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Eskom: Further steep tariff hikes needed to reach cost-reflectivity

But that might be counterproductive, experts say.
Eskom ultimately wants to link its increases to the consumer price index. Image: Waldo Swiegers, Bloomberg

Even with the 15.63% tariff hike to be implemented on April 1, Eskom considers its electricity tariffs to be far from cost-reflective.

To bring it to cost-reflectivity would have required a tariff jump to 150c/kilowatt hour (kWh) on average, instead of the 134c/kWh applicable from April 1, says Eskom’s general manager Regulations, Hasha Tlhotlhalemaje.

This translates to an increase of 29%.

Eskom hopes to close this gap over the next three years and energy expert Chris Yelland, MD of EE Business Intelligence, expects Eskom to gun for a further 15% increase in the average tariff in 2023.

‘Step change’ 

The thinking at Eskom is that this would give it the step change it says it needs, whereafter increases would be linked to the consumer price index (CPI) .

The introduction of a carbon tax next year and the connection of more independent power producers (IPPs) selling electricity to Eskom at predetermined prices could however result in even bigger increases.

In addition, the expected large increases could be less of a solution to Eskom’s woes, experts say.

It could have a dramatic impact on Eskom’s sales volumes, as alternative sources of energy become more viable and residential, commercial, and industrial customers embrace the relaxation of regulations that makes it easier to self-generate power or buy from IPPs.

In terms of the Electricity Regulation Act an efficient operator is entitled to recover its cost plus a reasonable return through electricity tariffs.

It is therefore clear that consumers should not pay for wastage and corruption.

Eskom has been at loggerheads with energy regulator Nersa for years and its view that it has been shortchanged has been vindicated through numerous court victories. The courts have found that Nersa failed to stick to its own methodology and acted irrationally in determining Eskom’s tariffs since 2014.

The corrections following these court rulings have already resulted in the current year’s increase growing from the 5.22% Nersa earlier determined to the 15.63% as announced.

Further increases

Unless Nersa succeeds with a pending appeal, there is at least a further almost R60 billion compensation that Nersa – and therefore the consumer – owes Eskom.

This relates to Nersa’s decision to subtract the three tranches of equity injections of R23 billion per year that government awarded Eskom from 2019/20 to 2021/22 period from Eskom’s allowable revenue.

In a court settlement last week, Nersa agreed to provisionally add R10 billion of the total of R69 billion to electricity tariffs, which sealed the 15.63% increase.

Exactly what the future tariff path will be remains to be seen.

Eskom’s current tariff period ends on March 31 next year and it has not yet submitted its application for the next three years – the fifth multi-year price determination period (MYPD5).

Moneyweb has learnt that carbon tax alone, which Eskom will have to pay from January 1 next year, can add a further five percentage points to Eskom tariffs over a full financial year.

Additional IPP costs are also not included.

Purchasing from independents

For 2021/22 Nersa has included R40 billion in Eskom’s allowable revenue to pay for power purchases from IPPs.

Eskom has no control over the tariffs at which it buys electricity from IPPs, as this is predetermined by the Department of Mineral Resources and Energy. These costs are simply passed through to consumers in electricity tariffs.

The amount will increase as more IPPs are expected to reach commercial operations and further add to the 150c/kWh Eskom says it needs to be sustainable.

Read:

At the presentation of its annual results for 2019/20 Eskom showed how its sales had dropped since 2015 – in stark contrast with its sharp increase in revenue.

Source: Eskom

Yelland says the expected sharp increases will only accelerate the reduction in Eskom’s sales volumes.

A view that increasing tariffs can solve all Eskom’s problems is therefore too simplistic, he says.

Customers across the board will increasingly look for alternatives.

Nersa’s electricity subcommittee has recently recommended the approval of a licence for Gold Fields to construct its own 40 megawatt (MW) generation plant and many of Eskom’s other large power users will follow, Yelland says.

Own-generation licence threshold

Municipalities have been given the green light for own generation and direct power purchases, and in his State of the Nation Address President Cyril Ramaphosa announced that the threshold of 1MW for the onerous licensing of generation plants will be lifted.

