SA’s energy regulator is fuming over Tuesday’s court ruling ordering it to add R69bn to the electricity tariff over three years. Stretched consumers, too, are understandably perturbed, but Eskom is exalting in the outcome as paving the way to its financial sustainability.
The utility’s elation is short-sighted, typical for an entity accustomed to living minute to minute in its daily struggle to keep the lights on and pay its enormous debt.
In fact, the court ruling is no victory for Eskom at all and will only hasten its inevitable demise.
In the judgment, the National Energy Regulator of SA (Nersa) was hauled over the coals for flouting its own methodology by including a R69bn government bailout in its calculation of what revenue Eskom should collect from consumers for the financial years 2019 to 2022.
The regulator was ordered to immediately add 10% to electricity tariffs in the current financial year, and to put R23bn on top of any tariff decision it makes for each of the next two years.
Eskom has for years argued that tariffs have been insufficient for it to cover its costs, and Tuesday’s ruling is the third success the utility has had this year in challenging Nersa decisions in court.
Energy expert and MD of EE Business Intelligence Chris Yelland says Eskom has only three ways to get the money it needs: revenue from the tariff, cash injections from the shareholder (the government) or borrowings.
“Eskom is saying the tariff has been kept artificially low by Nersa for years and though it has received some bailouts from the government, it’s not been enough to prevent borrowings from growing to unsustainable levels,” he says.
“Nersa argued it was acting in the interest of the country — but in doing so [it was] breaking its own methodology. Legally it does not have discretion to misappropriate government funds.”
Though Nersa is trying to keep the tariff down in the interests of consumers and the broader economy, in this case “Nersa tried to tighten the screws at the wrong time and at the wrong place”, says Ronald Chauke, an independent energy expert and former Nersa executive.
Nersa is at risk of losing in future cases. While it must consider the impact of electricity prices on consumers, it also obligated to grant Eskom the revenue it needs to cover its costs.
And running a large monopoly utility such as Eskom is an impossibly expensive endeavour, even if corruption and maladministration are taken out of the equation. So much so that most of the world has abandoned this model. Eskom CEO André de Ruyter himself has acknowledged the utility is arguably the last of its kind and an anomaly in the modern world.
The business case for alternatives just becomes better and better. If they lifted the red tape, it will happen faster
— Chris Yelland, MD of EE Business Intelligence
While the court ruling will help Eskom’s cash flow in the short term, it will ultimately accelerate its death spiral, says Yelland.
A utility death spiral is a phenomenon in which the growing cost of running a power utility and rising electricity prices cause power consumers to defect in favour of cheaper, greener alternatives. With fewer customers, the utility increases its prices even more, perpetuating the cycle.
Tuesday’s court ruling and the R69bn that will now be reflected in customer bills will undoubtedly send Eskom sliding down another rung on the spiral.
“The business case for alternatives just becomes better and better. If they lifted the red tape, it will happen faster,” Yelland says.
That red tape includes regulatory hurdles that have prevented business from generating its own power.
While Eskom and others may work to slow the move to alternatives, ultimately “it is just going to happen”, Yelland says.
That’s why the restructuring of Eskom is so critical.
Chauke says the process to unbundle and reposition Eskom is moving too slowly and cannot provide the basis to launch an economic recovery for SA in the wake of the Covid-19 pandemic.
The departments of public enterprises and mineral resources & energy should do better to drive and direct the process, he says, “but even they don’t seem 100% sure of what to do”.
“It’s like they are sitting in small corner praying and hoping things will improve, without taking the difficult decisions.”
Meanwhile the defection to alternatives will continue, Chauke says. “The revenue loss to Eskom is not yet profound. But as we move to a post-Covid environment, with sales lower and tariffs higher, Eskom is likely to find itself in big financial trouble.”
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