Eskom’s big price problem
Eskom has increased the price of electricity by 446% since load-shedding began in 2008, driving inflation in South Africa and significantly increasing the cost of doing business.
This was revealed in a study by South African Reserve Bank economists Zaakirah Ismail and Christopher Wood. They analysed the effect of administered price increases on inflation in South Africa.
The current electricity pricing regime ties prices to Eskom’s costs, resulting in years of mismanagement and crisis spending being passed on to consumers.
South Africa’s energy system faces a dual crisis of rising costs and declining performance.
Household electrical costs have risen by 60% since 2017, and the recently announced price increases for the 2023/24 financial year of 18.7% will maintain the pressure on consumers.
Despite the large price increases, it has been inadequate to cover Eskom’s growing financing needs.
With declining electricity demand, a costly and debt-fuelled build programme, and expensive short-term diesel usage, Eskom’s needs appear increasingly unaffordable for South Africans facing the steepest inflation in recent history.
Most price increases in the electricity tariff occurred after 2007, coinciding with the first wave of load-shedding.
Between 2007 and 2017, the average Eskom tariff increased by 333%. By 2022, it had increased 450%, consistently exceeding headline inflation by a substantial margin.
This drives inflation in South Africa, and as electricity is a universal input in producing goods and services, it raises the cost base of the entire economy.
However, the economists said efforts to contain costs may risk undermining the capacity for improving Eskom’s performance by cutting off funding needed for critical interventions.
The focus should be on managing Eskom’s funds appropriately, not just cutting funding for the sake of it.
Reforms to the regulated price of electricity offer little scope to contain prices in the absence of broader reforms to the electricity market.
There is scope to improve the underlying price-setting methodology, particularly by settling debates on the valuation of Eskom’s assets and improving the performance of municipal tariff-setting processes.
However, these interventions have limited capacity to rein in prices driven by an unavoidable crisis at Eskom.
Price setters remain stuck between a more price-reflective tariff and one affordable for South African households and industry.
This has created an impasse, with Eskom routinely asking for significantly above-inflation increases in electricity tariffs while its finances and performance continue to deteriorate.
The only way to solve this impasse is to implement reforms to the electricity market, said Ismail and Wood. But, this is a complex process that cannot be done quickly.
Despite the clear scope for Eskom to improve its performance, the governance inertia and resistance to change at the utility hamper efforts to address its inefficiencies.
This article was first published by Daily Investor and is republished with permission.
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