South Africans who have this year already endured multiple interest rate increases, persistent high inflation in essentials such as food and fuel, and the worst load-shedding in Eskom’s history, must prepare for another cost-of-living shock when next year’s electricity tariff increase is announced on Wednesday.
The National Energy Regulator of SA (Nersa) is expected to announce a “draft” decision on Eskom’s revenue application for the next two years at an energy regulator meeting.
After revising its tariff application for 2023/2024 and 2024/2025, which was part of Eskom’s fifth multiyear price determination (MYPD5) originally submitted in June 2021, the state-owned power utility is now seeking annual standard tariff increases of about 32% in 2023 and 9% in 2024.
Nersa approved a 9.6% increase in the standard electricity tariff for 2022/2023 (the first year of the MYPD5), which came into effect in April. The increase was about half of what Eskom requested.
Independent energy analyst Clyde Mallinson, who has presented at Nersa’s public hearings on Eskom’s tariff application for many years, expects the regulator to do what it has in the past: to try to find a balance between the increase that Eskom has asked for and the prevailing rate of inflation.
Several of the civil society organisations and municipalities that participated in the public hearings appealed to Nersa not to let the tariff increase exceed inflation, now at 7.6%.
Mallinson told Business Day it was unlikely that Nersa would approve a tariff increase in excess of 20%. But, he argued, what the tariff increase would ultimately decide is the size of the bailout Eskom would need from the government, given that it had argued at the public hearings that even if electricity rates were to increase 32% next year, the tariff would still not be cost-reflective.
“A larger increase [in the tariff] will mean Eskom will need a smaller bailout, and a smaller increase will mean they will ask for a larger bailout.”
Mallinson said successive above-inflation tariff increases were adding momentum to the “energy death spiral”.
The long-term solution, he said, was not to continue increasing tariffs to support a grid consisting predominantly of ageing coal-fired power stations, but rather to change the long-term goal to tripling electricity supply (predominantly from renewables) by 2035, while halving the cost of electricity in the process.
South Africans have been subjected to almost constant load-shedding, often at high levels that leave businesses and households without power for eight to 10 hours a day since Eskom ran out of money to buy diesel seven months into its current financial year.
It uses diesel to power two open-cycle gas turbines, which serve as emergency backup when the grid is under strain. These emergency generation units can spare the country from two stages of load-shedding when running at full capacity. But budget constraints have forced the utility to cut back on the amount of diesel it uses to run the turbines.
The regulator has already drifted from its original timeline, delaying the announcement of its decision on the tariff application from the original November 7 deadline.
Nersa head of communication Charles Hlebela told Business Day that while not pre-empting “the decision of the energy regulator, the matter of Eskom’s revenue applications for the 2023/2024 and 2024/2025 years is scheduled to take place on December 14".
Also on the energy regulator’s agenda for Wednesday is the approval of Eskom’s fourth MYPD regulatory clearing account application for the 2020/2021 year.
It is the mechanism through which Nersa lets Eskom recoup historical cost and revenue variances. Any amounts that Eskom is allowed to claw back via the regulatory clearing account in a given year are added to its allowable revenue for that year.
Eskom has applied to recover a regulatory clearing account balance of R3.4bn for 2020/2021, which is included in the 32% tariff increase.
Recovery
The regulator will also consider the implementation plan for the regulatory clearing account balance for the 2019/2020 and 2020/2021 financial years, that have already been approved.
Outlining the details of the tariff application during public hearings hosted by Nersa in September, Eskom CFO Calib Cassim said the allowable revenue the utility was hoping to recover for the two financial years in question had not changed compared with the original submission, in which it requested to be allowed to recover R335bn for 2023/2024, and R365bn for 2024/2025.
Carbon tax
However, there have been changes to how this total amount is calculated. For example, the provision for carbon taxes has been removed since the implementation date has been delayed, while provision for primary energy costs has been substantially increased.
Cassim said one of the main contributors to the higher expected primary energy costs was the rising price and volume of diesel for the gas turbines that form part of the emergency generation fleet.
While Eskom budgeted R5bn for diesel in 2023/2024, the cost was revised upwards to R16bn in the application now being considered. But recent events suggest that even at R16bn, Eskom’s provision for diesel purchases may prove woefully insufficient.
In November Eskom executives announced that the utility had spent its entire diesel budget for the current financial year, which ends in March 2023.
By the first week of December, Eskom had spent more than R15bn on diesel in this financial year against a budget of about R11bn.
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