CORRECTED-UPDATE 2-S.Africa power rate hikes to average 8 pct over 5 years

Thu Feb 28, 2013 9:33am EST

(Corrects first bullet point to below 16 pct)

* Granted hikes below the 16 pct increases requested by Eskom

* Consumers, industry welcome the lower-than-expected hike

By Agnieszka Flak

PRETORIA, Feb 28 (Reuters) - South Africa's energy regulator on Thursday granted power utility Eskom an average 8 percent annual increase in rates over five years, a move that will bring some relief to households and industry as it was half of what the utility was seeking.

Tariff hikes in recent years have far exceeded inflation and so the utility's application for a 16 percent annual increase over five years had triggered protests by industry, unions and ordinary South Africans who have felt squeezed.

The final rates charged for energy-intensive industries such as mining must still be set but they are topically about 20 percent higher than the wider consumer rates and given the less-than-anticipated hikes, they will also be lower than expected.

"We are pleasantly surprised. One must, however, keep in mind that Eskom will now set increases for energy-intensive users," said Dick Kruger, deputy head of technoeconomics at South Africa's Chamber of Mines.

The regulator said its decision was made against the backdrop of the continuing global recession and already existing pressures on consumers and industry.

The-far-smaller than expected hikes will ease pressure on consumers and dampen inflation in Africa's largest economy but raise questions about Eskom's ability to fund the building of new power plants needed to plug a gap between rising demand and limited supply.

"This is bad news for Eskom's balance sheet," said Peter Attard Montalto, emerging markets economist at Nomura in London.

"The government is asking Eskom to accelerate its infrastructure programme and take the bulk of that programme on its shoulders whilst not allowing it to raise funds through user-pay-principle to fund it," he said.

Eskom's other options may now include taking on more debt, perhaps through further bond issuance, while analysts say the state could also raise cash through the sale of assets.

"If we are to believe Eskom that 16 percent was barely enough, could this mean we may look at the option of selling some state-owned assets to help fund future expansion?," said George Glynos, managing director of financial consultancy ETM.

Eskom spokeswoman Hilary Joffe said the decision presented the utility with a "challenge".

South Africa's economy for decades was powered by some of the lowest electricity rates in the world but that party ended a few years ago as Eskom began to scramble to keep the lights on.

Power cuts in 2008 hit mining output in the world's top platinum producer and cost the economy billions of dollars.

The mining sector has been especially hard hit at a time when other costs such as labour have been steeply rising.

Eskom is in a race against the clock and construction of its new Medupi plant, which is supposed to start generating power this year, has been halted for several weeks because of violent labour protests. (Additional reporting by Olivia Kumwenda and Sherilee Lakmidas; Writing by Ed Stoddard, editing by William Hardy)