Big electricity price changes coming

Electricity prices are set for significant changes in the future as the Electricity Minister promises to implement a new electricity pricing plan. 

However, the best way to limit increases in the price of electricity is to improve transparency surrounding the methodology for determining price changes and the cross-subsidisation of costs. 

This is feedback from energy analyst and managing director of EE Business Intelligence Chris Yelland, who said electricity price increases hit the poorest the hardest. 

Yelland’s comments come in response to Electricity Minister Kgosientsho Ramokgopa’s announcement of his intention to create a new electricity pricing plan in South Africa. 

Ramokgopa said this plan aims to tackle the rising cost of power in the country as electricity prices have substantially outstripped inflation. 

These increases have been imposed while Eskom’s performance has significantly declined, resulting in South Africans paying far more for a less stable electricity supply. 

“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. 

The Electricity Ministry will also engage with South Africa’s energy regulator, Nersa, to propose ways to limit future electricity price increases and expand access to affordable energy. 

However, the Minister’s plans to reduce the cost of electricity are unclear as yet, and no concrete proposals have been outlined. 

Yelland said the first step is to be more transparent about the methodology used to determine the price of electricity. 

This will aid efforts to create a proper methodology to determine price increases and expose the underlying drivers of the rising energy price in South Africa. 

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 because Eskom needs additional cash to pay off its surging finance costs, which have more than doubled in the past decade. 

While these rapidly increasing costs result from mismanagement and poor capital allocation, it is difficult to pinpoint precise sources and outline ways to mitigate them. 

The second way that increases in electricity prices can be limited is for greater transparency regarding the cross-subsidisation of electricity in South Africa. 

Cross-subsidisation refers to ways in which different South Africans bear the price of electricity to ensure equitable access to energy. 

For example, big customers subsidise the use of electricity by smaller customers, and richer South Africans subsidise poorer citizens. 

There is a lack of clarity about how this is done, resulting in rises in electricity prices having a larger impact on poorer households despite government policy to ensure otherwise. 

Yelland also noted the rise in the number of municipalities that implement a fixed monthly fee for electricity use, often to compensate for revenue shortfalls. 

These methods hit the poorest the hardest, with some households seeing a 60% increase in their electricity bill due to the City of Johannesburg’s R230 fixed fee. 

“These are essentially political decisions, so public participation in these policy proposals is necessary. Although this is difficult, it will bear fruit in the long run.” 

The key is to better understand what is driving up the cost of producing electricity in South Africa and how that is being passed on to consumers. 

Yelland said the good news is that the unbundling of Eskom will reveal just where the increased costs lie, whether that be in the generation of electricity or its transmission and distribution. 

Furthermore, the cost of electricity should come down following the utility’s unbundling, as there will be competition for Eskom’s generation division for the first time. 

In the long run, this will enable customers to choose their source of electricity and force competing electricity generators to reduce the cost of producing energy.