Tag Archive | EIUG

Carbon Tax under attack from Eskom, Sasol, EIUG

Treasury determined on carbon tax…..

clampInsofar as the policy behind the need to implement a carbon tax, for whatever reason,  there appears to a vast disconnect between cabinet and the various affected government departments, treasury and energy users, said Mike Roussow, head of the Energy Intensive Users Group (EIUG).

This main point arose in a discussion group called together by chair, Sisa Njikelana, of the parliamentary portfolio committee of energy in an attempt to find some common group on the need for such a tax.    He had invited the various parties for a round-table discussion on the subject in order to put their views.

Major run in

Present at the meeting were such major players such as Eskom, Exxaro, BHP Billiton, the South African Petroleum Industry Association (SAPIA), the pulp and paper industry and Sasol.      Treasury was represented by treasury directors Ismael Mamoniat and Cecil Morden.

However, with only members of the portfolio committee on energy present but no representatives of department of energy (DoE), department of water and  environmental affairs (DWEA) or department of agriculture and fisheries (DAFF), nor any other portfolio committees such as trade and industry or environmental affairs, the discussions had little depth, said Rossouw.

Little by little says treasury

Treasury added to the discussion by stating that the point of departure was the White Paper on Climate Change and this was the basis for the tax proposals before them. The object was to change behaviour but unlike smoking legislation, such a tax would be introduced at a very low level so that energy users with emissions got used to the idea, thus giving a longer period to adjust, bearing in mind the costs of doing so.

“The worst scenario would be to wait and to introduce a sudden and crippling tax in years ahead” said Mamoniat.    The treasury officials referred to shale gas and sea gas possibilities, recognizing that these  may change the energy mix or the energy scenario, and treasury officials noted that whilst business did not like taxes and would object to their introduction on principle, a system had to be started and once going this would change behaviour.

Why be first, says business

Much of the debate centered around the fact that South Africa, with its slow rate of economic growth, business was not in a position to contribute to being a world leader, least of all being amongst the first to introduce such a tax globally.     “Perhaps we should not be leaders, but simply fast followers”, said one party to the debate who objected to the tax.

Eskom said it was saving most of its comments for the official responses to the carbon tax policy proposals recently gazetted but said that every unit it had was running at full capacity during the winter period and the cold weather currently being experienced, all effort being expended to accommodate the integrated resource plan (IRP), the anchor document for energy direction “to which the carbon tax proposals makes not one reference”, they complained.

Ducks not in a row, says Eskom

The Eskom team presenting, headed by Ms Caroline Henry, acting finance director, was pointed when said it was totally premature to introduce such a tax especiallywhen DWAE and DOE were still working on producing an integrated energy plan for the country.      The treasury proposals, she said, represented bad timing in every respect, bearing in mind that President Zuma had already announced that the country had no intention in changing its investment conditions or the economic scenario with any new conditions.     Such proposals were totally inappropriate therefore at this time, Eskom said.

Eskom added that the IRP already came up with a 34% savings factor on emissions but what was not needed at this stage, they concluded, were additional costs and further taxes added to a plan they had been working to for a long time.   Mamoniat appeared unmoved by this objection.

Sasol firm in objections

Sasol volunteered the remark that to introduce a carbon tax fully knowing that the country was totally reliant on coal gave the impression that they were out of touch with reality. They pointed to the fact that cost of the country’s exports were mainly energy intensive resulting in South Africa loosing competitiveness, if this course were adopted.

Sasol agreed that a carbon tax was one of many tools that could be used in causing industry to further mitigate the effect of carbon emissions but its introduction now was premature, they said. The costs to Sasol would be prohibitive in any case when applied to certain operations.

“We should not introduce a tool that can make no difference to a situation”, said the Sasol representative, who added, “Asking not to introduce a tax is not to say we are doing nothing.  Plenty is being done in mitigation of emissions. This country is one of the leaders carbon reduction programmes worldwide”, they added.

Liquid fuels industry over committed

SAPIA called for a practical approach and asked what really the industry could do that was not already being done. Already the petroleum industry was over-committed to modernisation and new fuel specifications.    The current world oil importation story placed the industry in a delicate position, as treasury must have surely realized, they said.