If industry’s call to lift it to 50MW succeeds, it could result in 5 000MW of new generation capacity independent of Eskom, recent research shows.

Yelland says Eskom has no option but to downscale generation and completely reinvent its business.

Forced to look for alternatives

David Mertens of the Association of South African Chambers says the 15.63% increase is already a huge shock to business. He agrees that this and further increases will force consumers to look for alternatives and will be counterproductive for Eskom.

Mertens expects a reduction of around 5% in sales volumes but says large power users will have to determine if they can really become independent at a cost lower than that of Eskom’s power.

He warns though that if Eskom’s power supply remain unreliable, even cost barriers may not be enough for customers to remain reliant on Eskom, as security of supply is paramount for them.

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Eskom must get their house in order. Department of Energy must also get their house in order. The allowing off alternative energy like windfarms should have been approved long ago.
Eskom is chasing customers away.

Just close it down like SAA.

I’m stating to think that it is unfixable.

Save the Tax payer, I do not see why we must be double and triple taxed for everything when our Tax payer money is in Dubai and Pakistan.

OK, nice Chris. 8 months you commented : Renewables are a myth, and received 166 upvotes. Now you talk abut alternative energy and windfarms.
Surely some progress.
http://www.moneyweb.co.za/news-fast-news/africa-should-leapfrog-the-rest-of-the-world-when-it-comes-to-renewable-energy/

Eskom has to be liquidated ASAP. I have been making regular comments on Disqus for at least 6 years like this: The whole electricity sector has to deregulated, liberalised, privatised and greened up.
Maybe Gov should only stills have a max 45% share in the grid, transmission company company as that unfortunately will remain a kind of monopoly. Generation can be fully privatised, sales and distribution must be taken away from munis and metros.

And take away all their gravy ?
Not going to happen (unfortunately)

It is a myth. In the long run it won’t be the miracle that it is made out to be. But The government said they will allow it to happen but they are still doing nothing.

Wind and Solar are not cost-effective in the long-run for baseload. Nuclear is, and has no carbon emissions. If the greenies were serious about global warming they would all be begging for nuclear

Eskom, you sell what we call in Economics an inelastic product, whereby the level of consumption of your product is to a slight extent, unaffected by the margins at which you increase your price. Your product is price insensitive given its importance and the monopolistic privilege that which you enjoy. Sadly, your overall knowledge about the functions of management are just as inelastic. For many years you have failed to stretch your level competency and innovation.

You are an institution that has travelled quite the distance in the preceding years but your displacement has always remained NIL, in less scientific terms, your labour has been fruitless and destructive.

Consumers are punished on multiple fronts because of your price increases. Consumers absorb your increments directly through the household use of your product and indirectly by the products and services the very same households purchase from businesses.

There is no amount of money that can effect a solution to your problems. You have had countless turnaround strategies to a point you do not know your north to your south. If it will be of any help at all; south is the trajectory that you are currently following.

Eskom sePush

Well King — After the first sentence you have lost the comprehension of all those in Government as well as Eksdom. Viva solar !!

Tax on solar will be forthcoming, mark my words.

We never hear about cutting costs, cancelling unlawful dubious agreements, clawing back the loot etc. just take the usual Govt. style short cut and screw the consumer.

you could not have put it any better, pitty is eskom does not have any financial or economical grip / understanding what is done to south africa in total due to their monopolistic increase in electricity tarrifs to cover 2 decades of their own technical and management f-ups(due to anc cadre employment,and far too many employees, etc, etc) – from a once leader in the electricity field, to a money sucking entity, saa’s big brother. the many excuses used for load shedding are now used up(lumps of coal was the newest one) and unacceptable – even with de ruiter cracking the whip at eskom, he won’t be able to replace obsolete power stations whilst the newest 2 are still not running at full capacity after how many years – its too late for eskom, no wonder is going to happen

Start weeding out the cadres and other useless staff. Look at the cost side ! Stop supplying electricity to clients that do not pay for it. What a farce !

