South Africa is privatising electricity and kissing Eskom goodbye

Efficient Group chief economist Dawie Roodt said South Africa is privatising the whole electricity network and kissing Eskom goodbye.

Roodt commented on Afriforum’s urgent legal application that could stop municipalities from increasing electricity tariffs next month.

It asked the Pretoria High Court to block the National Energy Regulator of South Africa (Nersa) from considering municipalities’ tariff adjustment applications without cost studies.

Afriforum manager of local government affairs, Morné Mostert, said Nersa had disregarded a previous court order related to this matter.

Mostert said applications of municipalities that do not have cost studies are simply based on an estimate of the cost to provide the service.

“Applications for tariff increases must be made on accurately calculated figures to ensure that fair tariff increases are passed on to consumers,” Moster said.

Afriforum local government affairs adviser Deidré Steffens said that the organisation’s application was made in the interest of consumers.

“Fairness and transparency in the approval of municipal electricity rates is essential,” she said.

“It appears as if Nersa’s current policy and process is not being carried out in accordance with the law and is therefore being applied to the detriment of consumers.”

Nersa has previously approved a 12.7% increase in the price of wholesale electricity that Eskom sells to municipalities.

Municipalities now want to increase rates for residents to compensate for the higher wholesale prices. However, many have not done a proper cost assessment, as required by law.

Roodt told Radio 702 that background is needed to understand the electricity price debacle playing itself out in South Africa.

He said Eskom has outstanding debt of hundreds of billions of rands and is expected to make a loss of over R20 billion this year.

Eskom’s plan to get out of financial difficulties is to increase electricity prices. These price, like the latest 12.7%, increases are well above inflation.

Most municipalities are also in financial trouble with rising debt. “More than 75% of municipalities are financially unsustainable,” he said.

These municipalities owe Eskom over R75 billion. It increases by between R1 billion and R2 billion monthly. “That is an unsustainable situation,” he said.

In response, municipalities are increasing prices for their customers, as electricity revenue is an important revenue stream.

They will get into even deeper financial trouble if they cannot get the additional electricity revenue.

The other option is for municipalities to improve their efficiency. However, this is highly unlikely considering the prevailing incompetence at the local government level.

The result is that the private sector is starting to take over electricity provisioning through rooftop solar and similar initiatives.

“Households and businesses are moving off the grid or are buying electricity from other providers,” Roodt said.

“We are, in a way, privatising the whole electricity network in South Africa.”

Independent energy expert Mohammed Madhi previously said the latest price increases are needed to keep Eskom afloat.

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 12.7% 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 eighteen months than Eskom’s baseload pricing.

“If Eskom continues with its price increases, nobody will need its baseload electricity eighteen 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.

Even more concerning for Eskom is that its 100 year monopoly will come to an end following the signing of the Electricity Regulation Amendment (ERA) Bill.

In May, the National Assembly passed the Bill that could end Eskom’s monopoly over power generation and transmission as the industry is opened up to private competitors.

Energy expert Chris Yelland called this “an extremely important step on the way to a restructured electricity supply industry.”

This sets the framework for separating Eskom’s transmission business from the rest of the power utility.

The Bill aims to move away from a predominantly single-buyer electricity market dominated by Eskom and towards a more competitive market.

The new market will have multiple electricity producers which can compete within an open market platform.

“The intention is to ease the ability of alternative suppliers to generate, transmit, and distribute electricity,” they explained.

 “Ultimately, the Bill’s intention is to create an electricity industry with a multi-market structure that will enable competition, a secured energy supply and a modernised energy sector.”

“This new energy market will create a fair and transparent platform for the purchase of electricity.”