South Africa’s electricity prices increased 1,000% in twenty years

Electricity prices have risen far faster than inflation since 2000, with the cost of energy rising just over ten times as Eskom’s performance deteriorates and its finances come under pressure. 

This is also partly due to decades of below-cost pricing to keep electricity cheap, which weakened the utility’s finances and led to repeated government bailouts. 

As a result, the current method for calculating electricity tariffs has come under scrutiny, with Eskom demanding cost-reflective tariffs, while the National Energy Regulator of South Africa (Nersa) has affordability concerns. 

The Organisation for Economic Cooperation and Development (OECD) has suggested that lowering the cost of producing electricity through new technologies and increasing competition in the sector is a potential long-term solution. 

The OECD recently outlined South Africa’s electricity pricing challenges in an economic survey of the country. 

It said the debate over electricity pricing has intensified over the past decade, driven by repeated increases that have raised overall prices tenfold since 2000. 

In the late 1990s and early 2000s, South Africa greatly benefited from cheap electricity, which enabled heavy industry to invest in the country and compete globally. 

However, while historic investments in capacity and infrastructure helped bring costs down, part of the reason for cheap electricity was below-cost pricing. 

This has created a major issue around raising tariffs to reflect true electricity costs after years of below-cost pricing that weakened Eskom’s finances and led to repeated government bailouts. 

Raising electricity prices to reflect the cost of production is difficult, as it will create major affordability challenges. 

Furthermore, for a cost-recovery approach to work, it is essential that services are delivered efficiently and consistently. 

Currently, South Africans are paying more for electricity services that are unreliable and insufficient to grow the local economy. 

The unreliability of electricity supply, combined with corruption and mismanagement, has contributed to driving up operational costs, further complicating public acceptance of higher rates. 

The OECD said implementing cost-recovery tariffs is essential for Eskom’s financial health, but requires it to provide reliable electricity much more efficiently to avoid burdening consumers with unnecessary costs. 

Eskom’s inefficiency and years of below-cost pricing have resulted in electricity prices soaring over the past decade. This can be seen in the graph below, which compares electricity tariffs to inflation since 2003. 

Solutions on the table

Reining in the rising cost of electricity in South Africa is highly dependent on fundamental reforms to the country’s electricity sector. 

The OECD argued that costs can be reduced over the long term by increasing competition in the electricity sector and rapidly increasing generation capacity in the country. 

Planned reforms aim to create a decentralised wholesale market in five years and will contribute to promoting efficiency. 

At the same time, the country has to invest in new generation technologies, from gas and nuclear to renewables and battery storage. 

These energy sources could be significantly cheaper than Eskom’s current ageing coal-fired power plants. 

This does not mean that the pricing methodology implemented by Nersa should not change, as this has to improve to ensure Eskom remains financially viable without making electricity unaffordable. 

Nersa has developed a new framework, the Electricity Price Determination Rules (EPDR), but its implementation has been delayed. 

While not a complete solution, the EPDR introduces improvements to Nersa’s pricing methodology, including benchmarking costs across the sector and increasing transparency by unbundling generation, transmission, and distribution costs. 

Importantly, it also aims to remove the clawback clause, which had allowed Eskom to raise tariffs to recover past losses. 

The OECD said advancing these reforms is essential to reach fair, cost-based electricity tariffs while ensuring support for low-income households. 

The organisation said future reforms could also explore a model used in Germany, where utility revenues are separated from operational costs. 

This “revenue cap” limits how much a utility can charge based on its revenue needs rather than on its expenses, helping keep prices stable and affordable.