The National Energy Regulator of South Africa (Nersa) has published its long-awaited revamped electricity tariff rules for South Africa, and it could spell disaster for Eskom’s revenue collection.
Nersa previously published the electricity price determination methodology (EPDM) for stakeholder consultation in June 2022, after which it held workshops and a webinar to get input from the electricity supply industry (ESI) about its proposals.
The EPDM is set to supersede the current multi-year price determination (MYPD) methodology used since 2006.
The new pricing principles aim to switch electricity tariff determinations from a revenue-based approach strictly focused on Eskom to a cost-to-serve approach that applies to a diversified network of electricity suppliers coming online in the next few years.
“The unbundling of the ESI, change in legislation, and the introduction of independent power market participants, have imposed a need to review and change the existing pricing methodology,” Nersa explained in a consultation paper on the new rules.
“The reviewers remain cognisant that a new price approach must seek to enable greater transparency, efficiency and cost reflectivity, and recognise that services might be provided by different service providers who must have clear unbundled and cost-reflective tariffs to compensate them for their costs.”
A major part of the overhaul in the latest draft EPDM rules is doing away with the clawback of revenue permitted under the regulatory clearance account (RCA).
This mechanism lets Eskom get additional price increases for future years to make up for the difference in projected revenue and actual revenue collected in historical years.
For example, Nersa has granted the utility an additional R31.1 billion in revenue as part of the RCA in the 2021/2022 financial year, and a further R13.9 billion in 2022/2023.
Both these amounts stem from shortfalls in previous years.
Nersa argued that the RCA had been abused to recover revenue from lost sales.
It explained the basic approach followed by many regulators in electricity regulation is that a price-regulated company must be given the opportunity to recover its costs, plus a reasonable return, which underlined all forms of economic regulation and was recognised as the revenue requirement standard in economic literature.
However, none of the methodologies used elsewhere guaranteed that a utility could collect the allowable revenue like the RCA does for Eskom.
“Factors that represent normal business risk, such as actual consumption by the various customers and bill payment and collection rates of the regulated company, will, in conjunction with the regulated rates, determine how much revenue is actually received by the company,” Nersa said.
The EPDM rules will have a key component called the revenue requirement methodology, which will not guarantee cost recovery.
According to Nersa, the costs associated with rendering an electricity supply service must be:
- known and measurable;
- just and reasonable; and
- in respect of capital investment, must be used and useful.
Aside from scrapping the RCA, Nersa said it would apply the same five-step methodology used to calculate regulated rates in the past.
The five-step process will entail the following:
- Identify the expenses and capital costs that conform the revenue requirement.
- Identify the different activities and functionalise the costs into the different price-regulated activities and price unregulated activities.
- Identify, within each activity functionalised in the previous step, the costs that are classified to different cost categories, namely: fixed, variable, and customer-specific.
- Allocate the classified costs to specific customer classes.
- Once all the costs have been allocated to customer classes, using billing requirements, rates for each customer class are calculated.
However, it will emphasise rates by segments in the industry, an element with which Eskom and electricity experts have taken issue.
The utility and analysts have warned that this approach could lead to consumers with variable load, like those with solar power systems, paying electricity tariffs over 1,000% more than big power consumers like mines pay.
Nersa has given stakeholders until 16:00 on 14 September 2023 to submit comments on the consultation paper.
Public hearings on the EPMD rules are scheduled for Friday, 15 September 2023, and Monday, 18 September 2023.
Massive electricity price hikes under MYPD
South African electricity consumers have been hammered with electricity tariff hikes way above inflation since the MYPD came into effect.
Between 2006 and 2023, Eskom’s average electricity tariff surged from 17.79 cents per kWh to over R1.51, a 749% increase. Over the same period, inflation has risen by just about 158%.
Nersa has seemingly attempted to shield consumers from the worst of Eskom’s price increases.
However, the law has been in Eskom’s favour on multiple occasions, with Nersa losing several court battles over the RCA and being forced to give the utility its dues as set out in the MYPD.
Eskom has seen electricity sales drop and diesel expenditure surge as it tries to keep South Africa’s lights on amid severe capacity constraints, leading to RCA applications for high amounts.
In its consultation paper on the proposed EPDM rules, Nersa said that a more balanced customer-focused approach was an overdue correction in regulating the full spectrum of the electricity industry.
In its response to the proposed rules, Eskom maintained that MYPD was not defective but that its application in the recent past had resulted in poor outcomes.
“Significant progress could have been made if the methodologies were correctly implemented,” Eskom said.
The utility has asked that Nersa implement its proposed retail tariff plan, the latest version of which it submitted to the regulator in August 2022.
Among the proposals in that plan is a controversial substantial increase in the costs of fixed capacity charges, which could significantly bump the tariffs paid by solar users that make minimal use of the grid.
However, it also envisions the introduction of time-of-use tariffs, which could help offset some of the aforementioned increase, as well as a feed-in tariff system that will give users credit for any extra electricity they push back into the grid.
Embedded below are Nersa’s latest proposed EPDM rules, the discussion document on the EPDM, and Nersa’s engagement with stakeholders.
- Nersa’s proposed EPDM rules
- Nersa’s consultation paper over EPDM rules
- Stakeholder engagements with Nersa over EPDM rules