Massive blow to Eskom – but South Africans will still feel the sting

The national energy regulator Nersa has wiped almost R16 billion off Eskom’s application to claw back lost revenue—but R8 billion was still approved, which will result in future price hikes for South Africans.

This was one of the decisions Nersa made public following its meeting held on 30 July, where it processed Eskom’s fourth Multi-Year Price Determination Regulatory Clearing Account (RCA) application for 2021/2022.

Eskom applied for an RCA of R23.9 billion for the year, but the regulator approved just under R8.1 billion, adjusting R15.8 billion out of the application.

The RCA is an account in South Africa’s current electricity tariff methodology that contains a balance between the actuals for Eskom’s full financial year and what was allowed by Nersa for that year.

Under the MYPD methodology, Nersa allows Eskom to apply for future tariff hikes based on the costs of its operations as well as projected revenues from sales.

The RCA monitors and tracks uncontrollable costs and revenues assumed in Nersa-approved tariff hikes and compares them to the actual costs and revenues incurred by Eskom.

In theory, if the decision and actual costs and revenues differ, the RCA balance could either be recovered by Eskom (if overspent) or given back to the customers (if underspent).

However, given Eskom’s dire financial and operational performance, the RCA has always favoured the power utility, and the RCA has led to Eskom applying for increasingly higher tariff hikes each year.

Whatever amount is given as due to Eskom—such as the R8.1 billion that has now been confirmed—is typically recovered through future tariff hikes. The more money due to Eskom, the higher the tariff application is likely to be.

For its 2022/23 RCA application, which Eskom submitted in January 2024, the utility has taken a far more muted tone, seeking only R9 million—a paltry amount by comparison.

In its application, Eskom said this was due to a significant revenue adjustment of R22.8 billion made in “favour of the customer” for “any load shedding sales volume not being included” in the equation.

The R9 million it is seeking is less than 2% of Eskom’s allowable revenue for the year and the lowest application it has ever submitted.

The need for change

The RCA is a highly controversial aspect of the tariff methodology in South Africa.

The account has been subject to messy court battles between Eskom and Nersa in the past, where the regulator has lost the fight.

Most notably, Nersa has been taken to task for not recognising a R69 billion government bailout as Eskom’s revenue and excluding it from the methodology.

The courts found this unlawful and ordered the regulator to add this back in—starting with R23 billion in 2021/2022, and the balance in RCAs for 2022/23 and 2023/24.

This has been reflected in the latest RCA approval. Eskom’s revenue in 2021/22 actually overshot approvals by R13.3 billion—but the RCA adjustment of R22.8 billion (as ordered by the court) gave a balance of R9.5 billion in Eskom’s favour.

The balance of the court order is likely to be reflected in the coming years.

In the meantime, Nersa is trying to move on from the MYPD methodology and especially the use of the RCA, which it has accused Eskom of abusing.

Nersa approved new rules—called the Energy Price Determination Rules (EPDR)—in mid-December 2023, which sees 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.

A key change in the EPDR is the removal of the RCA entirely.

However, Nersa rescinded its approval of the new methodology last month.

The reason for walking back on the new rules is because they were not practically implementable, Nersa said, as licensees were not yet ready for them. The rules were supposed to come into effect by 2025/26.

The regulator also said it needs to align the rules with the Electricity Regulation Act and the Electricity Pricing Policy.

Until a new methodology is finalised, the MYPD will continue, with the RCA in tow.

Read: A massive win for Eskom – that will hit South Africans where it hurts