South African electricity prices ‘spiralling out of control’

South Africa’s electricity prices are at risk of spiralling out of control as a decade of above-inflation increases have put households under immense financial pressure. 

Electricity minister Kgosientsho Ramokgopa once again flagged the issue of significant increases in electricity tariffs during his weekly update on the Energy Action Plan (EAP).

In the past few weekly updates, Ramokgopa has repeatedly called for changes to South Africa’s electricity pricing policy to ease this financial pressure on households. 

“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. 

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

In the latest briefing, Ramokgopa warned that these price increases are at risk of spiralling out of control and that the government’s policy of providing free basic electricity is not working. 

“The provision of free basic electricity is especially important in the midst of electricity prices that are almost spiralling out of control.”

“Since 2008 to now, the total increase in electricity tariffs has been around 600%. That is untenable. We need to find a way to protect people from these increases.”

He explained that the provision of free basic electricity was always intended as a measure to protect poorer households from high energy costs. 

However, now it is also becoming increasingly important to reduce the impact of higher costs on richer consumers and businesses. 

“It has become a structural problem that needs our attention. You do not resolve this problem by just offering free basic services. You resolve this by growing the economy. It is a crisis of economic production,” Ramokgopa told Newzroom Afrika. 

Without a growing economy, state finances will come under increasing pressure and limit its ability to protect consumers from higher prices. 

This can already be seen in municipalities, where grants from the National Treasury meant to benefit poorer households are used to fund other projects. 

“It is not a funding problem. It is an execution problem at the level of municipalities. There is a need for us to find a more reliable way to ensure households get this benefit.” 

“Municipalities get these grants, but the money does not flow through to the right people and is redirected to other areas in the municipal budget.” 

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. 

Ramokgopa appeared to agree with this assessment, saying that one of the main drivers behind an increasing cost in electricity production has been ‘leakages’ in the system.

“There is leakage. There is malfeasance. Someone must pay for that. Over the period, it was the end consumer that was paying for that,” he said.