Eskom, the gift that keeps on giving, or should we say, taking? Here we go again, with Eskom’s latest plea for a 36.15% tariff increase. Nersa, our energy regulator, is now embarking on a series of public hearings in various provinces.
On one side of the ring, we have Eskom desperately trying to cover its cost and getting a return on its assets. It is waving around the government’s R254bn debt-relief package like a lifeline to avoid sliding back into a pit of debt.
Ratings agencies have, rightly so, repeatedly stated the need for suitable tariffs, and Eskom is clinging to this as its ticket to execute its transmission development plan and sustain its generation recovery plan. Furthermore, Eskom’s debt burden, with ongoing challenges in collecting revenue, leaves little room for financial missteps.
On the other side, we have the harsh reality of low economic growth, high interest rates, and consumers battling to make ends meet. With inflation at 2.8% in October, chances of substantial salary increases to absorb a huge hike in electricity cost are slim.
Municipalities, which buy bulk electricity from Eskom and resell it to end users, face their own challenges with debt recovery and service delivery. A significant tariff increase pushes them over the edge, potentially leading to increased nonpayment and further financial strain on local government. The gap between the utility’s need for cost-reflective tariffs and what end users can afford seems too wide to bridge.
Eskom’s tariffs are determined in a two-step process. First, Nersa decides on the utility’s allowable revenue before determining the allocation to each consumer group — the tariffs that apply to households, businesses and industry respectively. In both stages, there are built-in subsidies that must be paid by electricity users but that are policy imperatives that could also be located elsewhere.
A case in point is the premium paid to the independent power producers in the first three bid rounds of the government’s independent power producer procurement programme (REIPPP). Those first bidders took on the risk of a new industry in a country where nothing like this had been done before. The supply chain and expertise were not yet locally available, and the government as procurer and Eskom as a buyer were new to the renewable industry.
That the projects would come at a premium was no surprise. Solar PV came at R4.66 in the first bid window, compared with 56c in bid window 6. At least a substantial portion of that initial cost was an establishment premium. The question is, what was the right mechanism for the payment of that premium?
The government chose to include it in the tariff, which is a pass-through in Eskom’s revenue determination. It will remain in the tariff for the 20-year duration of the power purchase agreements. Similar premiums, maybe not quite as high, are probably to be found in the first battery storage programmes and will be in the first gas projects, the first transmission projects to be put to the market and perhaps the first small, modular nuclear reactor.
In the second stage of tariff setting, negotiated pricing agreements to keep energy intensive smelters open are subsidised by Eskom’s standard customers — basically the rest of us.
The industry pays an affordability levy to assist poor households. All these premiums and subsidies result from policy decisions and distort the legislator’s requirement that Eskom is entitled to its efficiently incurred cost of supply plus a reasonable margin.
Smelters are getting their special pricing agreements in terms of a framework developed by the department of trade, industry & competition. Should that department not develop a bouquet of incentives for these and for the new renewable energy industries like that available to the automotive industry? And should subsidies for poor households not be part of the social package? It is just too easy to lump everything together in the tariff.
The burden has become too much for the end-user to bear. It is time for bold, systemic reform that balances Eskom’s financial sustainability with consumer affordability and fairness.
The debate about Eskom’s tariff increase must move beyond repeatedly stating the valid concern about affordability and focus on alternatives. This should include a thorough review of the allocation of subsidies, the creation of a dedicated energy transition fund for project premiums, and expanded fiscal support for low-income households.
Let’s stop using the electricity tariff for purposes it was not intended for.
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