New policy bars Eskom from passing inefficiency costs on

South Africa is overhauling its electricity pricing system to address high tariffs that have soared more than six times the rate of inflation since 2007, hurting industries and eroding households’ disposable incomes.

Though electricity supply has improved over the past few years, ending years of rolling blackouts to avoid collapsing the grid, electricity & energy minister Kgosientsho Ramokgopa has repeatedly acknowledged that its cost has become prohibitive.

“Over a period stretching back to 2007, electricity tariffs have increased by about 907%, and in the corresponding period, inflation has increased by about 150%. The price of electricity is undermining the competitiveness of our industries and is eroding the disposable income of households,” he told a media briefing on Tuesday.

“If we don’t address the cost of electricity, we are unlikely to grow this economy because our industries will be uncompetitive.”

The National Energy Regulator of South Africa (Nersa) moved to grant ferrochrome majors tariff relief at the start of the year in a desperate measure to save the country’s smelters and thousands of jobs.

If we don’t address the cost of electricity, we are unlikely to grow this economy because our industries will be uncompetitive.

—   Kgosientsho Ramokgopa, electricity & energy minister

But a draft report published by Nersa in June, after an inquiry into the impact of fixed charges levied by municipalities and the unbundled generation charges recently introduced by state utility Eskom, found that the negotiated price agreements the power utility has entered into with major companies over the years have not provided adequate relief for South Africa’s industrial base.

The new electricity pricing policy, which replaces one introduced in 2008, has been approved by the cabinet and will be published for public comment and input on Friday.

Among other changes, it will establish a tariff path requiring Nersa to publish a 10-year price forecast for electricity.

“We want everyone to have some degree of certainty on what will be the cost of electricity, not just today or tomorrow, not only in three years’ time or five years’ time. We want to create a 10-year horizon,” Ramokgopa said.

“This is important because, for heavy industries, when people want to make significant investments in the South African economy and they’re investing in a sector that relies on electricity, they want to compute their return on investment.

“And if electricity is a big part of the input cost, you need to have an appreciation of what the price path looks like. A price path of one year or two years does not introduce certainty, and therefore it risks that investment,” he added.

The new policy also seeks to regulate pricing as South Africa liberalises the electricity market, ending Eskom’s decades-long monopoly on generation and distribution.

“We are dealing a decisive blow to that monopoly by introducing competition, and that means that there’s a set of rules that must govern this new dispensation. We are moving towards the South African wholesale electricity market, and this electricity market must take account of what constitutes the overall and overarching electricity policy,” Ramokgopa said.

The reform of the energy sector includes the controversial unbundling of Eskom, with President Cyril Ramaphosa endorsing the first phase of plans to separate the transmission operator from the utility after studying a report by a National Treasury-led restructuring task team he had appointed to draft a blueprint for the process.

Eskom’s top brass, which has Ramokgopa’s support, has argued that stripping the utility of its transmission assets will leave it in a far worse financial position.

The new electricity pricing policy will enforce transparency and efficiency-based pricing by compelling Eskom and municipalities that distribute electricity to issue itemised bills to households and industry, blocking them from passing on costs resulting from system inefficiencies to customers.

“The bill that you are receiving must be able to itemise how the municipality or Eskom has arrived at that which they say you owe the municipality, or you owe Eskom. It’s going to show what are the energy costs, what are the costs associated with converting, for example, coal into electricity,” Ramokgopa said.

“It must show what the cost of going through a transmission line is, and it must show the cost of how it lands in your house using the distributed network. It must also show ancillary services, and it must also show what the cost of the municipal surcharge is.”

The policy also bars Eskom and municipalities from using tariffs to offset some of the debt owed to them.

“If you look at the current tariff, about anything between one and 2.5 percentage points of the tariff that we are paying is on the basis that Eskom is unable to recover what the people are owing and municipalities put in the cost of supply studies — the fact that they are being owed a lot of money. It means that they are putting additional pressure on diligent consumers,” Ramokgopa said.

“You are not allowed to punish those who are paying on account of those who are not paying. [Consumers] will benefit from that unbundled tariff because we are removing all the frivolous additions into the tariff structure. We are making it transparent, and we are insisting that the provider of electricity must be efficient. And when it’s efficient, you will see that the price of electricity will not be what we are currently charged.”

The new policy also raises the amount of free-basis electricity that qualifying poor households receive each month to between 200 kilowatt-hours and 300kWh per month from the current 50kWh, a move Ramokgopa said would not place any financial burden on the National Treasury.

“Within the existing framework of FBE allocation, which is R21bn per annum, that is sufficient for us to deliver on this promise, because we are introducing efficiencies; we are going to address leakage,” he said.

Business Day