Eskom explains massive price hike

Eskom CFO Calib Cassim acknowledges that a hefty electricity price hike in 2025 will likely result in fewer consumers connecting to the grid and increased non-payment rates. However, he says the power utility has no choice.

This is because of Eskom’s open tender processes, which have already been completed for operational aspects such as coal procurement for the next financial year.

Eskom has already committed to paying a certain amount for coal.

“There is the terminology that is used with regard to a death spiral. As the prices go up further, we’ll get less and less consumers staying on the grid and the non-payment rate will increase,” Cassim told SABC News.

“At the end of the day, it does cost to generate that electricity. Eskom procures its services via fundamentally open tender processes.”

“If I take, for example, our biggest cost item: coal, effectively for the first year, all of that is already contracted as we went through an open tender process,” he added.

The CFO explained that if the National Energy Regulator of South Africa (Nersa) were to disallow certain amounts contained in its revenue application, it would still have to pay these costs.

“Those are costs that are committed to that we have to recover. If through the regulatory decision, there’s an amount that is disallowed from the regulator, we still have to pay the coal suppliers the amount, and then we will have to find that shortfall,” said Cassim.

Moreover, Eskom won’t be allowed to borrow money in such a circumstance as a result of the conditions of its debt relief from National Treasury.

“The debt relief is used to pay interest costs and capital. You can’t use it for operating costs,” said Cassim.

“It leaves Eskom in an awkward position to decide which operating costs to incur and which ones to stop, or alternatively, deliver on your operating costs and slow down on your capital expenditure.”

He added that the latter would have devastating implications for the sustainability of Eskom’s asset base — its power stations.

According to Matthew Cruise, energy expert at Forest Energy Solutions, another significant contributor to Eskom’s hefty price hike application is the debt it has incurred burning diesel in recent years.

He explained that Eskom spent R15 billion on diesel over the last financial year and that its previous submission didn’t account for diesel spent during the energy crisis.

“There was very high diesel use during the energy crisis, which incurred debt and needs to be addressed,” said Cruise.

When generation capacity is insufficient, the state-owned power utility burns diesel in open-cycle gas turbines to meet peak energy demand.

Eskom’s diesel costs are often pushed into the Regulatory Clearing Account (RCA). However, they were excluded from the 2022/23 RCA.

Cruise also noted that coal costs are increasing.

“It costs Eskom around a third of its total operational expenditure for the year. That input cost is increasing as there is less and less good quality coal that is able to be found around the world,” he said.

“A lot of our coal is demanded from Europe, from China, and elsewhere. So the coal mines send the coal overseas, and then the coal that is in South Africa becomes more expensive.”

The power utility has applied for a 36.15% price increase for direct customers in the 2025/26 financial year, set to take effect on 1 April 2025.

Municipal customers could face a 43.55% price hike come 1 June 2025.

South African Human Rights Commission chair Chris Nissen has warned that the proposed price hikes could spark social unrest.

“We are foreseeing, as the commission, that these kinds of issues are sparks in our community that can ignite unrest,” said Nissen.

“Unfortunately, when a situation like this is created, you do find opportunistic people who use the issue from a party, political, or individual interest to highlight these issues, but of course with a hidden agenda.”

However, Cassim previously said the regulator’s decision-making process will consider affordability for vulnerable sectors.