What will happen if Eskom gets the tariff increase it is asking for?

If we have to pay 20% more for our electricity, we may simply consume less, leaving Eskom still in hot water, points out independent energy analyst Roger Lilley.

FIFI PETERS: You would be aware that the public hearings at the National Energy Regulator of South Africa over electricity tariffs have started. You’ll also remember that Eskom had applied to the regulator for a 20.5% tariff increase for the 2023 financial year. That increase would most likely kick in, in April.

Let’s get the latest from Roger Lilley, independent energy analyst. Roger, thanks so much for your time. Just how closely have you been following proceedings, and what are your main takeaways of what’s come out so far?

ROGER LILLEY: Yeah, good evening. Thank you for inviting me to your show this evening, and good evening to your listeners. Look, the situation with Eskom is that Eskom needs to restructure its whole tariff structure because of the fact that Eskom  is being unbundled. So, as distribution becomes separated from generation and from transmission, costs have to be assigned accordingly.

So what Eskom are talking about is about introducing a fixed charge plus a variable charge; the variable charges obviously then relate to how much one uses, while a fixed charge would then be a fixed charge, as the name explains. But if we just look at a simple calculation of 20% on top of existing structures, then we see that the domestic tariff, for example in the city of Cape Town, which is currently 272.4 cents per kilowatt hour, or R2.72.4 per kilowatt hour, that will jump to three R3.27. That’s a massive increase. That’s at the lower level.

If you exceed 600 kilowatt hours per month, then the tariff jumps even higher to about R5  per kilowatt hour. Now that’s obviously unaffordable for many people. And so we’re going to have to see how this is actually implemented and what Nersa determines in the long run. We’re not going to know the result of this until the end of February, unfortunately – around the February 25. So we’re all on tenterhooks in this regard.

FIFI PETERS: In your expert opinion, just having seen how these tariff applications, negotiations and hearings have gone in the past, how likely is it that Eskom might get the tariff increase they’re asking for?

ROGER LILLEY: Well, it all depends on how well Eskom is able to sell its case. The concern I think is that if we look at electricity prices on a global scale, then we’ll see that South African electricity is still relatively inexpensive on a global scale. So there is room for adjustment.

Now, when you combine that fact with the fact that Eskom has to be restructured into three operating units where costs have to be divided between them, then we start to see something that Eskom calls a ‘cost to serve’ calculation coming in, where Eskom is saying it costs it a certain amount of electricity to generate the electricity, to send it through the transmission network, into the city where the user is, and then through its distribution network from its major inputs, from its major switching stations, into the domestic environment, for argument’s sake, or into an industrial environment in some cases.

And so each part of Eskom has to be assigned a certain cost. The way they want to do that is going to mean that the costs have to be much more cost-reflective than they’ve been in the past, because certain costs cannot be shared any more since the business is going to be separated and unbundled.

FIFI PETERS: And even before the unbundling process the CEO of Eskom having spoken several times about tariff increases having not been cost-effective in previous years, just adds to your point of what happens in future. But in the event that Eskom does get what it’s asking for, what is the likely impact on the economy going to be?

ROGER LILLEY: Well, that’s interesting, because any businessman will tell you that just because you’ve put the price up by, let’s say, 20% does not necessarily mean that your revenue will increase by 20%, simply because consumers still have the right, or if you will the option to choose whether or not to buy your product.

So, in the case of electricity, we as users might well say: “Hang on a moment; we’re going to start to move away from using electricity for everything, and we’re going to switch to gas cooking, for instance, solar geysers on our roof, for instance; we are going to become far more sensitive about how we use electricity, be much more careful.”

It might end up that someone who’s been using, let’s say, 500 kilowatt hours per month might reduce that to let’s say 300 kilowatt hours per month, and end up paying exactly the same amount in rand that they’ve been paying up until now, notwithstanding the 20% increase in tariff. So Eskom might find itself receiving the same amount, or a very similar amount in ran terms – even with a higher tariff.

FIFI PETERS: Presenting another challenge for them in terms of plugging in that revenue.

We’ll leave it there for now. Roger, thanks so much for all your time. Roger Lilley is an independent energy analyst, explaining to us that we are not likely to know the outcome of what the current hearings will be until sometime in February –around February 25.

 

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If the owner of the gym comes to you and tells you that he needs to raise the fees by 20% because his ex-wife is suing him because he had an affair with a gold-digger, what will you do? Well, that is how we should treat Eskom. because Eskom also had an affair with gold-diggers.

She takes my money when I’m in need
Yeah, she’s a triflin’ friend indeed
Oh, she’s a gold digger
Way over town, that digs on me….

– Songwriters: Kanye West / Ray Charles / Renald J. Richard

End of comments.

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