Jacob Modise: Eskom’s rising tariffs close to paving way for IPP’s in SA

Energy Regulator NERSA, made a very unpopular decision when it approved passing Eskom’s diesel costs onto the consumer.  The increased tariff will see consumers paying 12.5 percent more for electricity this year. Alec Hogg was joined by Chairman of Nersa, Jacob Modise on CNBC Africa’s Power Lunch, to break down the details. 

We start off with this 12.5 percent increase that you gave to Eskom, what was shaping your thinking?

Eskom is facing a number of critical problems.  As the President said in the State of the Nation Address, some of the problems relate to maintenance and the fact that a plant is not available to generate electricity.  With a plant being unavailable Eskom fires up those OCGT’s, which uses exceptionally expensive diesel.  When they fire up the OCGT’s, they burn through cash very, very quickly.  The target increase that we gave them before was insufficient to cover the costs of the OCGT’s and we haven’t allowed them the full use of OCGT’s.  When we did what we call MYPD2, we told them we could use OCGT’s.  On average, we can generate about 300GW hours of power per annum, using OCGT’s.  In one year, they had generated close to 1700GW hours.

Were they told to do that?  Was this a national priority, to just run those generators on diesel no matter the cost, to keep the economy going?

This is what Eskom says, but as regulator, we simply look at the facts.  If you tell Eskom ‘you’re only allowed to generate 300GW hours per annum’ and the come and generate under 2000, we look at that, say ‘these are not prudently-incurred costs, and then we disallow it.

What’s going to happen into the future, though?  Clearly, we’ve made lots of mistakes.  No one is faultless in all of this.  How do you as a regulator, make sure you keep everybody onside?

We are economic regulators.  What we do, is balance a number of interests.  Firstly, we want to ensure that we have a sustainable industry that generates power to support other industries such as mining and manufacturing.  While we could say that we want power as cheaply as possible, in reality, we want to ensure that power can be generated as well.  One of the solutions would be that it would cost us a little bit more in the short-term.  As South Africans, we should just accept that we might have to pay for some of the errors that were made in the past.

Surely, the big story is ‘is the power price now high enough to attract foreign investors’ because if you can get more people into the country, maybe there will be power.  It might cost you more, but at least the lights will stay on.

I think that electricity prices have gone up sufficiently to start encouraging IPP’s.  Even the renewable IPP’s that we’ve licensed have come up at very competitive tariffs.  The answer to your question is ‘yes, the tariffs have gone up’.  They probably need to go up slightly more.  Eskom is still generating slightly cheaper than the IPP’s are, but I think we’re getting to a stage where we can encourage new players to come in.  The IPP’s need to meet or match the power generated by Eskom.  Recently, the approach has been ‘we will generate something that is called a blended tariff’, where some producers will be allowed a slightly higher tariff so that they make money out of their power plants.  The consumer would get a blended tariff, which means cheaper power generation from Eskom blended with slightly more expensive power.  In that way, you’re not limited to saying you have to match Eskom’s tariffs.

Again, bringing production capacity into the country, in the State of the Nation Address, a lot was spoken by the President about nuclear power.  Do you get involved in that at all?  Do they come to NERSA and say ‘well, we need a certain rate before nuclear is affordable’?

We have a separate nuclear regulator that looks at nuclear specifically, because it’s a specialist area.  However, as part of the bigger IP plan, we obviously have a say in it.  Nuclear is part of the current plan.

When are the lights going to be on permanently?  When will load shedding end?

Ideally, we need to look at five years, at least.

We have five tough years ahead of us.

Some power plants will come in and others will battle, but it’s a couple more years.

Jacob Modise is doing his best.  He is the Chairperson of the National Energy Regulator of South Africa.  It’s not the easiest job, in this economy.  With the prospect of load shedding pretty much an everyday reality for the next five years, vulnerable businesses are taking strain. 

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