EIUG),
representing Eskom’s 32 largest mining and
industrial customers, which collectively con-
sume 40% of the country’s electrical energy,
was particularly vociferous in its warnings.
However, Business Unity South Africa also
highlighted the threat, noting that Eskom’s
combined sales to industry and mining were
already 14% below 2011 levels.
If granted, Eskom’s revenue application
“would trigger further defections from the
grid”, the business body cautioned.
The topic was further interrogated during
a Wits Business School panel discussion
facilitated by Dr Rod Crompton, a former
regulator and the newly appointed director
of the business school’s Energy Leadership
Centre.
Crompton asked a panel, which included
former Finance Minister Nhlanhla Nene,
Eskom corporate specialist Deon Joubert,Fieldstone Africa MD Jonathan Berman,
former EIUG chairperson Piet van Staden,
as well as former regulator and current Powerx
CEO Thembani Bukula, whether Eskom was
indeed in a financial death spiral.
However, responses to Crompton’s straight-
forward enquiry were far from complicated,
with Van Staden describing it as a “complex
problem that has a very simple, easily under-
standable, wrong answer”.
There was no debating that Eskom was
experiencing financial hardship, or that the
utility’s difficulties had the potential to spill
over to the national fiscus, owing to the fact
that government explicitly guaranteed R350-
billion of Eskom’s debt and implicitly stood
behind all its obligations, which were set to
rise to R500-billion in the next few years.
Berman even argued Eskom’s death spiral
was not limited to its finances, owing to the
fact that it also faced political, policy and
structural death spirals, which had intensified
in light of serious allegations of corruption
and maladministration.
Nene indicated that he felt a sense of
culpability, given that, while Finance Minister,
he had overseen the 2014 conversion of a R60-
billion subordinated loan to equity, as well
as an injection of R23-billion into the utility,
arising from proceeds of government’s saleof its stake in Vodacom.
“Little did we know that, in selling the
family silver to prop up Eskom’s balance sheet,
there was a leak that was far beyond what
we were trying to plug,” Nene said, alluding
to strong indications that the utility had
since been used to enrich a politically con-
nected elite.
“Looking back, it was the best we could do
[to stabilise Eskom], but we should have been
much more stringent with our conditions.”
However, Nene described the death-spiral
question as one that did not require a direct
answer, because Eskom was “too critical and
central to the economy to be allowed to fail”.
That said, the utility still required “serious
surgery” if it was going to emerge from the
current crisis.Price Elasticity
Van Staden cautioned, though, that Eskom
was facing two significant transitions that
were making its current business model
“unsustainable”.
The first was a supply-side transition,
where the falling cost of renewable-energy
technologies was undermining the com petitive-
ness of Eskom’s coal fleet, while showing up
the problem of being locked into an expensive
and inflexible build programme.
The second was a demand transition, where
the end of the commodities supercycle,
together with efficiency improvements and the
rise of embedded generation, was resulting in
a decoupling of economic and electricity
growth.
“We are now in a situation where price
elasti city of industrial demand is quite
crucial and is a primary driver of the lack
of demand,” Van Staden argued, referring to
the phenomenon where a small change in the
price of a product is accompanied by a huge
change in the quantity demanded.
Eskom’s Joubert countered that argument
by suggesting that, while many commentators
were pointing to price elasticity of demand,
there were several other factors contributing to
declining volumes, not least the weak state of
the domestic economy and the increasing role
being played by the services sector.
At the equivalent of $0.063/kWh, Joubert
argued, Eskom’s retail tariff remained
competitive relative to most countries in Africa
and many countries globally.
The tariff also remained below the point
where substitutes and alternatives to grid
electricity became economically viable.
However, he admitted that the gap for
municipal customers, whose tariffs were
sub ject to subsidies and surcharges, was far
nar rower, which created the possibility for
defection by those customers more able to
afford own generation. Some 42% of Eskom
volumes are sold to municipalities.ELECTRICITYHard Times
Eskom’s ‘death spiral’ under the microscope
NEWS&INSIGHT
CLOUDS GATHER
Price elasticity of industrial demand a driver of the current lack of demandTERENCE CREAMER | CREAMER MEDIA EDITORPicture by Senior Chief Photographer Duane Daws- To page 10