Another nail in Eskom’s coffin
While experts agree that Eskom needs its double-digit price hikes to match the cost of generation to survive financially, they also warn that it will likely be the utility’s undoing in South Africa as it increasingly prices itself out of the market.
This warning continues as Eskom seeks another double-digit price hike for next year.
A recent report revealed that Eskom is set to request a substantial increase in electricity tariffs in the coming year.
The state-owned utility is seeking a 36.15% hike for direct customers and a 43.55% increase for customers supplied by local utilities, according to proposal documents that are yet to be submitted to energy regulator Nersa.
If approved, these increases would take effect on 1 July 2025.
According to an analysis by MyBroadband, the average price of Eskom electricity has increased by over 1,722% since South Africa became a democracy, significantly outpacing inflation of 451.9% over the same period.
From April 1994 to March 1995, the average electricity tariff was 10.32 cents per kWh. 30 years later, it had risen to 188.07 cents, nearly a 19-fold increase.
The graph below shows how Eskom’s average electricity tariffs have changed over the past 30 years compared to what they would have been if adjusted in line with inflation.
When asked about Eskom’s proposed price hikes, energy analyst Mohamed Madhi expressed his lack of surprise, considering Eskom’s financial situation and the market conditions.
However, Madhi emphasised that there is no need to panic just yet, as based on previous years’ outcomes, Eskom is unlikely to receive the full increase it is requesting.
Madhi pointed out that in a previous instance, despite requesting a 32% increase, Eskom was granted just over 18%.
Nevertheless, he cautioned that with the proposed increases, South Africans might still face another substantial increase next year, likely in the double digits.
It’s about survival
Before his departure, former Eskom CEO Andre de Ruyter said Eskom must obtain cost-reflective tariffs from Nersa to survive, and the regulator has often granted Eskom less than it has asked for.
“If we do not get them, Eskom doesn’t get cost-reflective tariffs; then in three to four years, the entity will be back at Treasury’s door with a begging bowl, asking for more because its costs will be higher than its revenues. You don’t need to be a business wizard to understand that,” De Ruyter said.
Despite this sentiment, the ‘cost-reflective’ tariff argument has also faced significant pushback. Nersa, the country’s energy regulator, claims that Eskom has abused this notion in the current tariff methodology.
Currently, Eskom can use the Regulatory Clearing Account (RCA) to request future tariff increases based on its operational costs and projected sales revenues.
However, costly items like diesel from open-cycle gas turbines, which Eskom uses excessively despite the regulator’s limits, are included in this calculation.
Thus, it has been argued that Eskom’s tariff hikes do not reflect the ‘true’ cost of producing electricity but rather the cost of the utility’s inefficiencies and failures in generating electricity.
Nersa has suggested a new method that eliminates the RCA feature altogether, which Eskom is not happy about at all.
Shooting itself in the foot
The irony of Eskom needing its ‘cost-reflective’ tariff increases to survive is that many energy and other experts believe these will also lead to the power utility’s ultimate demise.
This is because electricity will become too expensive, and many South Africans who can afford it will move to alternative sources of power.
Eskom will be left with fewer paying customers or those who can’t afford the adjusted tariffs. Customers will likely not pay. This is already happening, with Eskom owed over R75 billion in unpaid bills.
Notably, Eskom has improved its performance dramatically in 2024, with fewer breakdowns and a 50% cut in diesel usage. As a result, South Africa has experienced around three months without load-shedding—the longest streak since 2021.
However, while Eskom has credited its maintenance regime and overall improved operations for this turnaround, it has consistently neglected to acknowledge that one of the biggest reasons South Africans experience less load-shedding is a reduced demand for electricity from Eskom.
Trade & Industrial Policy Strategies (TIPS), an economic research institution, reported that Eskom’s electricity output decreased by an average of 0.7% per quarter, or 2.7% annually, from the first quarter of 2020 (just before the pandemic) to the first quarter of 2024.
Even before this, its production had already started declining, with a decrease of 0.4% per quarter (1.7% annually) from the first quarter of 2011 to the first quarter of 2020.
The shortage in supply was partly compensated by private producers, some of whom contributed to the grid.
In the first nine months of 2023, South Africa imported over R16.5 billion worth of solar panels, equivalent to over 4,500 MW of generation capacity.
RMB estimates that the private sector will add over 6,000 MW to the grid from the beginning of 2023 to the end of 2025 and 19,300 MW from 2025 to 2030.
Simply put, households and businesses are replacing electricity generated by Eskom with power from their own alternative sources or private providers.
Madhi believes that Eskom is harming itself by raising electricity prices above the inflation rate.
He points out that the cost of renewable electricity has now become lower than Eskom’s rates. Madhi predicts that renewable energy will be even cheaper than Eskom’s baseload pricing within the next eighteen months.
If Eskom continues to raise prices, Madhi believes that in eighteen months, there will be no demand for its baseload electricity.
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