Eskom’s licence to waste money and hike prices

Among the many factors that have led to surging electricity prices in South Africa is a controversial mechanism in the country’s electricity tariff calculation system called the Regulatory Clearing Account (RCA).
The RCA is part of the multi-year price determination methodology (MYPD) used to calculate Eskom’s allowable revenue and tariffs and effectively gives the power utility a licence to waste money.
The RCA has enabled the power utility to get additional hikes for under-recovery of costs compared to its forecasted revenue forecasts for roughly a decade.
For a simple explanation of the RCA mechanism, one can imagine Eskom as a bakery and the electricity it sells as a loaf of bread.
The bakery sets the price of the bread at R20, assuming that it will sell 1,000 loaves during the month for a total revenue of R20,000.
It also estimates the ingredients, labour, and other input costs for each loaf at R16, for a total cost of R16,000.
In the forecast, the difference between the revenue and costs is a R4,000 profit.
However, it turns out that the bakery vastly overestimated demand and only sold 750 loaves for a total revenue of R15,000 during the month.
The cost of each loaf’s ingredients was also underestimated at R17 instead of R16.
The 250 loaves that were never sold needed to be disposed of as they had become stale, but the money that went into their production was already spent.
Instead of profit, the bakery records a loss of R2,000 — the difference between the revenue of R15,000 and the cost of R17,000.
To make up for the difference, the bakery adds the loss of R2,000 to its profit margin for the next month, requiring the price of each loaf to be increased.
This excludes load-shedding and other load reduction from the analogy, which would be like the bakery begging customers to stop buying its products because it can’t produce them fast enough.
In reality, many bakeries or grocery retailers must compete on pricing, so an unhappy consumer could just go buy bread from another store.
Healthy competition naturally ensures that bakery or store owners get their estimates right, or they risk losing customers and potentially going under.
However, Eskom is effectively still a monopoly in South Africa.
Apart from a handful of customers using independent power producers (IPPs), the vast majority of people who are not off-grid have no choice but to buy its “bread.”
Without competition, Eskom has no incentive to ensure its revenue or cost estimates are correct, as the RCA is effectively an insurance against underperformance.
If it were a real bakery and hiked the prices of its product to make up a past loss, shoppers would quickly find a competitor offering bread at a better price.
Nearly R25 billion clawed back in five years
Eskom’s latest RCA application for under-recoveries in 2022/2023 requests a comparatively small R9 million in additional revenue.
This is the lowest RCA amount the power utility has sought since the mechanism first came into effect.
However, multiple RCA revenue allocations have been worked into price hikes in many years past, so it has contributed to the total increases over time.
From the 2018/2019 financial year, it has requested roughly R65.5 billion in RCA revenue, while Nersa has approved about R24.6 billion in clawbacks.
The table below summarises Eskom’s requested and approved RCA revenues in the past five years.
Financial year | RCA amount requested by Eskom | Nersa-approved RCA revenue |
---|---|---|
2018/2019 | R27.3 billion | R13.3 billion |
2019/2020 | R3.5 billion | R3.5 billion |
2020/2021 | R10.7 billion | -R204 million |
2021/2022 | R24 billion | R8 billion |
2022/2023 | R9 million | TBC |
Calls to scrap RCA
In theory, the difference between costs and revenues could also result in a refund to customers through lower tariff hikes in the next financial year.
However, Eskom’s poor financial and operational performance has always swung the RCA pendulum towards a revenue shortfall.
The utility’s sales predictions have routinely been overstated in recent years, ignoring or underestimating the impact that higher electricity tariffs, load-shedding, and increased embedded generation have on its demand.
The Organisation Undoing Tax Abuse (Outa) has been among the most vocal critics of the RCA.
The civil action group contends that the mechanism has allowed Eskom to regain revenue lost due to lower demand for electricity and poor economic growth.
“These trends are likely to continue, leading to a cycle of decreasing electricity sales and increasing electricity tariffs,” explained former Outa Parliamentary and Energy Advisor, Liz McDaid.
“There is no incentive for Eskom to apply its mind to solving the problem, as it can always rely on the RCA to bail it out.”
McDaid maintained that costs incurred due to incorrect calculation of energy production costs could not be passed through to consumers and that scrapping the RCA would increase certainty and consistency in future electricity tariffs.
A brief moment of hope
At some point, it looked as though Outa’s wish would be granted.
Nersa adopted its Electricity Pricing Determination Methodology (EPDM) to replace the multi-year price determination methodology (MYPD) in December 2023.
The EPDM proposed shifting away from the MYPD’s sales-and-revenue focus in favour of a pricing policy based on generation cost-reflectivity.
The EPDM was supposed to take effect in 2025/2026, but Nersa rescinded its decision to use the new methodology in July 2024.
The regulator acknowledged the rules were not practically implementable because licensees were not ready for them and the methodology would first need to be aligned with the Electricity Regulation Act and Electricity Pricing Policy.
Eskom also pointed out numerous undisputed flaws in the EPDM. However, the elimination of the RCA mechanism was among the major proposed changes that many people would have welcomed.