Eskom flags big problems with South Africa’s new electricity pricing rules

 ·1 Feb 2024

Power utility Eskom says that it is currently assessing the Nersa-approved changes to electricity pricing methodology in South Africa and will take any “necessary steps” once it has grasped the situation.

Nersa this week published its responses to stakeholders and reasons for approving the new Energy Price Determination Rules (EPDR), which will overhaul the way various stakeholders in the power industry – including Eskom – will be allowed to determine fees and fee hikes.

Nersa approved the new rules in mid-December 2023, and will see future electricity pricing steer away from a ‘sales and revenue’-based approach to setting tariff hikes and lean into ‘efficient use of generating capacity’ to determine pricing.

Notably, this change will see the removal of the Regulatory Clearing Account (RCA) component of tariff hikes, which is used by groups like Eskom to ‘claw back’ revenue lost to low sales or the higher cost of generating electricity.

The energy regulator has been openly opposed to the RCA, with South Africa’s current energy crisis leading to applications for increasingly higher electricity tariffs – the latest of which resulted in an almost 19% hike in 2023, with another 12.7% hike coming in 2024.

Nersa believes that Eskom has been “misusing” the RCA by trying to recover revenue lost to its own inefficiencies rather than the nature of its business and prevailing market conditions.

However, Eskom has pushed back hard against Nersa’s new ruleset, arguing in its submissions in September 2023, and reiterating them this week, that the methodology is untested, vague and unimplementable – with the net result likely being even higher electricity prices.

The national power utility told BusinessTech that one of the biggest problems with the EPDR is that the methodology has not been used or tested anywhere else in the world and goes against internationally accepted norms.

It also said that the new rules fundamentally misunderstand how the energy generation sector operates – and provide no practical examples, details, or guidance on how exactly things are supposed to work.

Instead, Nersa is pushing ahead with an implementation plan that leaves these threads hanging – and Eskom and other stakeholders are none the wiser.

“Nersa has proposed a Plan A and a Plan B Implementation). The plan A refers to the EPDM methodology. The Plan B refers to the existing methodologies being made available to all licensees,” Eskom said.

“It is very difficult to understand what is required – since these rules are not in an implementable format. Thus, it is unclear what is required of licensees to make an application – if indeed an application is required. Reference is made to forms – however, no details on forms are provided.”

Other big issues raised by Eskom around the new rules include:

  • The proposed EPDM has not been used anywhere in the world – there are no practical examples and it remains untested.

  • The rules try to link into current legislation, but Eskom said that no impact studies were done, and the rules do not even align with Nersa’s own documents and codes.

  • Eskom argues that Nersa has gone beyond its mandate and has no jurisdiction over many aspects the rules introduce.

  • The concept of the sales forecast is completely ignored. Tariffs are a function of costs divided by volume – and the new rules make no accommodation for how volume will be dealt with.

  • Eskom said that these features are fundamental to determining operational forecasts, and removing them from the equation will have “major implications for sustainability” and its ability to operate.

  • Under the new rules, where Nersa wants to link compensation to “merit order dispatch” – the order in which plants are used to meet demand – this will result in possible extreme pricing and stranded assets.

  • This means residential customers – who tend to use peak-demand electricity – will end up paying extremely high prices.

  • Eskom said that Nersa mixes up costs with tariffs, and made incorrect assumptions that revenue will be recovered when tariffs are determined. If costs are not able to be recovered, this brings going concern implications.

  • The removal of the RCA is a fundamental flaw, the utility said, as the system profile needs to be costed, not a customer’s unique load profile. The gaps between the two need to be accounted for.

Aside from these issues, Eskom said the new rules come with a host of practical implications as well, including the fact that there is no detailed methodology, ruleset or format – and no implementation guidelines on how the rules will be implemented and assessed.

“No readiness assessments have been done to determine how and when stakeholders will be able to implement (the rules). It is still not clear what must be submitted,” the group said.

In addition to this, Nersa’s capacity to implement the rules has also been questioned.

Despite the flags being raised, Nersa has approved the rules. Eskom said that it noted the decision and it plottings its path forward.

When asked whether it will be looking at challenging the rules, possibly through legal routes, the group said that it “is in the process of assessing and will take necessary steps based on the assessment”.

Read: Electricity pricing in South Africa is about to change in a big way

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