R50 billion kick in the teeth for South Africa
South Africa’s energy regulator will allow Eskom to raise electricity prices by more than previously permitted after the parties reached a R54 billion settlement, potentially fueling inflation and further alienating customers as demand wanes.
This victory for the state-owned electricity company, which challenged a January decision by the National Energy Regulator of South Africa, will see prices rise 8.76% in the year starting April 1 compared with an original hike of 5.36%, Nersa said in a statement late Wednesday.
This far exceeds the South African Reserve Bank’s forecast for inflation to average 3.3% this year and next.
The central bank will have less room to lower interest rates as it tries to bring consumer inflation down to its 3% goal, and it may also stifle economic growth as it raises costs for companies and consumers, said Joshua Mahony, chief market analyst at Scope Markets Ltd.
“You’re going to have to see an uplift in terms of the outlook going forward for forecasts for inflation,” Mahony said.
“It’s damaging for the idea of excess money for businesses; so how much lower the margins of South African businesses will be, the spare cash that households will have to be able to spend will be lower.”
The central bank cut its benchmark rate by 25 basis points last month to 7%. Money markets predict it will remain on hold until March, when 25 basis points of easing are priced in.
Government bonds edged higher on Thursday, with the yield on 10-year securities dipping two basis points to 9.57%. The rand was steady.
Eskom wasn’t immediately able to respond to a request for comment.
The utility has warded off record power cuts that hobbled South Africa’s economy in the last couple years by raising the reliability of its backbone of coal-fired units and stabilizing the grid.
At the same time, the government is moving forward with a plan to split Eskom into transmission, generation and distribution units and open the system to private generators that may offer cheaper prices for power.
South Africans have also increased their use of solar panels, especially during the nation’s streak of sustained outages, denting demand for power from the utility.
The amount of electricity sold to customers dropped 11% through the four years from 2020.
The regulator’s tariff award in January was based on incorrect data and left it with a R107 billion revenue shortfall, Eskom argued in court papers, according to Nersa.
The settlement will also see prices rise 8.83% in the year starting April 1, 2027, instead of the 6.19% announced previously, according to Nersa.
Eskom should be reimbursing customers, not the other way around
According to energy expert Chris Yelland, the R54 billion error by Nersa is “absolutely astounding”, especially in the context of how much Eskom has cost the country.
He said that “massive undeclared imprudently and inefficiently incurred costs” at Eskom have passed through to customers in higher tariffs in the past ten years.
Considering this, Nersa should be clawing back these costs on behalf of customers of electricity in the form of reduced electricity tariffs going forward, he said.
“Eskom’s revenue in the 2024/25 financial year is expected to be about R300 billion, so the R54 billion error means Eskom is being allowed an extra approximately 18% price increase over and above the MYPD6 price increases already granted.”
The Democratic Alliance also took exeption to the situation, saying that it was incorrigable for South African citizens and businesses to keep paying for Eskom’s and Nersa’s inefficiencies.
“South Africans, struggling under the weight of high electricity costs and a fragile economy, will now face additional tariff hikes on top of the already steep increases previously approved,” the party said.
“Businesses, municipalities, and households will once again be forced to pay for the incompetence of the regulator and the inefficiency of Eskom.”
South Africans will keep paying even more and even beyond a price hike.
Higher prices that are more cost-reflective could spur demand for illegal electricity connections and vouchers, according to a January presentation by South Africa’s auditor-general.
The utility needs to cut expenses and improve collections of debt owed by municipalities, it said.
Having stabilized the grid, Eskom is making moves to compete with established renewable-energy companies.
That’s included a plan to build green-power capacity of its own and calling for proposals from large users to buy solar-generated electricity.
Business-lobby groups earlier this month called for Eskom to withdraw its legal challenge against trading licenses granted by the national regulator.
Electricity Minister Kgosientsho Ramokgopa echoed this, asking the utility to withdraw or suspend the action. Eskom maintains the action is, in part, necessary to protect low-income customers.
“If a group of contributing customers is removed from the cross-subsidy base, it will exert pressure on the remaining customers to shoulder the burden of the regulated obligations on Eskom and municipalities,” it said in a separate response to questions Wednesday.
Reporting with Bloomberg
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