If there are any conclusions to draw from the public hearings hosted last week by the National Energy Regulator of SA (Nersa) on Eskom’s proposal to raise tariffs by 20.5% for 2022/23, it would be that for both residential and industrial electricity users, such an increase will be unaffordable — but at the same time for Eskom a double-digit increase is necessary to keep the lights on and perform critical maintenance work.
One of the most direct impacts of a sharp electricity tariff hike will be on consumer inflation. According to Hugo Pienaar, chief economist at the Bureau for Economic Research (BER) — a research institute at Stellenbosch University — their bottom-up inflation model indicated that if there was, for argument’s sake, a zero tariff increase this year, headline CPI would average about 4.8% in 2022. With a 20.5% rise in the electricity tariff, CPI would move to an average of 5.3% in 2022.
“So, in that sense such a tariff rise adds 0.5 percentage points to headline CPI in 2022 relative to a scenario of zero tariff rise and all else equal,” said Pienaar.
The other big impact of a 20.5% increase, said Pienaar, would be on fixed investment in energy-intensive sectors such as mining and heavy manufacturing. “The increase in cost simply means that the hurdle rate for new investment or capacity expansion increases further which could result in SA losing out on potential new investment and employment creation.”
Meanwhile, for households and smaller businesses, the tariff increase would mean that many would either be forced to reduce power consumption, or would need to cut back on other expenditures if they were unable to reduce their power usage, he said.
Eskom CFO Calib Cassim, who presented Eskom’s revenue application to Nersa during the public hearings, said during his final presentation on Friday that the utility had put forward an application in which it had kept the costs that are within its control “as low as possible”.
“We understand and appreciate the question of affordability, but we must also understand [what] the ramifications [will be] if Eskom is only allowed a tariff increase linked to inflation,” Cassim said.
An increase equal to inflation, said Cassim, would severely affect Eskom’s operations and would not allow the utility to do the maintenance required across its network.
He was responding to several of the stakeholders who made submissions to Nersa during the public hearings arguing that Eskom’s tariff increase should be set in line with inflation. Mayor of the City of Cape Town Geordin Hill-Lewis said that the main point of departure should be to look at what people can afford and that the increase should be kept in line with inflation at about 5.5%.
In its presentation to Nersa, the energy intensive users group, represented by the group’s CEO, Fanele Mondi, said their view was that the tariff rise should be kept to a single-digit increase linked to the CPI, for example CPI plus 2%-4%.
The Minerals Council SA, represented by its chief economist, Henk Langenhoven, reiterated its previous position that a producer price index (PPI) capped increase would be one appropriate method of determining electricity tariffs.
Langenhoven said in a statement that the tariff increases proposed by Eskom in the fifth multiyear price determination application for the 2022/23, 2023/24 and 2024/25 years, amounting to increases of R279bn, R335bn and R365bn respectively, would be “catastrophic for the economy in general and the mining industry in particular”.
Lungile Mashele, energy economist, believes that despite the arguments presented during the public hearings to oppose Eskom’s tariff application, there exists a likelihood that Nersa would grant the utility a double-digit increase.
“The majority of presenters during the public hearings made impassioned pleas about affordability, the economy and the impact a high tariff will have on industry. However, unfortunately Nersa is hamstrung by the methodology this time around. Nersa may not grant the full allocation, [but] the final outcome will not be far removed from what is being requested by Eskom,” said Mashele.
If Nersa decided to award Eskom a tariff far below what it has requested it would not be based on the needs or performance of the utility, she said, but rather on the need to protect the consumer from runaway electricity price increases.
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