Quite clearly in the petroleum industry, said SAPIA, there is no satisfactory return on investment and the only sensible recourse in their mind was to provide conditions where the motorist was called upon to reduce consumption.

EIUG queries common approach

EIUG repeated their initial supposition that there appeared no joint departmental overall government approach to such a tax which appeared to be the brainchild of treasury, possibly in conjunctions with DWEA. They said that it appeared that neither appreciated how much was already done and what was being planned in terms of the climate response policy calls, both globally and locally.

“We cannot and should not be the world leaders in the introduction of carbon tax”, they said. “Aside from this, there are many things wrong with the way the tax is constructed.”

Eskom queries basis of tax

Eskom concluded that it was disingenuous of treasury department to suggest that nobody was doing anything answer to reduce emissions.  In any case, the tax was not being introduced at a low rate, they said and Eskom produced figures showing the tax as suggested when applied to current production output numbers which they said would be quite crippling. They added that the effects of the tax on the Medupi and Kusile power station projects when in production totally contradicted treasury calculations on the same subject.

The discourse was closed by the chair on the note that carbon tax as a proposal could not proceed in a vacuum and he acknowledged the point that it seemed reasonable not to consider this before the production of the final integrated energy plan had been tabled and agreed upon, let alone agreement on the final energy mix involving nuclear, gas and clean energy renewables.

Treasury appears dedicated to tax

Parliament is now empowered to deal with a Money Bill as a result of the 2011 amendments to the Constitution should the carbon tax policy paper result in a draft Bill for public comment but it could be considered unusual in these early stages of parliamentary development on the issue to exercise such muscle and the matter no doubt depends on what message comes down from cabinet to party whips. The Bill would come from the Minister of Finance.

Refer previous articles in this category


Posted in Cabinet,Presidential, Electricity, Enviro,Water, Finance, economic, Fuel,oil,renewables, Health, Trade & Industry0 Comments

Eskom taking SA “to the edge”- says EIUG

EIUG says review of Eskom strategy necessary….

eiuglogoMike Rossouw, chairman of South Africa’s Energy Intensive User Group (EIUG), says South Africa has reach a “tipping point” in terms of electricity prices and that not enough attention is being given by government to the potential effect of damage to productive sectors of the economy with consequent risk of demand contraction and revenue collapse.

Writing in the Business Day, Rossouw, who represents major groupings of large power consumers such as paper and pulp, motor vehicle and steel manufacturers, called for a review to consider urgently new technology innovation in power sources; the validity of a substantial, expensive and inflexible nuclear programme and much more investigation into alternative fuel options such as gas.

Casualties ahead

EIUG stated it represents some 44% of the total electricity demand in South Africa and Rossouw complained that already the country has had to watch its ferrochrome industry lose its place as world leader to China in the last few years because of “global ineffectiveness on the electricity pricing issue”.

Foundries are shutting down, he said, and he blamed government for its lack of “an holistic approach in dealing with Eskom’s price application.”  He said that South Africa “cannot afford to get this one wrong” and called for NERSA and the minister of energy to take into account an investment and operating climate that should have more regulatory certainty.

”Government through NERSA must extend affordability to industry on power issues and accordingly the state must re-think its position on the effects of Eskom’s 16% hike per year for five years on the economy”, he said.

Looking back

Rossouw noted that the Eskom application will take the price of electricity “to about 128c/kWhr, an overall increase of a huge 540% over a 10-year period to 2017 with prices have already increased by some 200 % since 2007.

“Electricity cannot be treated as a source of revenue nor as a vehicle that allows municipalities to recover their losses”, he said. “10% increase is a figure that is enough to allow Eskom to continue viable operations”.

Calling for less “bulking up of Eskom’s balance sheet to meet rating agency expectations”, Rossouw stated that Eskom’s MYPD(3) application to NERSA contains only “limited disclosure” but, nevertheless, NERSA, he says, does in fact have access to the full story and maintained that the regulator should react by balancing affordability against the Eskom capital expansion programme.

