South Africans should prepare for a double-whammy energy price shock over the next few months with electricity tariffs now confirmed to rise 9.61% from April 1 while petrol and diesel prices are predicted to go up dramatically due to Russia’s invasion of Ukraine.
The National Energy Regulator of SA (Nersa) on Thursday announced its decision on Eskom’s revenue application for 2022/2023. On allowable revenue Eskom received approval for a below-inflation increase of 3.49% compared with the 14.58% the utility applied for.
Allowable revenue is the total cost that Nersa allows Eskom to recover from customers for primary energy generation, its operating costs, and asset-related costs such as depreciation.
Considering the amount Eskom is allowed to recover under the regulatory clearing account, the total approved tariff increase was 9.61%, less than half of the 20.5% it wanted.
The regulatory clearing account is the mechanism through which Nersa allows Eskom to recoup historical cost and revenue variances.
After a tariff rise of 15% in 2021, the debt-burdened power utility applied for a 20.5% price increase for 2022/2023 as part of the fifth multiyear price determination revenue application for the 2023-2025 financial years. Eskom also applied for price increases of 15% and 10% in 2024 and 2025, respectively.
Many stakeholders argued during Nersa public hearings on the tariff increase that Eskom’s tariff increase should be more in line with inflation, but the utility warned that this could have several ramifications.
Eskom said that should it get a price increase equal to inflation, it would have to approach the Treasury for further financial support. It would not be able to meet repayment commitments for its R392bn debt burden and its operations would be “severely affected”.
In response to Nersa’s decision, Eskom said in a statement it would “deliberate further before deciding on how to continue to sustainably provide electricity to the extent possible in the context of this revenue decision”.
The utility said that it was “keenly awaiting” the reasons for the decision that will provide further details on how the revenue determination was reached.
“The financial implications of this decision on Eskom’s long-term sustainability will need to be further understood,” said Eskom CFO Calib Cassim.
Cape Town mayor Geordin Hill-Lewis, who appealed to Nersa during the public hearings to refuse the 20.5% tariff hike, said in a statement that while the approved increase is less than half of what Eskom asked for the increase of 9.1% is still 4.1 percentage points higher than inflation.
“Our message to Nersa was simple: Capetonians simply cannot afford above-inflation increases in the cost of electricity. Such increases are unfair, unaffordable, and unjust. This remains our view,” he said.
Nersa’s decision “must be welcomed by every consumer and specifically by the more energy-intensive sectors of the economy,” said Henk Langenhoven, Minerals Council SA’s chief economist.
But, he said, while they were pleased with the tariff announcement, there were still more substantial issues at stake which should be clarified as soon as possible. “The uncertainty of future tariffs is but one of a whole range of institutional issues at play and constrains investment decisions by business,” said Langenhoven.
There was also still uncertainty about by how much, and when, the outstanding regulatory clearing account would be awarded to Eskom.
According to the commercial farmer organisation, Agri SA, the “above inflation” increase, when considered alongside a 6.9% increase in the minimum wage and the rapid increase in other agricultural input costs, would have “dire consequences for farmers who are already under tremendous strain”. Higher production costs on farms could translate into higher food price increases for SA later this year.
Some of the adjustments that Nersa made in reaching its decision was based on downward revisions of Eskom proposed revenue allocation for its regulated asset base, and Nersa also decided to exclude from the approved revenue amount Eskom’s provision for R5.6bn arrear debt.
Nersa’s Nhlanhla Gumede said that Eskom had indicated in the past that much of this debt was owed by municipalities. He argued that it would be unfair to penalise customers who do pay their bills because of those who do not pay. He suggested that Eskom had to find another way to handle this cost.
Nersa cautioned that the tariff prices were preliminary and did not include “other revenues that have been applied for and approved” which may affect the actual price of electricity which Nersa was due to approve by March 15.
Electricity costs will not be the only energy price increases to add more pressure for inflation-weary consumers — March and April could also see big hikes in fuel prices.
Investec chief economist Annabel Bishop said in a note on oil markets that the escalating Ukraine/Russian conflict had driven oil prices above $100 a barrel, and the price could climb significantly higher on a further escalation in hostilities.
“For SA, which imports oil instead of exploring and extracting its own, higher oil prices from an escalation in the Russian/Ukraine conflict would push up inflation substantially, and the petrol price, already at R20/l, towards R25/l,” said Bishop.
A R1.26/l increase is building for March, she said.
Update: February 24 2022
This story has been updated with new information.
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