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Kganyago concerned another big power tariff hike will trigger grid defections

6th December 2017 BY: Terence Creamer
Creamer Media Editor
South African Reserve Bank governor Lesetja Kganyago
South African Reserve Bank governor Lesetja Kganyago

South African Reserve Bank governor Lesetja Kganyago has added his voice to a growing chorus of concern that South African businesses, and even high-income households, could defect from the electricity grid in numbers should Eskom prevail in its bid for a 19.9% tariff increase from April 1, 2018.

Speaking to editors in Johannesburg, the governor warned that grid defection would not only be negative for Eskom’s financial viability, but could also undermine the sustainability of those municipalities that rely on electricity revenues. The impact could be particularly severe for those large metropolitan councils that were currently tapping the bond markets for funding.

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Kganyago was aware of the warnings that price elasticity of demand – the phenomenon where a small change in the price of a product is accompanied by a large change in demand – was already a factor in reducing electricity demand in the mining and industrial sectors. However, he feared that even commercial buildings and households might soon be in a position to defect, owing to the sharp decline in renewable energy costs.

Even the South African Reserve Bank had been approached with, and was seriously considering, a self-generation solution for its iconic high-rise office building in the Pretoria central business district. At a constant tariff, the hydrogen fuel-cell generation solution being proposed had a five-year payback and the payback period would be reduced to three years should Eskom prevail in its latest application.

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The National Energy Regulator of South Africa is scheduled to announce its decision on December 13.

Kganyago had supported the State-owned utility’s earlier efforts to increase the tariff towards cost-reflective levels. However, he argued that Eskom’s current predicament was about governance rather than finances.

“It’s because the institution is not run properly that it cannot get its finances in order. And this notion that, if they are not making budget, the answer is in higher tariffs, is a problem.”

Prices could only rise so far before the scales tipped, he cautioned.

The governor was also concerned about the fiscal and financial stability risks posed by Eskom, which is highly indebted and whose debt is either explicitly or implicitly guaranteed by government. In addition, 70% of Eskom’s debt is held by the Public Investment Corporation.

The bank’s most recent financial stability review highlighted the risks associated with any default by any of the country's major State-owned enterprises (SoEs).

The report attributed a “high” financial-stability risk to the contingent liabilities of SoEs. These had not increased significantly over the past four fiscal years, but the exposure of government had risen from 45% in the 2013/14 fiscal year to 65% in 2016/17.

The majority of this exposure is to Eskom, which had increased from 36% of the R350-billion available in the 2013/14, to 62% in 2016/17.

Any default on these debt obligations could “adversely affect both government finances as well as other financial institutions exposed to these enterprises”, the report warned. 

EDITED BY: Creamer Media Reporter
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