Big electricity price change in South Africa on the cards 

The government is set to intervene in electricity price increases to provide some relief to South Africans under financial pressure due to a rising cost of living. 

This is feedback from Electricity Minister Kgosientsho Ramokgopa, who told Standard Bank’s Climate Summit 2024 that he is confident there will be a government intervention regarding electricity prices. 

“There could be a policy intervention we could make to provide some measure of relief,” he told the audience. “We will make an announcement.”

In addition to preserving the financial viability of Eskom “we don’t want to undermine the ability of the economy to grow” and we don’t want to push the poor deeper into poverty.”

Ramokgopa’s comments come after Eskom asked regulator Nersa for permission to raise prices by 36.15% to cover the rising cost of producing electricity. 

On 23 September 2024, the National Energy Regulator of South Africa (Nersa) released Eskom’s multi-year price determination (MYPD).

Eskom is requesting total revenues of R446 billion for the 2026 financial year, R495 billion for 2027, and R537 billion for 2028.

The proposed average price hikes for Eskom’s direct customers are 36.15% for the period from 1 April 2025 to 31 March 2026.

For the subsequent years, the utility is seeking increases of 11.81% from 1 April 2026 to 31 March 2027 and 9.10% from 1 April 2027 to 31 March 2028.

“This application allows for an improvement in the financial sustainability of Eskom through the migration to cost-reflective prices,” Eskom said.

In his weekly media briefings, Ramokgopa has repeatedly cited rising electricity prices as a major problem for the government. 

“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,” he said last month. 

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.”

The rise in electricity prices is due to the premise that the tariffs Eskom charges must be cost-reflective. 

As the costs of operating the utility rise, regardless of the reason, the price increases almost in lockstep. 

This effectively means the South African consumer is paying for the historic mismanagement of Eskom as they pay the elevated tariffs charged as a result of increases costs. 

Furthermore, the increase in electricity is not necessarily due to the rising price of actually producing electricity by burning coal or other means – it is due to the inefficiency of Eskom as a company. 

A study by Reserve Bank economists Zaakirah Ismail and Christopher Wood found that financing costs are the major drivers of tariff increases. 

As Eskom was mismanaged and its capital was allocated poorly over the past decade, its financing costs rose as it issued debt.

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. At the end of its 2023 financial year, Eskom’s debt pile hit R424 billion. 

The cost of servicing this debt has skyrocketed as a result to over R40 billion per year, driving up the utility’s operating costs. Ultimately, these costs are borne by the consumer in the form of tariff increases. 

Eskom’s revenue shortfall, resulting in the need to borrow money and turn to the government for support, can be seen in the graph below.