Durban - Rating agencies have poured cold water on concerns that Eskom is in financial trouble, but have nevertheless underlined the need for it to charge more for electricity to improve its earnings and ensure its long-term financial health.
Erwin van Lumich, the deputy head of Fitch's energy and utility team for Europe, the Middle East and Africa, said this week that the local electricity price did not reflect the cost of production.
Eskom was granted a price increase of 14.2 percent for this year, but last week it asked the regulator to consider a further increase of 53 percent for essential cash flow, to cover the rising cost of coal and diesel and the expense of its energy-efficiency programmes.
Asked whether a price hike of more than 60 percent was justified, Van Lumich said it was very difficult for utilities to foresee the kind of price rises in oil and coal that had been evident recently.
The cost of building new power plants was a lot higher than a year ago.
"So ideally, prices should be adjusted to reflect the rising cost of generating electricity," he said.
However, regulators typically wanted to incentivise utilities to procure more efficiently.
Konrad Reuss, the managing director of Standard & Poor's South Africa, said Eskom faced significant challenges: it needed more baseload power stations, which required substantial investment, and prices for coal, diesel and gas had gone up substantially.
It was clear what was needed in investment but what was not known was the extent of input cost increases, he said.
"The question is, how will this be financed?
"One way is a sharp price hike; the other is financing from treasury and raising funds on capital markets.
"The discussion around the tariff increase will be around what mix Eskom's funding will take."
Craig Jamieson, the general manager for Moody's South Africa, said the solution to Eskom's funding must be holistic. A 60 percent price increase in one year would not be enough in isolation, nor would the R60 billion subordinated loan from the government to fund capital expansion.
Jamieson said: "The solution will probably need to be a mix of things, which could include indirect support, such as government guarantees for Eskom's debt or direct support such as further government equity-type contributions."