Good news about South Africa’s electricity prices

Electricity produced by independent power producers in South Africa could result in lower electricity price increases in the future. However, a marked impact will take a long time to see.

Eskom recently applied to the National Energy Regulator of South Africa (NERSA) for a 36% tariff increase.

The utility said the increase is needed to prevent the indebted company from returning to the authorities for further financial help.

Eskom told NERSA that it sought the hike because prior increases were “inadequate” for its financial needs. 

“Eskom has made its revenue application based on the costs it will incur to efficiently provide electricity to the customer,” CFO Calib Cassim said in a statement.

“It is a critical component in ensuring Eskom continues to provide reliable electricity services while improving its financial sustainability.”

The hike would be for the 12 months to March 2026 and would be followed by increases of 11.8% and 9.1% for the following two years.

This has led to widespread outrage, with even Energy and Electricity Minister Kgosientsho Ramokgopa saying the price hike would exacerbate energy inequality and render businesses uncompetitive.

The price hike would benefit bondholders by boosting Eskom’s cash flow. However, the impact on consumers and businesses could be serious, adding to inflation pressures and hampering growth.

Eskom has argued that its proposed price increase is cost-reflective. It has also said this significant hike is needed because of the government’s inability to rein in delinquent municipalities.

Municipalities, including those governing some of the country’s biggest cities, owe the utility around R85 billion, and that could rise to R200 billion in the 2028 financial year, Eskom CFO Calib Cassim said.

Roy Havemann from the Bureau for Economic Research’s (BER) Impumelelo Economic Growth Lab said 11.2 percentage points of the requested 36% tariff increase comes from increased primary energy costs, primarily coal-related costs. 

However, in comparison, the increased use of independent power producers reduces the requested tariff by 2.3 percentage points.

This can be seen in the graph below, courtesy of the BER.

Independent power producers are a positive force in bringing electricity tariffs down, and increased power from independent producers could see South Africa’s electricity prices reach far lower levels.

However, significant regulatory red tape still prevents interested parties from producing and selling electricity in South Africa.

Over the past year, the government has made significant strides in addressing this problem, with one of the most notable being the creation of the National Transmission Company of South Africa (NTCSA).

The NTCSA is Eskom’s biggest step yet toward its unbundling, a process that has been ongoing for decades.

The entity held its official launch on 7 October 2024, but it officially commenced trading in July this year.

“The NTCSA will own and operate the country’s national transmission system, the world-class System Operator, the grid strengthening function, energy market services and the International Trader,” Eskom said when the company commenced trading.

The NTCSA will act as a transmission system operator (TSO) and buyer and assume further roles empowered by the Electricity Regulation Amendment (ERA) Act.

“The NTCSA will trade with Eskom Generation and Independent Power Producers (IPPs) using the current industry framework,” said Eskom.

It will develop a platform for power generators, consumers, traders, and retailers to trade with one another, aligning South Africa’s electricity market with leading countries around the globe.

When the National Assembly passed the ERA Bill, which empowers the NTCSA, earlier this year, energy analyst Chris Yelland said it is “an extremely important step on the way to a restructured electricity supply industry”.

“This really sets the framework for separating the transmission business of Eskom out of the rest of Eskom, creating a separate and nominally independent company which is a subsidiary of Eskom Holdings,” he said.

The state-owned TSO established under the Bill will –

• Operate the national transmission grid
• Manage supply and demand
• Create an open-market platform that will allow for the competitive trading of electricity

Yelland explained that the importance of this legislation lies in the fact that it will create a level playing field.

This will result in all generators – not only Eskom – having equal access to the grid. 

This includes independent power producers, municipal electricity generators, and “prosumers” – customers of electricity who also generate electricity.

He said this removes some of the stumbling blocks to investment in South Africa’s energy sector because, in the past, preference has been given to Eskom generation. 

While there are still concerns about the NTCSA’s true independence from Eskom, the groundwork has been laid for independent power producers in South Africa to become far larger players in the country’s energy market.

However, the catch is that it will still take a few years for this to have a noticeable positive influence on the country’s electricity prices.

In a statement announcing its official launch, the NTCSA said it must accelerate the construction of new transmission development infrastructure to execute its Transmission Development Plan at the required scale and pace.

“It is anticipated that in the next five years, there will be 30GW of utility-scale renewables connected to the grid by the end of 2029,” it said.

“A step change will be required to ensure that this new generation can connect to the electricity transmission grid and to get it to the point of demand.”

The NTCSA hopes to have brought 11,000 MW of new capacity online by the 2027 financial year.