Big changes coming to electricity prices in South Africa

South Africa’s electricity and energy department wants to evolve the methodology for deciding and approving electricity tariff adjustments to ensure cost-reflective tariffs.

During a media briefing on Monday, 29 July 2024, the department included several slides discussing a tariff policy review in light of its unbundling, including proposing restructuring tariffs to remove artificial subsidies and provide greater transparency.

“To ensure the tariffs reflect the cost structure into the future, the Multi-year Price Determination Methodology (MYPD), for municipalities and the Eskom Retail Tariff Structural Adjustment (ERTSA) Methodology need to be evolved,” it said.

“Unbundling and restructuring tariffs will remove artificial subsidies, provide greater transparency of costs, and ensure the correct economic signals.”

At the briefing, minister Kgosientsho Ramokgopa emphasised the need to “bring down” the cost structure of generation.

“Over a period of time, it has had implications on the tariff structure because it’s a structural issue from a pricing point of view, and the teams are beginning to negate our over-reliance on diesel,” the minister said.

Eskom burns diesel in open-cycle gas turbines to generate additional energy when it is short of meeting demand. However, it costs Eskom significantly more than using coal-fired generation.

The department said the cost structure of transmission infrastructure consists mainly of asset-related costs — the capital invested in the assets and its associated costs.

“The tariff must reflect these costs, regardless of who builds,” it added.

The department said unbundling and restructuring tariffs would allow for more accurate payback periods when comparing a utility’s energy costs to alternatives, and the network costs are excluded.

“Correct separation and structuring of network, retail, and energy costs in the tariff charges would provide the correct economic signal and payback period for alternative energy decisions by comparing the energy cost of the utility versus the energy cost of the alternative,” it said.

It noted that electricity supply industries globally are experiencing various economic, environmental, strategic, structural, organisational, technological, and other challenges.

“These disruptions impact Eskom and municipalities, affecting their cost structures, cost of supply studies, tariffs, tariffsetting processes, and revenue stability,” the department said.

Ramokgopa wants to tackle the challenge of “energy poverty” in South Africa, which he says occurs when a country’s residents have access to electricity but can’t afford to pay for it.

“They must choose whether to reload the units on prepaid, buy bread, or pay school fees. Those are difficult choices,” said Ramokgopa.

Following outrage over the municipal electricity tariff adjustments that took effect on 1 July 2024, the minister said high municipal tariffs are because of foreseen underinvestment in electrical distribution infrastructure.

“We did warn a few years ago that at the rate of perennial underinvestment in relation to municipal distribution infrastructure, you are likely going to hit a snag sometime down the line,” said Ramokgopa.

“With the gradual erosion of the municipal revenue base as a result of the underperformance of the economy, we are seeing that they are investing less and less on the replenishment and maintenance of that infrastructure.”

“Then we are seeing a spike in municipal tariffs that is making electricity unaffordable, resulting in conditions of what I refer to as energy poverty,” added Ramokgopa.

Many South African municipalities are also in debt with the state-owned power utility, compounding the challenge of maintaining infrastructure and offering residents affordable electricity.

In early July 2024, the minister said South Africa must urgently address the issue of municipal debt to Eskom.

He said the country’s municipalities collectively owe Eskom R78 billion, and their debt could climb to R3.1 trillion by 2050 if left unchecked.