South Africa’s massive electricity price hikes caused by mistake

The head of electricity regulation at the National Energy Regulator of South Africa (Nersa), Nhlanhla Gumede, says that the methodology used for regulating electricity prices has focussed on Eskom’s revenue rather than the cost of supply, the Sunday Times reports.

Gumede says this is because of the incorrect interpretation of the Electricity Regulation Act (ERA), which led the regulator to approve Eskom tariff increases of 653% between 2007 and 2022 while inflation only went up by 129%.

Eskom’s price hikes have been approved to regulate the power utility’s revenue in accordance with the 1987 Eskom Act, which Gumede said was annulled by the 2001 Eskom Conversion Act and the 2006 ERA.

“The objective of the ERA is to balance the interests of Eskom, consumers and the supply industry,” says Gumede.

Therefore, Nersa is supposed to regulate certain Eskom activities such as trading, transmission, distribution, and generation rather than Eskom’s revenue, which Gumede believes the regulator has not been doing.

Minister of Electricity and Energy Kgosientsho Ramokgopa believes that Nersa cannot regulate tariff-related issues due to the increasing complexity caused by the liberalisation of the electricity market.

Therefore, Ramokgopa said an urgent review of Nersa’s methodology is needed, which he believes will improve its ability to address affordability and efficiency.

The outdated methodology has caused major administrative trouble recently.

This past week, Nersa’s attempt to appeal a ruling regarding tariff hikes implemented in July failed after being deemed unlawful and invalid.

This followed legal action launched by AfriForum in June to prevent Nersa from implementing electricity tariff hikes from July, which it believed was unlawful.

In 2022, the Pretoria High Court ruled that Nersa’s old method for approving municipal electricity tariff adjustments was unlawful because it only considered the previous year’s tariffs and not the supply cost.

However, the Electricity Regulation Act 4 of 2006 prescribed that these adjustments must be based on cost studies determining distributors’ actual cost of providing electricity to their customers.

These are called cost-of-supply studies and must include all relevant factors.

Following the 2022 court ruling, Nersa was instructed to develop a new methodology within one year, but the regulator gave municipalities this responsibility by ordering them to manage and carry out their own cost studies.

The court ruled in favour of AfriForum in June this year, with the regulator appealing the decision.

Following the regulators’ application for leave to appeal, Nersa approved the price hikes of 178 municipalities, which it said were in accordance with the Electricity Regulation Act.

However, only 66 of the 178 licensed municipal distributors that implemented the tariff hikes had cost-of-supply studies to motivate them.

The remaining 112 municipalities did not.

According to AfriForum, this lack of compliance was due to the high costs and logistics involved with cost studies.

Another reason is Eskom’s 12.72% price hike in wholesale electricity. If municipalities could not afford the cost-of-supply necessary to hike their tariff, they would lose money selling electricity to their customers.

On top of that, South African municipalities have accumulated debt with Eskom amounting to more than R78 billion.

“Nersa has now caused an administrative nightmare due to mismanagement,” AfriForum manager of local government affairs Morné Mostert said.

“Although the error can be relatively easily rectified in favour of municipal account holders, it will be much more difficult to rectify the error for consumers of prepaid electricity.”

AfriForum explained that applications for tariff increases for the 2024/25 financial year will still be considered if the necessary cost-of-supply studies are submitted within 60 days.