Eskom admits imposing a 36% tariff increase on its customers next year as a first step towards cost reflectivity will lead to higher inflation, but it says the impact would be marginal and “more than offset by increases in GDP growth, employment, investment levels and household consumption spending”.
Eskom CFO Calib Cassim recently called it “short-term pain for long-term gain”. Economists are, however, sceptical.
Eskom has applied for a tariff increase of 36.15% next year, 11.81% in 2026/27 and 9.1% in 2027/28, the last year of the period covered by its sixth multiyear price determination application. If approved, the price adjustments will increase Eskom’s revenue from R352bn in this financial year to R445.5bn in the next, R536.7bn in 2026/27 and R585.6bn in 2027/28.
Eskom has long been saying its electricity tariffs are not even covering its cost of supply and hopes to move towards cost reflectivity in the sixth multiyear price determination period.
There is, however, widespread concern about the effect of these huge increases on an already depressed economy with electricity & energy minister Kgosientsho Ramokgopa pointing out that South Africans increasingly must decide between buying electricity or putting bread on the table. He said even middle-class households could not afford the high tariffs.
Eskom, however, said based on an economic impact study done for it by Genesis Analytics in 2022, its tariff proposal would have the best overall economic outcome. The study was done in preparation for its previous multiyear tariff application, but energy regulator Nersa, which has the final say about Eskom tariffs, did not give Eskom what it wanted at that stage.
According to the utility, the study was updated with recent data and the principles are still valid.
Genesis looked at four scenarios.
If the tariffs increase immediately — according to Eskom it would require an increase of about 70% next year — economic growth and investment will initially deteriorate, but Eskom — due to improved financial health — will pose less of a risk to the fiscus and the credit ratings will improve over the medium term.
“Modelling Eskom revenue shortfalls by means of government debt financing, the government deficit is significantly reduced by R110.48bn by 2026,” Eskom said in its application.
Eskom’s proposed sixth multiyear price determination price path will see the utility’s revenue shortfall almost eliminated in the first year. “GDP deteriorates slightly relative to the baseline in the first year following the electricity price increase, but all macroeconomic variables beside inflation perform better than the baseline in the medium term as the impact of the price shocks are offset by the improved credit rating.”
The low-increase scenario, which factors in an above-inflation increase that is in line with earlier increases approved by Nersa, will leave Eskom with a reduced, but still significant annual revenue shortfall. Under this scenario most macroeconomic and fiscal indicators perform below expectation and credit ratings remain unchanged.
If tariffs are only increased by the consumer price index (CPI), which many stakeholders have been calling for, the study shows an increase in Eskom’s revenue shortfall and the government deficit.
“A significant annual revenue shortfall, worsening Eskom’s financial position and further destabilising the country’s overall fiscal outlook, results in an expected credit rating downgrade. While consumers benefit from the cheaper price of electricity and lower inflation more generally, this is offset on a macroeconomic and fiscal level by the effects of increased budget deficits, higher debt-servicing costs, lower employment, lower household consumption spending, less government tax revenue and less investment,” Eskom said.
Dawie Roodt, chief economist at the Efficient group, said the fundamental problem was Eskom’s real costs, and how efficiently it was incurred, was unknown. “I can assure you they are paying their employees too much. One must compare that with the staff cost of other utilities and Eskom has the data. I have asked for it, but they refuse to provide it,” he said.
Raymond Parsons from North West University Potchefstroom Business School told the government of national unity, whose overarching priority is much higher inclusive growth, and the Reserve Bank, which is committed to low and stable inflation, the magnitude of Eskom’s multiyear price determination applications should now be a red flag. There were economic risks embedded in the Eskom tariff plans that go beyond those recognised in the Eskom Economic Impact Study.
“It is clear the potential economic damage the Eskom tariff application could do in its current format needs top level intervention to get what might be called ‘sufficient consensus’ as to a sensible outcome,” Parsons said.
“The president’s Economic Advisory Council could also be consulted. And in view of the overall positive economic message that finance minister [Enoch] Godongwana will want to give to the country and business in the MTBPS on October 30, it may be prudent to include an update on how the Eskom tariff issue is to be further handled,” he said.
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