The National Energy Regulator of SA (Nersa) wants to overhaul the outdated methodology used to determine electricity prices following two court rulings against Eskom tariff decisions that could translate into higher power costs.
Speaking to the media on Thursday, Nhlanhla Gumede, the member primarily responsible for electricity regulation at Nersa, said that revised models were overdue.
"We are not moving with the times," he said.
"We as Nersa, we have a dynamic mandate. The market is changing drastically and yet we are still using static structures, we are using outdated methodologies in terms of how we set prices, even in terms of how we regulate the sector," he said.
His comments follow a recent spate of legal challenges mounted against the regulator by Eskom over its tariff decisions, which, the utility argues, are not cost-reflective and do not allow it to recover its costs.
Rulings against regulator
Already there have been two rulings against the regulator, the most recent being last week when the high court in Pretoria set aside three of Nersa’s regulatory clearing account decisions.
According to energy expert Chris Yelland, these rulings
have "shaken the public perception" of Nersa as a competent regulator.
In making a tariff determination Nersa is required to balance the needs of the utility and the consumer.
The current methodology gives it discretion in making its decision, but it’s how that discretion is applied that has faced fierce opposition from Eskom.
Gumede said the regulator and Eskom were arguing over the output of the models rather than the construct of the models themselves.
"We are fighting about methodologies that should have been changed quite a while back," he said. "Isn’t it time we focus on changing the regulatory approach?"
For example, the multi-year price determination uses Eskom coal contract prices as an input. These range from R342 per tonne to more than R1,000 per tonne of coal of varying quality.
"Why should the negotiations by a licensee be paid for by the consumer," he said, adding that a benchmark coal price should be agreed upfront.
Similarly, budgets for projects and diesel usage should be predetermined and the modelling should not allow for cost overruns to be input.
The tariff also lumps together the costs of generating power and delivering power, which is problematic now that Eskom is no longer the only producer of power.
Gumede said the modelling needed to consider changes in the industry, such as the growing penetration of renewable energy, which has lower energy costs but, because it is intermittent in nature, needs to be complemented by back-up power. The balancing act poses operational challenges for the grid.
True cost reflectivity and international best practice require the tariff to separate out the cost of the infrastructure that delivers the energy and the cost of the energy itself, the regulator said.
Gumede said the energy conversation had for too long been concerned with the supply infrastructure and the need to build more power generation plants.
He proposes greater emphasis be placed on catering appropriately priced power for different segments of consumers.
Customers requiring large amounts of consistent power should be serviced by base load plants, such as coal plants. The use of costly diesel fuel peaking plants, which are often used in times when people wake or arrive home from work, should be avoided.
Gumede said that innovative ways had to be found to shift the residential sector towards the use of gas for heating and cooking. This, he said, was something that would have to be driven by the regulator and not Eskom, which had an interest in preserving electricity sales.
Gumede said electricity played a significant role in the economy but prices were unsustainable for customers and for suppliers.
"It’s not enough to just arrest the price, we need to find a way to reverse it," he said.
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