A massive win for Eskom – that will hit South Africans where it hurts

Energy regulator Nersa has rescinded its decision from December 2023 to approve a new electricity pricing methodology in South Africa – leaving Eskom free to keep applying for massive price hikes each year to cover its losses.

The regular said this past week that it had withdrawn its approval of the new Electricity Price Determination Methodology (EPDM) rules, which were supposed to come into effect from 2025/26.

The reason for walking back on the new rules is because they were not practically implementable, Nersa said, as licensees were not yet ready for them. The regulator also needs to align the rules with the Electricity Regulation Act and the Electricity Pricing Policy.

New rules for electricity pricing

The EPDM was developed to replace the current Multi-Year Pricing Determination (MYPD) which has resulted in Eskom applying for massive price increases each year and South Africans being saddled with tariff hikes that have grown exponentially.

Nersa approved the new rules in mid-December 2023, and would have seen future electricity pricing steer away from a ‘sales and revenue’-based approach to setting tariff hikes and lean into ‘efficient use of generating capacity’ to determine pricing.

The removal of the Regulatory Clearing Account (RCA) component of tariff hikes would have been key to the new methodology. The RCA is hugely beneficial to Eskom, and has been flagged by Nersa as being abused.

Under the MYPD methodology, Nersa allows Eskom to apply for future tariff hikes based on the costs of its operations as well as projected revenues from sales.

The RCA monitors and tracks uncontrollable costs and revenues assumed in Nersa-approved tariff hikes and compares them to the actual costs and revenues incurred by Eskom.

In theory, if there is a difference between the decision and actual costs and revenues, the RCA balance could either be recovered by Eskom (if overspent) or be given back to the customers (if underspent).

However, given the dire state of Eskom’s financial and operational performance, the RCA has always been in the power utility’s favour, and the RCA has led to Eskom applying for increasingly higher tariff hikes each year.

This reached an inevitable crescendo in the latest round of applications, where, amid record levels of load shedding and Eskom being in its deepest financial crisis in history, Nersa was forced to allow the embattled utility to hike tariffs by over 18% in 2023/24 and more than 12% in 2024/25 based on the RCA clawback.

A major gripe of the RCA is that it allows for various costs to be included in the formula beyond sales and revenue, such as coal burn costs, independent power producer costs, levies, and – importantly – Open Cycle Gas Turbine (OCGT) costs.

The inclusion of OCGTs is seen as especially egregious when considering the massive amounts being spent by Eskom on these incredibly expensive power generators over the past few years.

The (now shuttered) Department of Public Enterprises noted earlier this year that Eskom had spent over R65 billion on diesel for its OCGTs in the past five years, far above the limits allowed by Nersa.

While Eskom is now celebrating using less diesel, the damage is already done, and these egregious costs are likely included in the reported 44% hike in electricity tariffs the utility will be seeking for 2025.

Electricity and Energy Minister, Kgosientsho Ramokgopa

Unsustainable, untenable

Energy and electricity minister Kgosientsho Ramokgopa on Monday (8 July) warned that “exponential” electricity tariffs in the country are pushing South Africans into making desperate choices, and could lead to social unrest.

He said the rate at which Eskom tariffs and municipal tariffs are increasing is unsustainable, describing it as “an untenable situation”.

“We are getting to a situation where your lower-to middle class – even your public servants – can no longer afford the cost of electricity in this country,” he said.

“So as we speak now, it’s an affordability question; over a period of time, if you don’t address it, it’s a national security problem. Because people are ‘not going to just fold their arms’.”

Higher electricity prices also have inflationary pressure, which impacts the cost of goods and the cost of doing business.

“This is a problem that is likely to become acute over a period of time, and needs to be addressed urgently,” he said.

The rising cost of electricity will also have a knock-on effect on municipal revenue. As power becomes more unaffordable, households are forced to choose between basic necessities – and if the choice is between “more bread or more power”, the answer is clear.

“More and more people will lose access to electricity. Not because it isn’t available…it is as a result of prohibitive pricing,” Ramokgopa said.

Eskom has been accused by Nersa of abusing the RCA to make South Africans pay for its inefficiencies

Eskom will be happy

Eskom flagged the EPDM as being problematic for various reasons.

The national power utility told BusinessTech that one of the biggest problems with the EPDR is that the methodology has not been used or tested anywhere else in the world and goes against internationally accepted norms.

It also said that the new rules fundamentally misunderstand how the energy generation sector operates – and provide no practical examples, details, or guidance on how exactly things are supposed to work.

The utility was also concerned that no impact studies were done, and the rules did not align with Nersa’s own documents and codes.

It added that the concept of the sales forecast is completely ignored and that various features fundamental to determining operational forecasts had been removed from the equation, which would have “major implications for sustainability” and its ability to operate.

However, given that the approval of the new rules have been rescinded, the utility might be out of the wood—for now at least—with the current beneficial MYPD methodology continuing until further notice.

Nersa may yet throw a spanner in the works, with its original “Plan B” (if the new methodology fell through) to continue with the MYPD methodology but make targeted changes, including interventions to prevent the misuse of the RCA.

“The EPDMR has not been implemented; in this regard, the energy regulator may take another decision regarding the EPDMR, accepting that administrative action is taken only when the EPDMR has been applied.

“Nersa remains committed to reviewing its regulatory tools, considering the dynamic changes in the electricity supply industry, as well as legislative change, the unbundling of Eskom and new investments in energy generation,” Nersa said.

For the everyday South African, though, until the regulator makes its next move, it means that the double-digit hikes are unlikely to disappear any time soon.