Why electricity became so expensive in South Africa

Eskom’s skyrocketing finance costs, which have more than doubled over the past decade, have been a primary driver of the increase in electricity tariffs in South Africa, while the utility’s other costs have increased slightly above inflation.

This was revealed in a study by South African Reserve Bank economists Zaakirah Ismail and Christopher Wood. They analysed the effect of administered price increases on inflation in South Africa. 

Eskom has increased the price of electricity by 446% since load-shedding began in 2008, driving up inflation and significantly increasing the cost of doing business in the country. 

South Africa’s energy system faces a dual crisis of rising costs and declining performance.

Household electrical costs have risen by 60% since 2017, and the recently announced price increases of 18.7% for the 2023/24 financial year will maintain the pressure on consumers.

Between 2007 and 2017, the average Eskom tariff increased by 333%. By 2022, it had increased 450% since 2007, consistently exceeding headline inflation by a substantial margin.

The current electricity pricing regime ties prices to Eskom’s costs, resulting in decades of mismanagement and crisis spending being passed on to consumers. 

Eskom’s ballooning costs have been driven primarily by increased financing costs, with the utility’s expenditure growing significantly since 2007 without a corresponding performance improvement and added revenue. 

Between 2007 and 2021, Eskom spent R680 billion with generally poor results, said Ismail and Wood. 

Major projects during this time included the return of three end-of-life power stations to service, the development of two additional peaking plants and the construction of two very large new power stations, Medupi and Kusile. 

The latter two plants were particularly riddled with cost overruns and breakdowns, requiring an additional R33 billion to complete.

Much of this new generation capacity was rolled out quickly, with major governance challenges and a dearth of technical knowledge in a utility that had not built a new power station in 20 years. 

This resulted in very high costs and a substantial debt burden for Eskom. 

By the end of 2022, Eskom’s annual gross finance costs were R44 billion, exceeding employee costs (R33 billion) and equalling about half the value of the utility’s own generation costs (R84 billion).

Eskom’s capital expenditure and debt burden significantly impact the costs underlying the electricity tariff, and the methodology has limited scope to stop these costs from affecting consumers.

A deterioration in its credit ratings compounds Eskom’s problem. Worsening credit ratings since 2018 have affected Eskom’s ability to borrow and pay mounting debt service costs. 

Despite promised support from the National Treasury, in the absence of meaningful cost-saving measures, Eskom will have to continue increasing prices to cover its debt costs. 

Eskom has also struggled to generate sufficient revenue, with its sales declining to a point where it cannot cover its costs and reduce its reliance on debt to fund basic operations. 

Since 2006, Eskom’s sales have declined by an estimated 0.5% per year due to load-shedding and lacklustre economic growth since 2008. 

There has also been a steady decline in demand for energy, which peaked in 2007, due to a shift towards energy-efficient technologies and alternative energy sources in response to load-shedding and rising costs. 

Declining sales volumes present a sustainability risk for Eskom and compound the reliance on price increases as a source of revenue growth.

The National Treasury has urged Eskom to find effective ways to increase actual electricity sales. However, due to stagnant economic growth and the rise of alternative energy sources, Eskom is unlikely to be able to restore its sales volumes.