South African Utility Sees Higher Tariffs as Only Panacea to Financial Woes

William Arsn

(Bloomberg) — South Africa’s embattled state power utility said its ballooning debt can only be kept in check if it’s paid cost-reflective tariffs because cost cutting offers limited respite and government bailouts are unsustainable.

a group of clouds in the sky: Kusile coal-fired power station, operated by Eskom Holdings SOC Ltd., in Mpumalanga, South Africa.

© Bloomberg
Kusile coal-fired power station, operated by Eskom Holdings SOC Ltd., in Mpumalanga, South Africa.

Eskom Holdings SOC Ltd. executives told lawmakers on Wednesday that the company had amassed 488 billion rand ($27.3 billion) in debt by the end of March, almost 11{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} more than it owed a year earlier. The company’s finances have deteriorated despite the government having given it 188 billion rand in grants and loans over past decade.


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Besides being denied the tariff increases it requested by the electricity regulator, Eskom has also been grappling with breakdowns at its old and poorly maintained power stations and massive cost over-runs at two new plants. Inadequate generating capacity has resulted in rotating power cuts that have reached new heights this year and dealt a further blow to an already struggling economy.

Read: South Africa’s Eskom Resumes Blackouts After Plant Breakdowns

Power prices need to rise 25{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} in real terms for Eskom to become sustainable, Eskom Chief Financial Officer Calib Cassim told parliament’s Standing Committee on Appropriations. He noted that the average price of electricity has increased five-fold since 2007-08, while Eskom’s debt grew nearly 10-fold. The utility’s tariffs rank among the lowest in the world, he said.

Eskom produces most of its electricity from coal, and the fuel is among its biggest costs. Negotiations with suppliers had failed to deliver cost-saving, the utility said.

Other highlights:

Electricity supply is likely to be unreliable and unpredictable for the next 18 months while plants undergo required maintenance.Eskom is having to rely on diesel-burning turbines to supplement its output, which is pushing up its costs.The utility is reviewing a swath of contracts that may have been illegally concluded or where prices may have been inflated from what was originally agreed.South Africa’s Treasury has dispensed 6 billion rand in aid to Eskom in the current financial year, with another 50 billion rand still to come. The utility still hasn’t met several conditions attached to the aid, the Treasury said.

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