Years ago I met a neighbour of my mom, an older man who had worked for Eskom for ~40 years. They live in a retirement village in Limpopo. He had retired at exec level but did consultancy work on and off at Megawatt Park. He had come back from one such a session and was completely gobsmacked ….. he noted halls of people at the head office with nothing to do, people literally sitting around doing nothing all day. The man was speechless. He predicted exactly what is now happening…. and this was probably 15 years ago. I initially thought he was exaggerating. Depressing to say the least.

It’s a crazy notion but somehow, sometime, somewhere the penny must drop that the power generation model employed by the ANC is not sustainable in any way shape or form. The facts alone are astounding: Eskom has dug itself into a debt hole that puts the Marianas trench to shame. What have they received in turn for this massive debt burden? Their infrastructure is unravelling faster than a two dollar tee shirt, they have not built a single functional power station for decades and purchase energy from ISP suppliers that they sell at a loss running in the tens of billions annually (someone’s laughing all the way to the bank). Much of their product is given away or stolen while the ANC turn a blind eye. NERSA and Eskom can quibble about tariffs till the cows come home but this will not change things one iota. This will not fix their monumental inefficiency. Corrupt officials employing more and more inputs for the same output simply pass their costs onto the taxpayer/ consumer. This is either done via tax payer bailouts, adding to the debt mountain (simply deferring the bailout) or raising the price of the product as only a monopoly can. Capital is used extremely inefficiently and wealth is destroyed on a grandiose scale. This is the legacy of the ANC. It is, of course, the same reason why the Soviet Union failed. Pricing is an incredibly important signal and in the current regime everything is set arbitrability by decree. Eskom will accept NERSA’s proclamations. Eskom will buy electricity at prices over and above what they are allowed to sell it for. There is no accountability for the debt. There is no enforcement of payment. Pollical considerations take precedent. We bear witness to a failed state.

The following fixes are needed:

1. Axe the carbon tax. This is simply a tax grab not a weather changing initiative.
2. Sell off each power station to a private entity. Running these is subject to a strict but reasonable environmental plan.
3. Privatise the grid. Run as a regulated monopoly.
4. Allow anyone to produce electricity, at any amount, by any means, that the grid company can purchase in a free market i.e. willing buyer willing seller.
5. Remove the sales/ billing function from corrupt municipalities. Allow competition in the sales sector.
6. Enforce the law. You pay for the services you consume. Thieves get prosecuted. Illegal connections are cut off and prosecutions are the order of the day.
7. Subsidies are paid by the government not the utility company.

Enforce the lax – ha ha ha what a joke!

Taxpayer money gets stolen and is in Dubai and Pakistan, what are they doing about it?

Don’t get me wrong, the Ramaphosa administration is by far more knowledgeable and capable than the previous gangster administration but they too cannot perform miracles!

First and foremost, catch and charge all those people in the townships who are brazenly and openly stealing electricity and making illegal and dangerous connections. It makes no sense, to allow such a significant ‘leak’ only to turn around and argue that you are not charging enough and need to increase tarrifs. You will need a significantly less increase if you devoted efforts to cutting off those who don’t pay, including municipalities and government departments, as well as some heads of state departments who seem to think that paying for electricity is for ‘other suckers’ and the poor and unelected. Continuing to charge businesses and a handful of law abiding citizens a higher and higher tarif is just how you kill the goose that lays the golden egg. To be frank.

The politicians and judiciary beck the theft all the way.– Look at how many times the efforts on the part of Eskom to cut off supplies have been thwarted by judgements !!

Ms Hasha Tlhotlhalemaje, the problem is that Eskom costs are too high (too many unrequired employees, for a start). So Eskom needs to cut costs, then the 134c/kWh will be enough to reach cost-reflectivity.

Do you know anyone who got a 15% increase last year? I definitely don’t.

The CPI basket of goods definitely excludes electricity and local taxes.

In the process of trying to “save” ESKOM you destroy the country.

anc logic.

This zombie must be put into it’s coffin, the light at the end of the tunnel must be switched off.

Purchasing a product from an organisation that supports racism, inefficiency and corruption in the name of tranformation is equal to buying goods from a illegal business which does harm to the society around it.

Western Cape have set forth to procure electricity independently which is a step in the right direction and then Nersa can finally play it’s roll with teeth.

