Massive price pain hitting South Africa this week

Residents in South Africa’s major metros will have their electricity and other rates bills hiked starting Monday (1 July) as budgeted increases come into effect.

Energy regulator Nersa on Friday (28 June) approved the electricity rate hikes for all 178 licensed electricity distributors across the country. However, the High Court has interdicted the approval for any municipalities that did not submit cost studies as part of the application.

This has left only 66 municipalities that can hike their electricity tariffs from this week – with the balance needing to submit a cost study to justify their applied increases.

While this is good news for residents of the 112 municipalities that have been blocked from hiking rates this month, the major metros are not counted among these.

The cities of Johannesburg, Cape Town, Ekurhuleni, Tshwane, eThekwini and Nelson Mandela Bay all submitted cost studies, and their hikes have thus been approved

These metros all applied for double-digit hikes for electricity, and Nersa approved rates in line with the Eskom hikes (circa 12.7%).

The remaining municipalities have 60 days to submit their relevant cost studies and other information to Nersa to get their hikes approved.

Devastating

According to energy analyst Mthunzi Luthuli, the coming hikes will have a devastating impact on residents and businesses alike. Even if the High Court has delayed them, they will still come—and keep coming.

Luthuli said that electricity costs in South Africa have gone up by “crazy amounts” in the last 12 years or so. By his calculations, since 2009, electricity costs have gone up by about 600%, hitting households and businesses alike.

It leads to all sorts of things, like inflation blowing up, which then impacts the price of everything else, he said. Ultimately, the latest hikes will have a devastating effect on the economy, making it far less competitive.

Luthuli also noted that the High Court not allowing tariff hikes for most municipalities is not the end of the saga.

The cost studies are a procedural element in the price hikes. As vital as they are, they do not negate the Nersa-approved price hikes given to Eskom, which will filter through to municipalities and end-customers, in the end.

Luthuli explained that municipalities use (or are supposed to use) the cost study to determine how much it costs them to deliver electricity to end-users and to add a reasonable profit margin to the figure. This is then added to their own cost of purchasing power from Eskom.

Eskom hiked its prices by 12.7% in April, which is why most municipal hikes are above that rate.

The analyst said that the real issue lies in the methodology that gives Eskom access to such high rate hikes to begin with.

South Africa does not have a fully competitive electricity market, it is a regulated market, he said. In these kinds of markets, you need to have a proper price determination methodology – and at the moment, it is not 100% what it should be.

“The different licensees do not subscribe to it. Some do, some don’t. We need to harmonise our electrcitiy pricing determination methodology. Once we do that, it will streamline the whole process so we don’t get these shocks. If it’s done properly, it will help decrease the rate at which prices go up,” Luthuli said.

Unfortunately, that process has not been resolved yet. Nersa has moved to restructure its methodology, but it is still years away from being implemented, and will likely be challenged by players like Eskom.

Other rate hikes incoming

The electricity rate hikes are one of the key tariff increases that will impact residents and businesses in the big metros and keep pressure on already strained budgets. However, other rate hikes will also kick in.

Water, sanitation, property rates and refuse collection rates will also be hiked this month – while also outstripping inflation in almost all cases.

Read: The ‘perfect storm’ that could cost South Africa billions – and threaten power supply