Eskom to Raise S. Africa Power Price 8% Annually for 5 Years

Eskom Holdings SOC Ltd., the supplier of 95 percent of South Africa’s electricity, is allowed to raise prices by an average 8 percent in each of the next five years, half the annual increase it requested.

Power tariffs will climb to 65.51 South African cents (7 cents) a kilowatt hour starting April, and to 89.13 local cents by 2018, Cecilia Khuzwayo, head of the country’s energy regulator, said today in Pretoria. Eskom had sought 16 percent a year through March 2018.

“It will certainly present challenges,” Hilary Joffe, a spokeswoman for Johannesburg-based Eskom, said by phone. “We need to study the details.”

South Africans were confronted by average power-price increases of 25 percent in each of the past six years to help Eskom finance about 500 billion rand of spending through 2017 to overcome an electricity shortage. Factories and mines of companies including Anglo American Plc were temporarily halted in 2008 because of the deficit.

Above-inflation gains in tariffs have contributed to lower profit for mining, agriculture and steel-producing operations in Africa’s biggest economy.

“This is good news from an inflationary perspective,” Johann Els, an economist at Old Mutual Investment Group, the country’s largest private money-manager, said in a phone interview from Cape Town.

Inflation Target

“It lowers the inflation profile for the second half of the year,” said Els. “Every bit of lower price increases helps.” Els estimates price growth will peak at 6 percent in July compared with 6.3 percent before the tariff announcement.

Inflation eased to 5.4 percent in January, the first month in which the statistics agency based the rate on data using new weightings that more than doubled the importance of electricity to 4.21 percent. The central bank targets inflation of 3 percent to 6 percent.

“We’re satisfied with the ruling,” said Shaun Nel, a director at the Energy Intensive User Group of Southern Africa, whose 32 members include the local units of BHP Billiton Ltd. and ArcelorMittal. “Rising electricity prices have been a significant contributor to economic slowdown and job losses.”

Gold and platinum producers will still face 860 million rand ($96 million) more in electricity costs from the eight percent increase this year, Mark Cutifani, president of the Chamber of Mines who becomes chief executive officer of Anglo American in April, said in a statement.

Borrowing Needs

Eskom and Transnet SOC Ltd., the ports and rail utility, are the biggest contributors to the nation’s debt requirements. The National Treasury forecasts borrowing by state-owned companies to fall to 1.1 percent of gross domestic product by the year through March 2016 from 2.1 percent this fiscal year, with financing to be supported by higher cash flows, it said in the Budget Review released yesterday.

The tariff announcement by the National Energy Regulator of South Africa “is bad news for Eskom’s balance sheet and for issuance, where the difference will have to be made up,” Peter Attard Montalto, a London-based economist with Nomura International Plc, said in an e-mail. “The government is asking Eskom to accelerate its infrastructure program and take the bulk of that program on its shoulders, whilst not allowing it to raise funds through user-pay-principle to fund it.”

Eskom has 195 billion rand of debt and interest outstanding, according to data compiled by Bloomberg.

“What is key is Eskom must be given an opportunity to respond and to indicate how they think they are going to make that an affordable proposition and keep themselves viable,” Finance Minister Pravin Gordhan told reporters in Cape Town today. “Clearly, from a business and household point of view a single-digit increase is welcome.”