Beleaguered Eskom is once again looking to the National Energy Regulator of SA (Nersa) to increase the price of electricity. This time it is via a mechanism called the regulatory clearing account (RCA), which allows Eskom to apply for future tariff hikes based on what happened in the past.
In its current application the cumulative difference between prior forecasts and actual outcomes is R27.3bn. Eskom is now asking to recoup all of this money from customers, and Nersa must decide how much of this amount is a legitimate claim under the RCA and how much is based on prudently incurred costs. The public hearings kicked off in Cape Town on February 3 and will end on February 24.
While some presenters have interrogated the detail of the application, the elephant in the room is the process itself. This is the first problem: the whole RCA methodology is flawed and no longer fit for purpose. To illustrate this, the largest components of the application, totalling R22.2bn, are variances in both revenue allowance and primary energy costs. The backstory to these large sums starts with Eskom, a crystal ball and predictions of future electricity sales and production costs.
Given the rapidly changing energy landscape in SA, these estimations are unlikely to be accurate, as has been the pattern over the years. Nonetheless, in an initial step Eskom provides Nersa with some estimations and after deliberation, as a second step, the regulator makes allowances. Further down the track, in a third step, Eskom compares what actually happened with these allowances, and then follows the RCA rules in making its application.
For the 2019 financial year, as in the past, Eskom spent more than its allocation on producing electricity, but received less revenue than it was allowed. The kicker is that this situation actually lands Eskom in credit according to the RCA, even though it is not logical.
The irrationally of the whole RCA mechanism is overshadowed by a second, bigger problem: fundamental challenges in the electricity system are not being solved.
As a result, if the RCA application is successful the people of SA will pay more for power supply because Eskom overspent on production and earned less than it was allowed to. This is the failure and perverse nature of the RCA. Compared with a prior guess, Eskom can claim costs related to spending more on generating electricity than was expected, but, in addition, when less money comes in this perceived shortfall is also claimed. This is essentially rewarding bad business, and is a primary reason the RCA is not working.
Imagine if a bakery overestimated people’s appetite (or ability to pay) and was given a permitted turnover from the Bakery Council. Said bakery was then inefficient in making bread and missed its sales target, but the Bakery Council responded: “Don’t worry, based on our guidelines you can bump up your price per loaf in the next batch to try to make up for it.” Of course, customers would just go elsewhere, as there are many bakeries in town.
Until fairly recently Eskom was a monopoly player, so consumers did not have alternatives, but that is changing. Through energy-efficiency, small-scale, off-grid generators and independent power producers, the demand for uncompetitive Eskom electricity is decreasing.
The irrationally of the whole RCA mechanism is overshadowed by a second, bigger problem: fundamental challenges in the electricity system are not being solved. At present, Nersa is stuck nit-picking over the details of a tariff increase, but this is a distraction from the fact Eskom is de facto bankrupt, and if it falls through the floor it will take SA with it. In Eskom’s own documents it indicates that debt and interest repayments will be its single largest annual cost by 2021, at a whopping R96bn, even more than its projected cost of electricity production at a national scale!
Think about that for a moment. Eskom is in a monumental mess, and the essential task is to find a forward-thinking, inventive way of addressing the debt crisis. Until the debt spiral is resolved, it will be near impossible to make any positive progress in the electricity sector in this country. To be clear, tariff increases will not solve this colossal debt story. In addition, the entity needs to be reformed (or restructured or unbundled, or whatever term is ultimately used) because it has become undeniable that the status quo is damaging the country.
A new role for Eskom, or some of its components, in the transition to a better energy system needs to be identified in a consultative way that includes all stakeholders, as all South Africans have been affected by the utility’s decline in recent years. This has been glibly promised by the government, but we are yet to see a coherent strategy.
For many reasons, including financial, human health, environmental and climate change imperatives, there needs to be a shift from fossil fuels to renewable energy. Moreover, this needs to be done in a fair way that applies principles of justice, particularly for workers and communities that will be affected the most by this change. Hence the term “just energy transition”. While there have been many discussions and debates on this topic in recent years, there is no plan from the government yet.
In fact, mineral resources & energy minister Gwede Mantashe is still acting as a cheerleader for the coal industry, and the national renewables programme has been stalled since 2016. While widely accepted that the notion and scope of a just energy transition requires further public debate as it is a complex socioeconomic topic, the urgency of the situation requires that we at least move in the right direction.
A transition of this magnitude is a mammoth task, but you will never tame the beast if you continue to focus on the minutiae of a pricing methodology that is no longer useful. Above-inflation tariff increases and rolling government bailouts are Band-Aids — they do not tackle the core issues of Eskom’s debt and the need for a solid just energy transition planning from government.
If SA does not urgently accept and tackle these matters, Eskom will continue to decline and citizens will continue to suffer from an expensive and unreliable supply of a basic service. These RCA hearings are a diversion from where real focus and action is required. While it may not be the job of Nersa to change the legislation, someone has too.
There are people and organisations working on innovative solutions for Eskom’s debilitating debt and proposals around a just transition, both of which need national support. The government must take this seriously. During this process of Eskom reform and just energy transition planning, a new electricity pricing system can then be designed that is fair, equitable, predictable and suits an improved energy system of the future.
• Halsey is a researcher at Project 90 by 2030.
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