Eskom as we know it will disappear

Award-winning economist Dawie Roodt said Eskom is facing “back-door” privatisation.

Roodt told The Money Show that the latest Eskom price increases are misguided because market forces do not drive them.

Eskom is basing its substantial price increases on the rising cost of producing electricity. However, the notion of cost-reflective tariffs is an economic fallacy.

Although cost-reflective tariffs sound like a logical strategy with a monopoly like Eskom, the premise of this model is false – there is no absolute cost of producing goods and services.

Eskom used to produce the most affordable electricity in the world. It was well-run and had access to affordable coal to drive down costs.

Fast-forward two decades, and the power utility has a bloated workforce, a widespread waste of resources, corruption, and mismanagement.

These factors are increasing the cost of producing electricity. Allowing Eskom to increase prices to cover incompetence, corruption, theft, and mismanagement is misguided.

No amount of price increases will solve these problems, which is why it continues to record losses despite huge price increases in recent years.

Apart from damaging the economy, Eskom is also losing its best customers because of its big electricity price increases.

Roodt warned that Eskom’s incessant above-inflation price hikes and poor performance will chase wealthy consumers away, leaving the utility with only poor customers.

Eskom’s high electricity prices, coupled with its unreliable supply, make it attractive and necessary for those who can afford it to provide their own power.

An increasing number of South African businesses and households are ditching Eskom in favour of alternative energy generation options like solar panels.

“The clients who remain behind are mostly poor people, so Eskom is getting deeper and deeper into financial trouble,” Roodt said.

Eskom pricing itself out of the market

Independent energy expert Mohamed Madhi told eNCA that the latest price increases are needed to keep Eskom afloat.

However, he explained that the price increase only covers a portion of what Eskom needs because of its rising cost base.

The rising cost base includes increased maintenance costs, rising debt servicing costs, and an eroding market share because of solar PV installations.

In turn, Eskom is forced to make the same or more revenue from fewer clients. The only way is to increase prices.

“The 12.74% electricity price increase is not the end of the story. We will see similar increases for at least five to ten years,” he said.

Madhi argues that Eskom is shooting itself in the foot with the above-inflation electricity price increases.

Renewable electricity prices, like solar PV, decrease year-on-year while Eskom prices increase.

“We have already reached the point where renewable electricity prices are cheaper than Eskom’s rates,” he said.

He added that baseload power through renewable energy will be cheaper within the next 18 months than Eskom’s baseload pricing.

“If Eskom continues with its price increases, nobody will need its baseload electricity 18 months from now.”

Companies and households will be able to install renewable energy with battery backup, which produces cheaper electricity than Eskom.

This means that Eskom is pricing itself out of the market, making it more attractive for South Africans to produce their own electricity.

Eskom will disappear

Another way to see it is that the private sector is slowly taking over electricity generation from Eskom.

Roodt said the price of electricity should not be regulated. Instead, it should be left to the market.

“Neither Nersa nor Eskom truly know what the right electricity price increase should be,” he said.

The high price increases are causing Eskom to lose customers who are using more reliable and affordable alternatives, like solar PV and battery backup.

Although it is not official policy to privatise Eskom, the reality is that state-owned enterprises, including Eskom, are run into the ground.

The private sector is forced to provide these services as the state can no longer provide them reliably and affordably.

Rood said in the future, South Africa will have many electricity generation suppliers and private sector players. “This will give the country more reliable and cheaper electricity,” he said.

“We are slowly, through a back door kind of way, privatising Eskom. That is what is going to happen in the end.”

“Eskom will go the same way as South African Airways – it will disappear.”