In the article, he repeated the call that much that much more attention should be given by DOE to what appears to be a “highly inflexible nuclear power generation programme” and “more investigation carried out into alternative fuel options such as gas.”

Posted in Electricity, Energy, Finance, economic, Land,Agriculture, Mining, beneficiation, Public utilities, Trade & Industry0 Comments

Eskom MYPD electricity call is to sustain ratings

 Eskom stands by its MYPD3 asking price…….

Brian Dames, CEO, Eskom, on their Multi-Year Price Determination (MYPD 3) application to the National Energy Regulator of South Africa (NERSA), told parliamentarians of the trade and industry portfolio committee that price increases were necessary. He said that on one hand they had to have a respectable balance sheet to obtain development money whilst on the other hand, Eskom was coming from a background where investment activity had been inactive over the years.

“To keep the lights on”, Dames said, “there is now a cost.”

Electricity currently below cost

He said that because of historical reasons, electricity was currently charged at below cost-reflective levels and was not sustainable. Electricity prices needed now to have a “transition to cost-reflective levels to support a sustainable electricity industry that had resources to maintain operations and build new generating capacity, guaranteeing future security of supply.”

Dames said that Eskom had also recently issued an “interim integrated report” for the six months ended 30 September 2012 setting out a contextual review of the company’s overall performance from 1 April 2012 and in the light of this had presented the NERSA application.

He said that the current MYPD 2 was ending and consequently Eskom had to submit such an application to NERSA to determine the country’s electricity price adjustment for 2013/14.

However, this time Eskom was proposing a five-year determination for MYPD 3, running from 1 April 2013 to 31 March 2018, which would ensure a more gradual and predictable price path for households, businesses, investors and the country as a whole.

Eskom’s five-year revenue request translated into average electricity price increases of 13% a year for Eskom’s own needs, plus 3% to support the introduction of Independent Power Producers (IPPs), giving a total of 16%, representing a total price increase from the current 61 cents per kilowatt-hour (c/kWh) in 2012/13 to 128c/kW h in 2017/18.

Balance sought between needs of Eskom and poor

The impact of the price increase on the economy had been considered in addition to guidance from the President’s State of the Nation Address in which he requested Eskom to consider a price path which would ensure that Eskom and the industry remained financially viable and sustainable, but which remained affordable especially for the poor. Dames said he believed that Eskom’s application achieved an appropriate balance.

In addressing the impact of price increases, Dames said that Eskom believed that poor households should be protected from the impact of electricity price increases through targeted, transparent cross-subsidisation in accordance with a national cross-subsidy framework.

A failure to achieve cost-reflective prices would sooner rather than later impact on South Africa’s economy and its growth prospects, he said.

MPs query what electricity giant has as objective

A number of opposition MPs disagreed and queried the entire cost-reflective process used by Eskom, saying that the tariffs proposed by Eskom rather posed a dangerous threat to economic growth and the future of business in South Africa, as well as job creation.

Whilst Eskom wanted a 4% targeted return in the medium term and 8% in the final year, they said, JSE majors had returned on average 6.6% per year in the last ten years. They asked if Eskom was attempting to build a balance sheet that compared with global corporates just in order to get loans.

The main thrust of certain opposition MPs queries was the sacrifice in growth rate, damage to business development, to job creation. ANC MPs complained of the effect on the poor.

Paul O’Flaherty, finance director at Eskom, said that the only sources of funding available to Eskom were debt; equity injected from Government and operating profit from its revenue. Eskom had requested for an additional equity injection from the state but that was not forthcoming leaving generation of debt to them and raising enough operating profits from its revenue.

He said in terms of depreciation factors on the figures shown, such was regulated by Nersa and that there was no way of getting around the fact that Eskom had to pay its way. According to the cash flow predictions, a trillion rand of revenue would be needed to pay for primary energy costs, employee costs and demand side management, repairs and maintenance.

