Oct. 9 (Bloomberg) -- South Africa needs to set electricity prices at levels that will attract companies into the industry and encourage funding for necessary expansion by Eskom Holdings Ltd., the state-run utility’s Chairman Bobby Godsell said.

“If we can get the tariff right, I think the capacity of Eskom to borrow significantly will be enhanced,” Godsell said in Johannesburg today. “The desire of people to come into the industry will be enhanced. If we fix the tariff, we should have 30 percent of total generation from private sources.”

Eskom will spend 385 billion rand ($52 billion) in the next five years on projects including two so-called base load coal- fired power stations and a pumped storage peaking plant. A lack of investment led to a near collapse of the electricity grid in January 2008, closing most mines and smelters for five days. Godsell said Eskom managed to avoid a three-week shutdown.

Eskom’s application to the energy regulator to raise prices an annual 45 percent for the next three years has state support, a person familiar with the proposal said yesterday. Another plan for a 146 percent jump in the first year and smaller gains after that was rejected by the government, the person said.

Godsell declined to comment on government support. “There will be national debate about how rapidly we can move to a realistic tariff and whether it is one year, two years, three years, or longer,” he said, adding the regulator would decide.

Tariff Increases

Eskom won approval to raise tariffs 31 percent this year after boosting them an average 28 percent in 2008. It got 176 billion rand in state guarantees and a loan of 60 billion rand after reporting an operating loss of 3 billion rand last fiscal year. Eskom had an 80 billion rand funding deficit in July. The company may borrow 50 billion rand this year, Godsell said.

South Africa needs 10,000 to 15,000 megawatts of nuclear power, he said, adding that it was his own opinion. South Africa’s sole atomic plant is the 1,800 megawatt Koeberg site.

The utility abandoned plans to build the first of three nuclear power stations in December because of the cost. The 4800 megawatt Medupi coal-fired plant is being built for 120 billion rand, or less than half the cost of a nuclear generator.

“We cannot carry on with 95 percent” coal-fueled power, Godsell said. “We don’t have coal supplies,” the plants use too much water and produce too much carbon, he said.

To contact the reporter on this story: Nicky Smith in Johannesburg at nsmith38@bloomberg.net

Last Updated: October 9, 2009 09:59 EDT