Power utility Eskom has updated key assumptions in its revenue application to the National Energy Regulator of South Africa (Nersa), proposing a 32.02% electricity price hike from 1 April 2023.
Nersa is currently consulting on Eskom’s Multi-Year Price Determination (MYPD) 5 revenue application for the 2024 and 2025 financial years.
According to the methodology, Eskom must provide any updates on changes in conditions and environments that impact various cost elements of the revenue requirements.
“Changes are made within the cost items as required with an offset in the return on assets,” Eskom explained.
Despite the amendments, Eskom said its total revenue as applied for in June 2021 — R335 billion for the 2024 financial year and R365 billion for the 2025 financial year — remained roughly the same.
As a result, the price increase of about 32.66% that Eskom originally wanted from April next year has been reduced slightly to 32.02%.
Eskom said the primary drivers of the required increase included depreciation of 10.67% due to Nersa overvaluing Eskom’s assets in its 2023 price adjustment decision, particularly assets in its generation business.
In addition, Eskom’s primary energy costs are anticipated to increase by 7.8%, the majority of which is due to increased diesel and fuel oil prices and higher usage of these products for Eskom’s open-cycle gas turbines (OCGTs).
Lastly, Eskom said its cost to procure electricity from independent power producers (IPPs) would increase by 9.05% due to more reliance on private power, including for emergency generation.
If Eskom gets the price increase it is hoping for in 2024, the hike for 2025 should be 9.74%, with IPPs contributing 5.39% of this.
Nersa is set to hold public hearings on Eskom’s MYPD5 application with in-person and online sessions between 19 September and 23 September 2022.
The regulator has interpreted Eskom’s price increase differently, stating the hike is 38.1% over the previous financial year when using the cost items as calculated under Eskom’s previous application.
It has included an additional R15 billion in its calculation, part of a R59-billion amount which Eskom is set to recover after Nersa incorrectly deducted it as equity support between the 2020 and 2022 financial years.
The table below shows how Nersa determined the effective price hikes. Nersa has opened public comments on the proposed tariff increase.
The fundamental changes from Eskom’s previous update on the revenue application in January 2022 include increases in primary energy costs.
These are driven by a combination of costs related to the diesel price increase and a higher volume of diesel to be used.
In addition, Eskom has removed the arrear debt-related costs — in line with Nersa’s decision for the 2023 financial year — where other customers do not contribute to the gap created by non-paying customers.
Eskom has also removed carbon tax-related costs after finance minister Enoch Godongwana announced impending legislative changes to postpone carbon tax liability beyond the 2025 financial year.
Other cost items changed include independent power producer (IPP) costs, which have increased due to emergency IPP procurement, a slight increase in expected sales volumes, and a further reduction in average energy availability factor for Eskom power stations to 59%.
Eskom last month also submitted a proposal to Nersa to restructure tariffs.
It believes a new approach is needed to calculate the allowable revenue to better reflect the unbundled costs for Eskom’s future separate divisions and better account for fixed and variable expenses in electricity supply.
“This ensures that customers are more aligned to the actual costs they impose on the system,” Eskom argues.
It also maintains the new structure will address certain customers using the electricity system as a battery and back–up and effectively being subsidised by more consistent users.