South Africans give Eskom’s 66% tariff hike the middle finger
The Organisation Undoing Tax Abuse (OUTA) has joined the chorus of opposition to Eskom’s application to hike electricity prices by 66% over the next three years, saying it is unreasonable for the utility to dump the cost of its own inefficiencies on customers.
Energy regulator Nersa has been holding public hearings on Eskom’s MYPD6 tariff application, with feedback from customers and stakeholders wholly rejecting the amount being asked for.
Hearings in Gauteng, the Western Cape, Limpopo, the Free State and KZN have delivered messages of rejection, with many calling the hikes unaffordable, budget-breaking and even an attack on the poor.
The hearings have also drawn protests from political parties and other stakeholders.
In a wide-sweeping presentation commenting on the application, OUTA was the latest to call for Nersa to reject the proposed hikes.
This is on the basis that Eskom is apparently pushing the massive price hikes onto customers while not doing enough to tidy up its own operations and finding cost savings by being more efficient.
Eskom is proposing a revenue and price increase of 66% over the next three years, which equates to:
- 36.15% on April 1, 2025;
- 11.91% on April 1, 2026;
- 9.1% on April 1, 2027.
The National Energy Regulator of South Africa (Nersa) said that the main drivers of the Eskom’s request for price increases were the cost of primary energy, operating costs, the cost of independent power producers (IPPs), international purchases and depreciation.
In a presentation to Nersa, energy expert and OUTA advisor Chris Yellend noted that this comes after 15 years of above-inflation price increases, and Eskom’s focus remains on achieving cost reflectivity through revenue and price hikes – which OUTA argued is unsustainable.
OUTA expects Eskom’s proposed price increases to hurt various stakeholders.
They said that households, especially those with lower incomes, will struggle with higher costs, while SMMEs and the broader business community may face financial strain that hinders growth.
Municipalities and electricity distributors could find it challenging to maintain service delivery. Additionally, the agricultural, manufacturing, and energy-intensive sectors are at risk of reduced competitiveness and potential job losses.
The civil society organisation argued that Eskom’s application inadequately addresses cost inefficiencies, provides an outdated economic impact study, and fails to consider the severe societal consequences of such a large price hike.
OUTA’s arguments
OUTA argued that Eskom’s application demonstrates a lack of self-discipline in reducing its cost structure and improving performance and efficiency.
It said that Eskom is ultimately prioritising price increases as a solution to its financial challenges rather than implementing cost-saving measures.
In Yellend’s presentation, as well as OUTA CEO’s letter to Nersa, the civil society organisation pointed to the following issues:
- Insufficient cost reduction efforts:
OUTA argued that Eskom’s MYPD6 application lacks adequate detail and commitment to specific cost reductions and performance improvements across major cost categories.
This includes primary energy costs, staffing costs, operation and maintenance costs, cost of losses, finance costs, return of assets, and depreciation.
- Overdependence on Coal:
OUTA criticised Eskom’s continued heavy reliance on coal, despite the rising costs and environmental concerns associated with it and called for a more robust plan to transition to cleaner and more cost-effective energy sources.
- Inefficient use of diesel:
While acknowledging Eskom’s efforts to reduce diesel costs, OUTA pointed out that the use of Open-Cycle Gas Turbines (OCGTs) remains inefficient.
The group advocates for strategies to lower OCGT load factors, improve diesel procurement, and explore alternative solutions like gas conversion and energy storage systems.
- High staffing costs:
Concerns have been raised about Eskom’s staffing costs, and an independent study to review staff remuneration, size, and hiring policies has been recommended. This could potentially lead to downsizing and rightsizing the workforce.
- Questionable O&M practices:
OUTA questioned the quality and effectiveness of Eskom’s operation and maintenance (O&M) practices and their associated costs.
It suggests exploring outsourcing, partnering with original equipment manufacturers (OEMs), and closing down inefficient power plants.
- Inadequate loss management:
OUTA criticised Eskom’s handling of losses related to electricity theft, non-payment, vandalism, and procurement irregularities.
It recommends a more comprehensive approach to addressing these issues and setting concrete targets for reduction.
- High debt burden:
Eskom’s high debt, estimated at around R450 billion, is a major contributor to its financial woes.
OUTA urged stricter adherence to National Treasury conditions for government bailouts and emphasised exploring options for debt reduction.
This includes selling non-core assets, collecting outstanding debt from public entities, considering debt-equity swaps and listing certain entities.
- Asset valuation:
OUTA challenged Eskom’s methodology for valuing its assets, arguing that it leads to an inflated regulatory asset base.
This, in turn, contributes to higher allowed revenues and ultimately impacts electricity prices.
OUTA highlighted concerns regarding the overvaluation of assets like Medupi and Kusile and the depreciation costs based on inflated capital costs.
OUTA recommendations
OUTA strongly recommended that Nersa reject Eskom’s application for the 66% price increase.
Instead, the group advocated for a shift in focus from price hikes to improving Eskom’s performance, efficiency, and cost reduction efforts to achieve genuine cost reflectivity.
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