Electricity price pain for South Africa

Electricity prices are set to rise further in the future as Eskom says its tariffs do not yet reflect the cost of producing electricity in South Africa.

Eskom revealed its Summer Outlook 2024/2025 on Monday, indicating that the utility’s improved performance will continue.

It expects no load-shedding to be implemented for the next seven months due to the drastic improvement in performance at its coal-fired power stations.

In the worst-case scenario, Eskom said it would keep load-shedding to a maximum of stage 2 in summer.

CEO Dan Marokane said that since April 2024, Eskom’s performance has been consistently above expectations, and there has been a structural shift in the performance of the fleet.

This has enabled the utility to conduct more maintenance of a higher quality and dramatically cut its diesel bill by over R10 billion.

However, Eskom’s management team remains concerned about the utility’s financial health. Its debt burden remains significant, and municipalities owe it over R80 billion.

Eskom’s historical underperformance has also resulted in the utility’s cost of producing electricity skyrocketing.

A study from Reserve Bank economists found that electricity price increases have largely stemmed from Eskom’s need to service its massive debt pile. Its debt-servicing costs have more than doubled in the last decade.

These rapidly increasing costs result from mismanagement and poor capital allocation. Eskom spent R680 billion between 2007 and 2021, with poor results and a decline in performance.

The current electricity pricing regime ties prices to Eskom’s costs, resulting in decades of mismanagement and crisis spending being passed on to consumers.

And so, as Eskom’s cost to produce electricity continues to rise, so will the amount South Africans have to pay for it.

At the media briefing outlining the utility’s Summer Outlook, chairman Mteto Nyati said the high cost of producing electricity remains a systemic risk for Eskom.

Nyati said tariffs, despite having risen over 500% since 2010, still do not reflect Eskom’s cost to produce electricity.

This means the utility will have to continue asking Nersa for tariff increases to cover these rising costs.

Relief will come

Electricity price increases have significantly outpaced inflation over the past decade. However, this is set to change as the government reviews the electricity pricing plan and the private sector opens up generation, driving down costs.

In his weekly updates on the implementation of the Energy Action Plan (EAP), Electricity Minister Kgosientsho Ramokgopa has called for changes to how electricity prices are calculated.

“Our new electricity pricing plan needs to kick in, and that is the primary preoccupation of the ministry now, working with Eskom’s Distribution division and municipalities,” Ramokgopa said.

“The provision of free basic electricity is especially important in the midst of electricity prices that are almost spiralling out of control.”

“Since 2008 to now, the total increase in electricity tariffs has been around 600%. That is untenable. We need to find a way to protect people from these increases.”

“It has become a structural problem that needs our attention. You do not resolve this problem by just offering free basic services. You resolve this by growing the economy. It is a crisis of economic production,” Ramokgopa told Newzroom Afrika.

A review of the electricity pricing plan is part of the government’s plan to ease the burden of rising costs on consumers and effectively bring down headline inflation.

The government has also begun extensively reforming South Africa’s electricity market, opening up energy generation to private players.

This will allow companies to generate their own electricity and sell the excess to the grid, reducing the chances of load-shedding.

It will also drive costs down through competition as it will be the first time that Eskom’s generation division will have to compete with other generators of energy.

The project management head in the Presidency, Rudi Dicks, explained to Investec that the unbundling of Eskom will have a significant impact on the price of electricity.

“One of the more fundamental powers is giving it the power to purchase on an open competitive market,” he said.

Globally, such market reforms generally lead to lower electricity prices. This is because power is purchased based on the lowest cost and highest reliability.

As more generators enter the market, competition increases, which tends to drive prices down.

“We’ve seen that from all sets of studies global. It shows us that electricity pricing comes down when you set it up in that way. We’re moving in that direction.”

This article was first published by Daily Investor and is republished with permission.