The National Energy Regulator of SA (Nersa) holds its first public consultation session on Monday about Eskom’s proposed electricity price increase. Over the next two weeks as we tour the country taking part in these consultations, we urge as many citizens and stakeholders as possible to join the conversation.
The electricity supply industry is undergoing fundamental changes, including the democratisation of the industry. The decision reached by Nersa at the end of this consultation will set the course for our economic growth, prosperity and quality of life in the years ahead.
Eskom is required by law to submit the revenue it will require to efficiently generate and deliver electricity to the customer for the next three years. We do this using Nersa’s multiyear price determination methodology. Nersa is the only authority that can determine the price of electricity in the country.
There is also a second Nersa process being conducted, which is equally important. It details our proposed changes to the tariff charges and rates. These are used to recover from our customers the revenue Nersa awards to Eskom through the multiyear price determination process.
Nersa published our retail tariff plan on November 7 2024 and the public consultation sessions will start after those for the multiyear price determination. Our proposal in this regard is clear. We want electricity pricing to be fairer and more transparent.
To give just one example, residential households now on prepaid and postpaid pay more per unit as they buy more electricity during the month, due to the inclining block tariff. Eskom is proposing to remove this tariff so that low-usage households pay the same price no matter how many times electricity is bought in a single month to support affordability and provide greater access to energy services.
Understanding the context to how we arrived at proposed increases is critical to power informed debate and develop lasting solutions.
Eskom shares the widespread public concern about the proposed tariff increases, which are in the main the result of Nersa not allowing Eskom to recover the actual efficient cost of producing electricity for many years.
The key principle of the rules that govern the setting of electricity prices, as detailed in the 2006 Electricity Regulation Act, is that Eskom is required by law to apply for the revenue it requires to recover efficient costs and a reasonable margin of return. We have followed the rules year after year.
The lack of cost-reflective tariffs and resultant revenue shortfall has been a challenge since 2006 for Eskom and is one of the main reasons for its financial constraints that has required increased reliance on debt to fund the shortfall.
We have it within our control to be efficient and we will continue to aggressively sharpen our pencil, within our focus on driving a high-performance culture.
Our debt balance has increased in lockstep with the growth in actual revenue shortfall, together with a sharp increase in arrear debt owed by municipalities. By the end of our financial year in March 2025, municipalities and metros will owe Eskom more than R90bn. We are now witnessing not just municipalities but whole metros’ arrear debt escalating at an alarming rate.
We have experienced examples of municipalities and metros that have acknowledged their indebtedness to Eskom but are refusing to pay the full amount of the monthly bill. In terms of the constitution and the intergovernmental relations framework, these organisations are supposed to co-operate and assist Eskom with fulfilling its mandate of ensuring that citizens have access to affordable electricity.
We also need to be clear on what elements make up our price application. The Eskom revenue requirement comprises all the costs associated with the generation and delivery of electricity to customers as well as a fair return. Eskom’s management has a role to play in about 50% of the total costs of the revenue application. Of the costs, many are multiyear contractual in nature and/or have a dependence on other regulated domains, including water, diesel, uranium, and fuel oil costs.
We have it within our control to be efficient and we will continue to aggressively sharpen our pencil, within our focus on driving a high-performance culture.
Eskom is capable of being efficient in comparison to the past. There is no greater example of what Eskom is capable of in this regard than the results that increase week on week from our investment in the generation recovery plan. Load-shedding has been suspended for more than seven months, unplanned outages are at a four-year low and our year-on-year diesel savings have reached R15.16bn, with these savings only expected to increase.
With our operational turnaround well under way and financial performance already exceeding our corporate plan targets, the business is on the path to profitability and transitioning responsibility into growth. Without demonstrating profitability, we won’t be able to attract investment to future-proof our power system.
Investors are noticing these results. When I recently supported the SA delegation of business leaders and politicians on the SA Tomorrow investment roadshow to New York and London earlier this month, we had the most positive meetings in years. Two topics were driving this positivity. The suspension of load-shedding and the formation of the government of national unity.
The other 50% of the costs that are included in the tariff application are externally decided for us and are out of Eskom management control. These include depreciation of our assets based on the Nersa formula, the government’s independent power producers’ programme, which requires us to pass through to customers their costs, the environmental levy and carbon tax, and the arrear debt from municipalities and metros, as well as court review outcomes on previous Nersa decisions.
We are clear on the cost of producing electricity and that we have followed the letter of the law in calculating this for the next three years.
Over the coming weeks, there will be a noisy discourse focusing on the headline numbers. However, we also have the critical opportunity to have an informed debate that unpacks the challenges and changes required to mitigate these increases.
The lifeblood of any modern economy is having stable, affordable electricity. This is the only genuine way to drive economic activity that creates employment, the development and ownership of small businesses, drive growth and provide the best chance possible to lift the country out of poverty.
Affordability protection for electricity is of primary concern to Eskom. With the government-funded electrification programme, the free basic electricity grant that is available to 10-million SA households, as well as the affordability subsidies that provide this, Eskom believes these existing protections should be strengthened and extended to fulfil our developmental agenda.
Eskom has a new board and executive team that continues to tirelessly focus on the efficiency of Eskom and the morale of our employees to deliver further efficiencies. With the onset of competition, Eskom will not be as large as it was in the past. However, it is very much in our hands how large we will be. We have a responsibility to create a sustainable and investable company.
When all stakeholders become involved, the true range of policy mechanisms can be tested and explored to mitigate the impact of the cost of producing electricity. This will require political leadership. We need to bring the same level of vigour and pace the national energy crisis committee brought to ending load-shedding to the regulatory environment.
While we cannot and will not pre-empt the outcome of this Nersa process, it is clear lasting policy change is required for electricity suppliers to be paid for what they deliver, otherwise Eskom will remain reliant on government support and in turn the taxpayer. After all, the economic cost of inadequate electricity supply is much higher than mitigating the adverse effects of a tariff increase.
• Cassim is the CFO of Eskom.
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