Eskom to lose big from Nersa tariff changes

The National Energy Regulator of South Africa (Nersa) has published new electricity tariff rules for the country, which could significantly impact Eskom’s revenue collection and financial health. 

The regulator previously published the electricity price determination methodology (EPDM) for consultation in June 2022, with the new regulations set to replace the current multi-year price determination tariff (MYPD). 

Under the MYPD, Eskom has been able to ‘claw back’ revenue through a clawback clause allowing the utility to recover lost revenues from future tariff hikes. 

These clawbacks and recoveries have led to Eskom applying for greater tariff hikes each year – and with each dismissal by Nersa (to the benefit of energy users), Eskom’s financial woes and debt burden grew. 

This reached a peak in the latest round of applications, where, amid record levels of load-shedding, Nersa was forced to begrudgingly allow the embattled utility to hike tariffs by over 18% in 2023/24.

The EPDM’s new pricing principles, as MyBroadband reported, aim to switch tariff determinations from a revenue-based approach to a cost-to-serve approach. 

This will change the focus of tariff determinations away from Eskom’s revenue to the cost of serving electricity that can apply to a diversified network of electricity suppliers coming online in the next few years.

A key part of the changes in the draft EPDM rules is doing away with the clawback clause previously included under the MYPD.

Nersa argued that the regulatory clearance account (RCA) had been abused to recover revenue from lost sales.

Regulators in electricity regulation typically allow price-regulated companies to recover their costs plus a reasonable return. 

This approach is known as the revenue requirement standard and is widely considered the standard in economic literature.

Eskom vs Nersa

South African electricity consumers have been hit hard by electricity tariff hikes that have far outpaced inflation since the Multi-Year Price Determination (MYPD) came into effect.

Between 2006 and 2023, Eskom’s average electricity tariff increased from 17.79 cents per kWh to over R1.51 – a 749% increase. Over the same period, inflation rose by just about 158%.

Nersa has tried to protect consumers from the worst of Eskom’s price increases, but the law has been on Eskom’s side in several court cases. Nersa has been forced to grant Eskom the requested tariff increases, as set out in the MYPD.

Eskom has seen electricity sales drop and diesel expenditure surge as it struggles to keep South Africa’s lights on amid severe capacity constraints. This has led to Eskom requesting even higher tariff increases.

BusinessTech reported that, based on stakeholder consultations over the proposals, it is clear that Eskom is not a fan of the planned structure.

Eskom believes that the current MYPD methodology is sound but has been applied incorrectly. 

Nersa disagrees, saying that the existing methodology is flawed and that it guarantees Eskom a revenue that is not sustainable.

The MYPD is a cost-of-service methodology that determines Eskom’s allowable revenue based on the utility’s projected sales and costs. 

This methodology has been in place since 2006 and has allowed Eskom to recover its costs and earn a reasonable return on its investment.

However, Nersa argues that the MYPD methodology has not effectively protected consumers from high electricity prices. 

This is because the methodology guarantees Eskom revenue that is not tied to the cost of providing electricity, leading to the utility requesting tariff increases that are far higher than necessary, putting a strain on consumers’ wallets.

Nersa is proposing a new methodology that would set prices based on measurables and investment rather than promising Eskom an allowable revenue. 

This would be more in line with international best practices and would help to protect consumers from high electricity prices.

Under the new methodology, Eskom would be allowed to recover its costs and earn a reasonable return on its investment, but it would not be guaranteed a specific revenue. 

This would force Eskom to be more efficient and manage its costs more effectively. It would also make it more difficult for Eskom to request excessive tariff increases.

The new methodology is still in the proposal stage, and it is unclear when it will be implemented.