Eskom must be seen as viable entity for capital programmes

Eskom’s capital program over the next five years included finishing the Kusile power station repayments, plus a further R360bn in debts, which meant that R200bn had to be raised from the market. This had to be done against a successful balance sheet. Eskom got investment status because of Government uplifting, he said. It had to show its cash metrics were moving towards a more sustainable company, he said.

Dames added that Eskom required on its equity a higher return than the sovereign because of the risk involved and in terms of the cost of debt in a normal environment and that the cost of Eskom borrowing was more expensive that the sovereign borrowing. The cost of debt had been arrived at by Eskom working with NERSA as well by as KPMG and the costs included in the MYPD 3 application were appropriate, in his opinion.

Mohamed Adam the legal representative at Eskom said on questions relating to the impact of price increases on the manufacturing sector, that the impact of price increase on the economy had been considered in addition to ensuring that both Eskom and the industry remained financially viable and sustainable, but which remained affordable especially for the poor. There was a threshold at which Eskom would also face which amounted to a tipping point if prices were too low.

Unbundling of Eskom not an option

In conclusion, Mr Dames said that the submission of the MYPD 3 application was the beginning of a public process and he rejected MPs suggestions that Eskom was a monopoly that should be broken up.    He said that any unbundling of Eskom accompanied by the introduction of private participants would fail to bring in lower prices since higher returns would be needed by private generators and distributors.

As to whether Eskom would be willing to supply certain municipal customers,  Dames said that local authorities had a constitutional right to supply the customer within their jurisdiction and  Eskom was unable to supply a number of municipal customers anyway based on their relation to the network. Also municipalities would lose revenue.

Dames said that the growth rates in the MYPD 3 submissions were lower than those required in the New Growth Path and the National Development Plan and whilst the energy reserve margin might be held in the immediate future, it would disappear if new generation capacity was not brought on line after the completion of Kusile and if there was growth. The current build programme did not address all the capacity needs of South Africa into the future.

EIUG figures do not reflect current picture

Dames, in addressing the claim by Energy Intensive Users Group (EIUG) that Eskom’s costs of maintenance were higher than they should be, said a considerable quantity of EUIG’s comments were based on inaccurate figures.

Much in the way of numbers quoted by EIUG were based upon “aspirational targets achieved during the 1990s when Eskom’s power stations were a lot younger”, it was said. The constrained power system now existing did not now allow for such philosophical assumptions. There was a balance which Eskom now needed to strike in practical realities as far as keeping the lights on was concerned.

Posted in Electricity, Energy, Finance, economic, Land,Agriculture, Public utilities, Trade & Industry0 Comments

Local government technical skills totally lacking, MPs told

Sisa Njikelana Chairperson

Despite relatively positive reports from both Eskom on skills training in the electrical engineering workplace and from SAPIA on petro chemical industry advancements in the same sphere, a report from the Association of Municipal Electricity Undertakings caused chairperson of the portfolio committee on energy, Sisa Njikelana, to remark that the country faced massive problems unless efforts to improve the quantity and quality of skills training in all spheres were re-doubled.

Present was the director general of the department of energy (DOE), Nelisiwe Magubane.

Chairman Njikelana remarked in conclusion of the meeting that nobody really seemed “totally coherent on the issue of skills transfer, mentorship and apprentice training as indeed they should be, some worse than others”, although he acknowledged that EWSWTA, the energy sector SETA, had fallen well behind in its targets mainly as a result of mal-administration in the past.

As the meeting progressed it became more and more evident that skills at local level service delivery level were a “crisis issue”.

Senzeni Sokwana, on behalf of EWSWTA’s interim board recently appointed, said that in the year under review this SETA had made a certain recovery; had identified a strategic direction with a revised corporate governance plan and that past performance in the recent short period had received unqualified audits. Nevertheless, MPs commented later, the SETA was still under-achieving.

Artisan learners registered for the energy and water SETA were 1765 with 1004 persons completing their courses and 649 wireman’s licences were issued. Included were projects such as that of Coega and a special emphasis that had been laid of “green energy” skills.  Clearly what EWSWTA was achieving, said Sokwana, was a “drop in the ocean compared with what was required” but MPs noted that it was pleasing that the turnaround in governance had been achieved.

