Due to poor management, rising costs, declining demand, and runaway debt, Eskom’s electricity tariffs have increased by around 450% since the start of load shedding in 2008 – outstripping inflation substantially.

This is according to an economic bulletin published by the South African Reserve Bank (SARB) – written by economists Zaakirah Ismail and Christopher Wood.

The report showed that the current electricity pricing regime ties prices to Eskom’s costs, with decades of mismanagement and crisis spending passed along to consumers.

The National Energy Regulator of South Africa (Nersa) regulates the electricity price per the Electricity Regulation Act 4 of 2006 and the National Energy Regulator Act 40 of 2004, according to the Department of Public Enterprises.

Eskom makes a tariff application based on the Multi-Year Price Determination (MYPD) methodology, which bases prices on an allowable revenue that Eskom can earn to cover costs and expected energy sales for the period.

A part of this MYPD methodology is the Regulatory Clearing Account (RCA). Select deviations from Nersa’s forecasts – such as changing costs for energy generation or capital expenditure – are then captured in the RCA.

The RCA is effectively the difference between actual and forecast costs and is used to adjust the following year’s tariff to account for these deviations.

As a result, the report showed that most tariff price increases occurred after 2007, coinciding with the onset of the first wave of load-shedding before skyrocketing as Eskom faced the costs of addressing its neglected and collapsing power plants.

However, while the MYPD methodology itself is relatively rigid, Nersa is not bound by its findings and can deviate from the methodology given “due consideration of what may be in the best interest of the
overall South African economy and the public,” noted the report.

Despite this, between 2007 and 2017, the average Eskom tariff increased by 333%. By 2022, it had increased by 450%. Inflation over the same period was recorded at 98% – meaning tariff hikes more than quadrupled that of headline inflation.

“Electricity price inflation has consistently exceeded headline inflation by a substantial margin, driving up the overall price level and impacting South Africa’s price stability,” said the report.

As a result of this excessive price escalation over the last 15 years, the report further showed that South African households pay more than those in most African, Southeast Asian, and BRIC countries – with the exceptions being Rwanda, Kenya, Uganda, Hong Kong, Singapore, the Philippines, and Brazil.

Compared to a list of 147 countries, South Africa’s electricity prices ranked 62nd highest, placing it above the midpoint of cheap and expensive markets, noted the report.

However, despite the price escalation over the last 15 years, South African businesses still pay low tariffs compared to businesses in other countries, the SARB noted. The average price paid by South African businesses in 2021 was below all European, Southeast Asian and the BRIC countries.

According to the report, despite these higher prices, Eskom has not generated enough productive capacity to meet demand.

With Eskom unable to supply sufficient electricity despite dwindling demand, a ‘utility death spiral’ is a real risk, the economists said.

“This death spiral occurs when declining demand, and therefore, sales, means that tariffs need to increase to cover the costs of maintaining and expanding the grid, which in turn reduces demand even further as customers substitute alternative electricity sources or find themselves unable to pay,” it said.

The report noted that significant annual electricity price increases will be necessary for the foreseeable future unless direct support is provided to Eskom or broader reforms in the industry are fast-tracked.

These reforms refer to what’s currently underway in the sector – in which Eskom’s generation, transmission and distribution components will be split into separate entities ahead of introducing competitive markets in each of these areas.

“This is a clear scope for Eskom to improve efficiencies, but given the governance inertia and active resistance to change at Eskom, it is unlikely that this reform will be realised quickly,” said the report.

Source: businesstech.co.za