It’s public knowledge that Eskom is 30% overstaffed – yet the plonkers have the gall to talk about cost reflectivity! Only in SA would they be allowed to get away with this abuse of basic business ethics.

No, it’s more like 85% overstaffed

ANC Cadres employment turned Eskom into another useless SOE. Wake up South Africa and stop voting for these oxygen stealing thieves!

The high cost base is a result of:
1. Too many AA staff with a lack of skills ie passengers who do nothing.
2. BEE procurement policies -paying triple for everything so that ANC cadres can steal.
3. Board after board of inept nobody’s with zero skills.
4. A shareholder which is incapable of running anything ie the ANC government led by the CFO of the Zupta regime

Simply reduce the debt by reducing the pension pots and salaries by 30% of :
1. All ANC MPs , ministers and deputy ministers
2. All generals in all armed forces services(they do nothing anyway starting with the corrupt and useless SAPS)
3. The captured judiciary-all High, SCA and CC judges can take a 30% cut in salaries and pensions-no law firm will want them anyway!
4. All SOE employees earning over R1m pa -nobody else will employ them as they are largely useless

Also, cut the number of ministries! That’s where it should start.

Has anyone ever heard of stolen money getting recovered? No

They come to the Tax payer over and over.

You pay exorbitant paye, vat but that is never enough.

If you save money by working nights and weekends they want to tax you on your wealth.

No tariff could ever be high enough to be reflective of the inefficiencies at SOEs. Privatisation will provide the checks and balances inherent to the competitive nature of the market to deliver cost-effective services.

I realise Eskom looks at its revenue number but can we please stop about this 134c/kWh!!!

My effective cost is around 280c/kWh after council has done its bit. My increase will be closer to 50c than 15c.

A good article would be:
Take 5 power profiles of actual data (small home, large home, typical 50 person office, medium factory, large factory).
Price those profiles at Eskom tariffs for those categories.
Price the same using the applicable tariffs of a few municipalities.
Compare and compute average total cost / kWh.
Derive the margin added to Megaflex tariff that Eskom charges municipalities.

I know more people that are looking at moving 80% off-grid than are not looking at it. The technology is there, the pricing for people like us that pay 330c/kWh is also there. The solutions are certainly cheaper than grid by 2023 and one would have no loadshredding.

We WILL have a constitutional court challenge when the powers that be try to stop it using regulations designed to protect eskom and councils.

I watched a program on YouTube about electical cars and the tariff for electricity in Houston was the equivalent of R 1.50 in SA compared to over R 2.24 I am paying. That was when the exchange rate was about R 16 to the dollar. Rip off by Eskom and local municipalities who are impossible to raise to get billing queries sorted out.

Your article is great but there is one error I would like to point out. The new IPP that are coming online now were bidding 50 to 70 c/kWh which is much lower than Eskom R1.50 reflective cost. Surely this will have the impact of decreasing required increases not increasing them.

Why arent we pushing for a lot more renewable IPP.

Secondly Eskom is at R1.34 this coming year or R1.2 the past year. Yet Munics are at R2 to R2.8 / kWh and dont pay Eskom. So how do they justify a 15% increase on a figure almost Double Eskom?

eskom and its management is looking for quick fixes at the cost of its client basis, but do not understand that they themselves form the core of the problem – financially, economically and the managing of a semi-dead soe organisation – 20 years+ ago the anc saw soe’s as job for cadre pals (their way of “creating” job opportunities in sa) but the whole sa is now reaping the results thereof – a massive long term monthly salary account for all state employed employees where hardly any work is done/ delivered if at all – eskom is a mirror image thereof – they don’t understand that a higher turnover with a similar increase in debtors/bad debts + sky high loans has no higher cash inflow in reality.

The R1.50 includes transmission and generation costs. The 50 to 70c per kWh ” it’s so cheap” does not include transmission costs. In a typical setup the transmission costs are 2x to 3x the generation costs. In Australia, most folks have solar on the roof. One only gets paid what the generation costs are when you feed energy into the grid (AUD0.07per kWh). When you suck a kWh out of the grid you pay AUD 0.27 (1AUD ~ R12).

