Energy

Big electricity price changes for South Africa planned

Kgosientsho Ramokgopa

Major changes are set for electricity prices in South Africa, with Electricity Minister Kgosientsho Ramokgopa driving the implementation of a new “electricity pricing plan”. 

This plan aims to provide a solution to energy poverty in South Africa, whereby people cannot afford electricity, and tackle the rising cost of power in the country. 

At a media briefing earlier this week, Ramokgopa provided an update on the implementation of the country’s Energy Action Plan (EAP) and outlined the new focuses of his ministry. 

“Our electricity pricing plan needs to kick in, and that is the primary preoccupation of the ministry now, working with Eskom’s Distribution division and municipalities,” Ramokgopa said. 

More engagements will also be held with South Africa’s energy regulator, Nersa, regarding ways to limit the increasing cost of electricity and expand access to affordable energy. 

He said that industry players, including Eskom and municipalities, are committed to finding a solution to the rising cost of electricity in South Africa. 

South Africans will pay five times more for electricity in 2025 than in 2010, following the repeated implementation of the above-inflation increases in electricity tariffs. 

Many of these increases have also come when Eskom’s performance has declined, resulting in prolonged periods of load-shedding. These price increases are largely due to the utility’s dire financial situation.

In a recent study, Reserve Bank economists Zaakirah Ismail and Christopher Wood revealed the major drivers of tariff increases. 

The study found that electricity tariff increases have largely occurred due to Eskom needing additional cash to pay off its surging finance costs, which have more than doubled in the past decade. 

These rapidly increasing costs result from mismanagement and poor capital allocation. Eskom spent R680 billion between 2007 and 2021, with poor results and a decline in performance. 

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. 

In particular, cost overruns at the two new power stations saw Eskom’s debt burden soar. The latest available data shows that by the end of the 2022 financial year, the utility’s finance costs were R44 billion, which was far above inflation. 

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

Ismail and Wood thus said that Eskom’s growing debt-servicing burden is the primary driver of electricity prices increasing at a greater rate of inflation. 

Eskom’s tariff increases have significantly outstripped inflation since load-shedding began in 2008, with the tariff increasing by 653% over the last 15 years while inflation increased by only 129% over the same period.

This is shown in the graph below. 

Source: Power Optimal

During the media briefing, Ramokgopa acknowledged that some interventions from municipalities have not been well-received. 

He particularly mentioned the practice of imposing surcharges as a method to increase municipal revenue and address their financial challenges. 

“There is an uproar across the country. We have seen this R200 surcharge being implemented and the effect it has had,” he said. 

“Many municipalities have the same cost structure. It is important that we resolve this problem by working with municipalities.” 

Energy analyst and managing director of EE Business Intelligence, Chris Yelland, warned earlier this month that high prepaid electricity price increases increase the likelihood of social unrest. 

Yelland mentioned the increases by the City of Johannesburg in particular, which have risen by six to twelve times the headline inflation rate. 

“City Power’s prepaid electricity prices are 76% to 49% higher than those of Eskom, in the range of consumption considered,” Yelland said.

City Power is 100% owned by the City of Johannesburg and is responsible for most of the electricity distribution and retail sales in Johannesburg.

The prepaid electricity price increases of 61% to 33% are 47 to 20 percentage points higher than those of Eskom in the range of consumption considered.

“City Power’s prepaid electricity prices and price increases hit low consumption, and therefore poorer prepaid electricity customers, much harder than those with higher consumption.”

He said this disparity and big increases for poor households are dangerous and may increase the risk of social unrest.

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