The national energy regulator’s surprise rejection of a tariff increase for Eskom is a serious blow for the power utility.

But the next news should be positive for it with the forthcoming announcement by the government of the equity injection expected on Tuesday‚ says Nomura global markets researcher Peter Attard Montalto.

“This means next year’s tariff and the process of cost recovery for this year remains wide open. We remain of the view that large tariff increases are on the horizon and backed by government‚” he says.

This cements liquidity risks around Eskom for this year but is probably neutral for the Reserve Bank given fears about future tariff increases.

“Overall we see this as pretty neutral for the markets‚” adds Attard Montalto.

“This is a serious blow for Eskom – more because of the poor impression it gives of inability to submit a proper application and lack of clarity on future liquidity‚ than in balance sheet terms in the short run. As any tariff award was not going to be legally implementable until next year anyway‚ this application was more about using a tariff increase now to secure low market funding costs and stabilise the rating alongside the forthcoming equity injection.

“Eskom can now only reclaim this year’s cost overruns through an RCA claim (a regulatory clearing account claim – which put simply is where certain cost overruns ‘go’ to be clawed back through larger tariff increases in the following year). This means Eskom may well end up with a high tariff increase next year in the order of 20-25% anyway‚” says Attard Montalto.

It is vital to note‚ however‚ he says‚ that Eskom has already secured a 12.69% tariff increase which includes RCA cost recovery for last year and the baseline 8% it has anyway as part of the multi-year price determination.

“Complicating the matter further is the fact that during July Eskom will we believe be making its full MYPD reopener for the coming fiscal years. It may well use this in conjunction with an RCA claim to set the coming three fiscal years’ tariffs in line with higher OCGT usage‚ continued loadshedding‚ build programme delays and other factors.

“If this application is submitted during the next month NERSA would be unlikely to rule on it before November of this year and possibly not until the start of next year.”

Attard Montalto believes the Reserve Bank will remain hawkish on the prospects of future large tariff increases and their impacts on inflation and wages.

“Hence‚ we see a temporary reprieve for households and businesses in South Africa‚ but also expect more loadshedding in the coming period given the much higher winter maintenance being undertaken this year.

“We retain our July rate hike view‚ and by that time the SARB may have some idea of specifics about future tariffs if the full reopener has already been made by Eskom. Wider market jitters around Greece and the next inflation print may also keep that hike on track‚” he says.

Bond markets should steepen slightly on this news‚ with greater risk of Eskom issuance in the market oversupplying the curve‚ he adds.

“However‚ as we have stated before‚ Eskom is also looking increasingly to new rounds of multilateral funding from the likes of OPEC‚ BRICS development bank and the new AIIB.

“The next news should be positive for Eskom‚ however‚ with the forthcoming announcement by the government of the equity injection expected tomorrow (Tuesday).”