Get ready for massive Eskom price hike

There are “strong indications” that South Africans should brace themselves for a massive electricity price hike to be announced on Tuesday, 29 November 2022, according to Sunday newspaper Rapport.

That is when the National Energy Regulator of South Africa (Nersa) is set to reveal its decision on Eskom’s application for a 32% hike in average electricity tariffs from April 2023.

Intellidex head Peter Attard Montalto told Rapport that Nersa had limited room to manoeuvre for a significantly smaller price increase.

That is due to Eskom winning several court cases against the regulator in the recent past, after being granted much smaller price hikes than it was entitled to under the multi-year price determination methodology (MYPD).

Montalto said he expected a price increase between 25-30%, which would be unaffordable to the economy.

Eskom previously explained there were three primary reasons why it calculated it would need a 32% tariff  hike:

• Depreciation of 10.67% due to Nersa overvaluing Eskom’s assets in its 2023 price adjustment decision, particularly assets in its generation business.
• The utility’s primary energy costs are expected 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).
• The 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.

Rapport also said discussions in a Nersa subcommittee meeting made it clear that the regulator’s tariff adjustment would be based on dramatically higher OCGT costs.

Eskom has already spent over R11 billion on diesel for its OCGTs in the current financial year — more than double its budget — which led to a decision to stop running this expensive emergency generation and rather increase load-shedding to higher stages.

That resulted in intervention from public enterprises minister Pravin Gordhan, whose department secured 50 million litres of diesel for Eskom from PetroSA, which has allowed it to lower load-shedding stages.

De Ruyter says South Africa’s electricity is too cheap

Eskom CEO André de Ruyter recently came under fire after saying that South Africa’s electricity prices were too cheap during the Joburg Indaba in early October 2022.

“Our electricity is still too cheap,” De Ruyter stated. “Something that is cheap gets wasted; something that is expensive gets treasured.”

The CEO also defended Eskom’s proposed 32% price increase as part of a “mechanical exercise”.

“We don’t sit and suck up this very daunting number of a 32% increase,” De Ruyter said.

“This is the extent to which we’ve pushed this can down the road, and we are now at a point that, when you plug in the numbers, that’s what you get.”

An analysis by Daily Investor has shown that De Ruyter’s view might be misguided.

The publication used the utility’s annual reports to track Eskom’s electricity tariffs from 1950 to 2021.

It showed that electricity prices in South Africa were very low until 2008. However, large annual hikes since that time quickly changed the situation.

In 2008, the utility’s average selling price for electricity stood at 19 cents per kilowatt-hour (kWh).

It would surge radically to reach 111 cents per kWh by 2021, an increase of 472%, which is also far above inflation over the period.

De Ruyter’s assertion that the increase was a mere mechanical exercise also failed to consider that the utility has a bloated workforce and has suffered severe corruption and gross mismanagement, all of which led to surging costs and a growing mountain of debt.

Eskom achieved excellent financial results in the years before these problems emerged while also keeping electricity cheap.

The table below compares Eskom’s electricity prices and key financial performance indicators between 1994 and 2021 to illustrate how the state-owned power utility has deteriorated.

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Now read: It’s very easy to blame the President and government for load-shedding — Ramaphosa