No Richard,

There is no way in hell that T&D is 2-3 times generation cost. Just look at Eskom Megaflex tariff structure for an idea.

What matters most is Eskom generation cost from coal – that is for the new stations about double IPP.

Eskom charges fees and incurs costs for T&D whether the electron comes from coal or wind or nuclear or diesel. They have been doing the cost of supply break-out for years now.

BUT If I inject surplus solar into my council they resell it down their wire and incur no transmission fees.

This article repeatedly and FALSELY claims/implies that new IPPs will add to the tariff burden. Even when the bulk of IPP power (from all but the first few bid windows) is sold to the grid at BELOW HALF new Eskom tariffs.

In Australia the Energy Regulator claims the exact opposite
> https://www.pv-magazine.com/2021/02/19/australian-regulator-credits-renewables-for-electricity-price-decline/

“Australian regulator credits renewables for electricity price decline.
The Australian Energy Regulator says that investments in renewables and rooftop solar uptake are driving the ongoing decline in electricity prices”

Rather collect electcity debt and stop theft of electricity

Stopped reading after the WORDS “cost-reflectivity”. There is no such thing at Eskom. Cost-reflectivity for them means including all the Gupta and Cadre “COSTS”, in real world and not La La land this means WASTAGE.

Someone must pay for the rampant corruption.

Ever heard people talking about “The good old days” There was a time in South Africa that Eskom provided electricity. Everyday, Generating a profit for the company and cost effective for the consumer.

1994 was when Eskom switched from its core business of generating electricity to a new core business of enriching the ANC and ANC cadres, with electricity generation as largely incidental.

I think the comments about “Eskom needs, or should or has to” are missing the point, even though the comments, for an electricity generating business, are sound. The point is that SA is really getting to be another Kenya, Nigeria, Ghana or Uganda where no one expects anything from government owned utilities, except self enrichment of said government cadres. Probably best to plan what you can actually do rather than expecting a corrupt and probably bankrupt utility to change.

The Darkness presents … The Darkness

every financial year Eskom requests Nersa to approve tariff hikes. It is unsustainable to keep hiking prices. Eskom needs to collect enough revenue from all stakeholders to offset the rising debt. You cannot pay long term debt with short term revenue that is not enough to sustain the ballooning debt. Reduce expenditure, wage bill, unnecessary costs that could hamper successful collection. Eskom also needs to be serious about dealing with the culture of non-payment. Hiking tariffs will not solve the cost problem of a power utility. We are just being bled dry and the debt of Eskom keeps rising and rising. The unions need to step back and also stop meddling in the affairs of a power utility, we understand the interest of their members etc, but opportunity cost, cost-benefit analysis determine what is best for Eskom. If wages are and the workforce is costing Eskom then make the cut. It will see a huge cost saving in operations and also free up additional cash to see to critical matters at Eskom

Cheap reliable electricity used to be South Africa’s competitive advantage. Now it is a millstone around the neck of the albatross.

Last week Soweto residents who were interviewed with regards to this increase stated clearly that this increase is going to be hard on them so they will choose to not pay at all.They did not say that they will choose to register for indignant electricity vouchers.
We have informal settlements mushrooming in all empty spaces with illegal connections.

This increase is going to be unfair to the few law abiding citizens who are easy to track and cut off.

Eskom is 400 billions in debt, what company can survive this!
I don’t see hope with this company in its current structure form.

The price off electricity has to be cost reflective otherwise the status quo is unsustainable. However, cost reflective prices should be for a well run and managed company which Eskom is not. Putting up prices to cover bad management just results in the continuity of the poor management. Consequently one never arrives at a cost reflective price because any additional income from price increases is simply wasted or stolen.

As of last week, I am 90% off the grid after an approximately R280k investment. Now to do the water….

The old IPP were a rip-off, but the new deals are far below (half) Eskom’s generation cost, so not clear why there is the flag about the new IPP impact?

Nice thing about 60c IPP is that Eskom has no maintenance or other elements, it is a pure variable cost???

So we can expect to be further screwed by E-skam over the next ten years. Time to get off the grid and let all the Gangster State’s SOEs perish.

End of comments.

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