A relatively positive contribution came from Dr Raymond Patel of the metal, engineering and motor retailing SETA, merSETA, which institution had received major funding from the German DIZ programme. He gave positive figures on learners enrolled on traditional-energy related programmes, sponsorships and programmes initiated as a result of international skills training agreements.

Training was reported with positive numbers in the metal and engineering; auto manufacturing; motor and retail management; tyre manufacturing and plastics industries. Of specific interest was their “green energy” programme and Dr Patel told parliamentarians of their first internally bench-marked forum being held at that time on the subject.   merSETA was part-sponsor of the VW-NMMU solar car being developed at Tshwane University; had signed photovoltaic skills development agreements in the Eastern Cape and was working with Eskom on the Kusile power project and Medupi power station.

SAPIA’s presentation came from Gerard Derbsy, CEO of BPSA, who told parliamentarians that the industry was going through “a period of transition as a new generation of engineers and operators entered the industry”.     The annual payroll if the industry was some R5bn with 1bn paid in tax, he said, and the industry offered 100,000 jobs both direct and indirect.

Survey findings clearly indicated, Derbsy said, that the industry was lacking high level technical skills and the reasons for scarce occupations in the petro-chemical industry were lack of experience and a lack of qualifications of equity candidates, especially black women.

There was a need, he said, to recruit people with petroleum industry-specific knowledge and “upskill” existing employees and replace those already trained but who had moved on.

At the end of 2010, 1215 artisans and process operators qualified and another 106 were completing training for qualification mid 2011. Such were funded jointly by the Chemical Industries Educational and Training Authority. 348 people, mainly black people and women graduated from the 2006-11 “Leadership in Oil and Energy Programme”. An advanced certificate in oil and gas management programme is to be launched next year, he said.

Parliamentarians noted the lack of a recognised qualification in the industry and BP’s Derbsy said that the possibility of an “institute of petroleum qualification” had been initiated and an MOU between Total, the French government and Sapia with Wits University was about to be entered into.

On the lack of women entrants into the industry, he answered that that one of the problems with the petro industry was its global nature.

On questions regarding skills training being given on oil procurement, he countered these by stating that most of the answers here lay with DOE, the future of and direction of renewable energy and a conclusion of the ISMO Bill..

Eskom showed a year 2013 target of 5,735 on stream for internal learners in training from apprentices to engineers and the utility had already achieved 7,110 persons, mainly because of the emphasis on power station building in the New Build programme.   In addition, they had achieved a total of 5,018 “external” learners mainly through the support of the sixteen Further Education and Training (FET) colleges in South Africa.

In addition, Eskom was supporting six universities in South Africa, each “leading” in a specific area of research and development, which programme was called the Eskom Power Plant Institute programme. For example, Wits University handled combustion engineering and high voltage (AC) subjects, UCT handled and energy efficiency, Stellenbosch University renewable energy; Pretoria University handled asset management and Kwa-Zulu University high voltage (DC).

Eskom said it had 4,950 artisans in the pipeline which represented 11.8% of the Eskom artisan headcount; they were investing R758m in skills training and 80% of the workforce was undergoing some form of training.

The Association of Municipal Electricity Undertakings reported that a crisis was developing at municipal level throughout the country insofar as training of electrical engineers and trade qualified artisans was concerned and the necessity to re-build staffing levels was critical.

CEO Rhodes said that South Africa had gone through a process of indecision over the REDs issue; underfunding, incoherent SETA programming and liaison; and a process of moving towards outsourcing to the private sector, all of which had left the cupboard bare in terms of local level staffing in municipal structures.

He called for a complete and national review of the needs to improve training and skills development at local government level and he was aware that SALGA was very active with the department of energy on this issue, who again were awaiting the outcome of the ISMO Bill to see what training emphasis was necessary.

Chairman Sisa Njikelana concluded that “the grim environment” in the local government area had to be investigated in the next parliamentary session.



Posted in BEE, Electricity, Energy, Fuel,oil,renewables, Labour, Mining, beneficiation, Public utilities, Trade & Industry0 Comments

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