Big electricity price changes coming for South Africa

The Electricity Ministry is planning significant changes to South Africa’s electricity pricing policy to ensure that tariff changes become more predictable and affordable. 

South Africa’s electricity prices have risen by 190% in the past decade, significantly outpacing inflation and placing immense financial pressure on households and companies. 

The rising prices have effectively undermined any incentive for heavy industry to operate in South Africa, with the sector being created by the country’s historically cheap and abundant electricity supply. 

Electricity Minister Kgosientsho Ramokgopa has directed his ministry to find ways to alleviate the pressure from rising electricity prices and has brought Eskom to the table. 

Speaking at the utility’s latest State of the System media briefing, where it outlined its Summer Outlook, Ramokgopa said electricity prices are one of the three headwinds facing Eskom and South Africa. 

Ramokgopa was full of praise for the utility’s efforts in substantially reducing load-shedding over the past two years, but urged it to now focus on other areas of concern. 

One of these areas is the price of electricity, with the minister saying it has now become unaffordable for many in South Africa to afford the basic service. 

“I have repeatedly made the point that electricity is unaffordable. It has now reached the point where the situation is untenable,” Ramokgopa said. 

“Households are finding it difficult to keep up with the increases and the rapid erosion of their disposable income. Companies are also increasingly becoming less competitive. So, again, it is an existential problem.” 

Ramokgopa has long promised a review of South Africa’s electricity pricing policy, with it first being announced over a year ago following the government’s plans to reduce the cost of living. 

He confirmed that the ministry is looking to revise South Africa’s electricity pricing policy, with conversations proving immensely complex.

“Our intention is that, by the first half of next year, we will have concluded a review of the policy, with it requiring robust and thorough discussion,” Ramokgopa said. 

“It is not a review that is isolated to smoke-filled boardrooms and the enlightened. It must go to every corner of the country.” 

Ramokgopa said only one or two things need to be finished up before the plan is presented to the Cabinet and implemented. 

The answer is competition

The only long-term sustainable solution to South Africa’s electricity crisis is increased private-sector competition to Eskom. 

Changes to the pricing structure are likely to make increases more predictable, bring them in line with inflation, and potentially result in small wins for consumers. 

However, the only way prices can be driven downwards is through investment in new generation capacity with cheaper technologies. 

This is feedback from the Organisation for Economic Co-operation and Development (OECD), which outlined how increased private competition can bring down electricity prices in South Africa. 

It explained that South Africa’s electricity sector is one of the least competitive in the world, with the country being reliant on a single provider, Eskom, for most of its electricity. 

A more competitive sector will bring in new players, reduce the reliance on Eskom, and aid investment in new and cheaper technologies. 

Eskom’s current financial health limits its investment in new capacity and has contributed to its soaring cost of producing electricity, which is passed on to consumers.

The OECD said a fundamental restructuring of the entire electricity supply chain is needed to ensure long-term electricity security. 

This includes establishing a competitive market, opening the distribution segment to include private operators and strengthening municipal financial and managerial capacity.

Eskom owns or operates most of the sector’s transmission and distribution segments and generates around 91% of the country’s electricity. 

This current structure limits the entry of new players in all segments, providing preferential access for Eskom’s ageing fleet to the grid and limiting competition and energy security.

Planned reforms aim to create a decentralised wholesale market in five years and will contribute to promoting efficiency. 

Nersa has developed a new framework, the Electricity Price Determination Rules (EPDR), but its implementation has been delayed. 

While not a complete solution, the EPDR introduces improvements to Nersa’s pricing methodology, including benchmarking costs across the sector and increasing transparency by unbundling generation, transmission, and distribution costs. 

Importantly, it also aims to remove the clawback clause, which had allowed Eskom to raise tariffs to recover past losses. 

The OECD said advancing these reforms is essential to reach fair, cost-based electricity tariffs while ensuring support for low-income households.