Electricity pricing in South Africa is about to change in a big way

Electricity pricing in South Africa is about to change in a big way

South African energy regulator Nersa has approved the new Energy Price Determination Rules (EPDR) following a lengthy consultation process with stakeholders in 2023.

The regulator made the decision to approve the new rules at its meeting on 14 December 2023 and has subsequently published the various engagements with stakeholders, including Eskom, and reasons for approving the rules for public consumption.

Nersa has been developing the new rules in a bid to steer away from the current pricing methodology – the Multi-Year Price Determination (MYPD) – which has resulted in massive tariff hikes for consumers over the past few years, including another double-digit hike coming in 2024.

Among the many changes to the new pricing methodology, one of the biggest is the removal of the Regulatory Clearing Account (RCA) component of tariff hikes, which has been hugely beneficial to Eskom.

In simple terms, 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 12% in 2024/25 based on the RCA clawback.

These approved tariffs were much lower than the percentages Eskom applied for.

The biggest criticism of the RCA from other stakeholders, energy experts and analysts is that it does not incentivise the efficient use of generating capacity – with Nersa going as far as to say that Eskom outright misused the clawback.

This is because the RCA 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.

For 2023, Nersa begrudgingly allowed Eskom to ramp up its OCGT load factor to 6% (from the industry standard 1%) to better deal with the load shedding crisis. Instead, Eskom’s OCGT load factor was upwards of 20% – costing multiple billions of rands.

These egregious costs have to be recovered somewhere – and it’s definitely not coming through sales and revenue, with Eskom posting a R20 billion loss in 2023 and projecting much of the same for 2024.

Change of plan

Under Nersa’s new methodology, the regulator is making a hard turn away from the RCA and using revenue and sales as a guideline for tariff structures. Instead, it is now leaning into the “efficient use of available capacities” to determine tariffs.

“For the setting of tariffs, a critical departure from the past is the use of capacity as a rate determinant to drive efficiency rather than the use of sales. This shift will eliminate the need for the widely contested RCA and the price instability that characterised the Eskom MYPD methodology,” the regulator said.

Nersa acknowledged that the new methodology would not be easily implementable at short notice and without a lengthy transition, but it laid out two plans to get it done.

Plan A, it said, is to use the revised EPDR methodology in the medium term – from 2025/26 onwards – and enable the setting of tariffs in the short term (2023/24 and 2024/25) using the MYPD5 years 2 and 3

This should allow stakeholders to use the interim period to ready themselves for the EPDR after 2024/25.

Failing this, Nersa’s Plan B is to continue using the MYPD methodology but with key changes – one of which is specifically dealing with the RCA.

“Important changes must be effected to address the price distortions currently related to, inter alia, Eskom’s bundled average tariffs and misuse of the RCA risk mechanism,” it said.

The other change that has to come into effect is using the methodology with the entire electricity industry to acknowledge the increased penetration of independent power producers, it said.

Overall, Nersa found that stakeholders generally agreed with the new pricing, or agreed with conditions. Eskom stood out as being the stakeholder who disagreed with most of the plan.

BusinessTech asked Eskom about its path forward with the new methodology now approved, but it did not respond by the time of publication.

In its engagements with Nersa over the new methodology, the national power utility argued that the removal of the RCA and the current structure of determining tariffs would have the end-effect of actually increasing electricity prices for consumers.

“(Adjustments to the RCA) will force very conservative assumptions to be made by the licensee and regulator, which will increase prices to consumers,” Eskom said.

“It will (also) dramatically increase uncontrollable risk on licensees – which in turn will either result in significantly increased cost of capital and higher prices or inability to attract capital. Failure to attract capital to an inherently capital-intensive industry would be a major failure of economic regulation and a breach of one of the objects of the Electricity Regulation Act,” it said in September 2023.