Power punch for SA as 18.65% Eskom tariff increase announced

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FIFI PETERS: Let’s get back to the big story of the day, and that is the story around electricity tariffs, that much-anticipated announcement coming from the National Energy Regulator today, saying that as of April new tariffs would be kicking in which would be 18.65% higher for this financial year. This is pretty steep, but it could have been worse, as we know that Eskom was asking for a whole lot more, 32%.

We’ve Nhlanhla Gumede, the regulator member responsible for electricity regulation at Nersa for more on the story. Nhlanhla, thanks so much for your time. Can you please help us understand what factors Nersa accounted for in arriving at the 18.65% tariff increase that you have granted to Eskom?

NHLANHLA GUMEDE: Good afternoon to your listeners, and thank you for inviting me. In essence, this particular application was driven by the fact that it needed to be considered using the MYPD [multi-year price determination] methodology to a tee, which we did do.

So we did not deviate from the methodology. The methodology is very specific in terms of how it recognises assets, the rates of return, what it recognises in terms of cost, operating costs, people and all of the other pass-throughs, including environmental issues and the levies and things like that.

But specific to this application was the application for use of diesel, because there was a major shift in terms of what was originally applied for in terms of the diesel, and [a] move from an original application of some R210/211 million for diesel to an application that went to R2.5 billion for diesel. So that became a major driver.

FIFI PETERS: So you are saying that you did not grant Eskom leeway in getting more for its diesel bill right now through higher tariffs?

NHLANHLA GUMEDE: What we’re saying is that we tried to balance, we tried to increase. Again, the whole point was that diesel was supposed to be used as a last resort before load shedding.

However, the number that Eskom applied for, which was a 12% load factor of their diesel plan, was still allowing a significant amount of load shedding.

So the question was, because clearly that’s not the target from Eskom, but shouldn’t we be extracting more efficiencies [from] a lot more of those plants, coal plants, because at any one point in time, six out of the 10 coal plants are not working. We’re saying Eskom, that’s well within your control. Get those back into operation. So we did allow some, only 6%, and not the applied-for 12%.

FIFI PETERS: Of course the tariff increases also kick in for the next financial year. That’s 2024/25, where you’ve granted Eskom a further 12.74% increase. Again, not exactly what they asked for.

The challenge, Nhlanhla, is that Eskom has said that even in its initial application, even the 32% that it had initially applied for, this still didn’t account for the full cost of producing electricity. This is still not a cost-reflective tariff, as it were. And the fact that it has [received] much less – inasmuch as it is going to cripple most households, and even businesses are not liking this; we saw the reaction on the market – puts its financial position on more shaky ground. I’d like to understand what you think about that, because the financial viability of Eskom is in a sense the financial viability of this country.

NHLANHLA GUMEDE: Okay. Can I explain this? In terms of cost-reflective tariffs, Eskom only applied for a weighted average cost of capital of 1.7%. I’m looking to cut one year. But in terms of the methodology, it could have applied for 11.5%. I’m talking about the real weighted average cost of capital which, if it had applied for the full 11% of in terms of the net assets, would’ve been in its view a cost-reflective tariff – if it had applied for that and been granted that.

Unfortunately, the whole system is that when we say yes, it’s not a full 11% that was applied for, neither was it granted, but in fact only 1.7%, far from a cost-reflective tariff.

The challenge is that that 11% of the replacement cost is not a replacement cost of all the plants, including plants that are dysfunctional. So in real life one would’ve said all of the assets that are actually not functioning, we would have impaired that. You would’ve only paid and worked out cost-reflective tariffs for those, and only allowed those plants that are producing and selling, that you then give them – they should be able to sell at a cost-reflective tariff.

So this argument is a bit difficult in an environment of deemed cost, and not an environment of real cost.

FIFI PETERS: There’s been court action between yourself as Nersa and Eskom before over matters pertaining to tariff increases, the tariff application. Are you expecting such action to happen again, given that Eskom didn’t quite get what it asked for?

NHLANHLA GUMEDE: No. In this particular case, no. We are at pains to make sure that in terms of the methodology, we applied the methodology to the tee, including accepting those revalued assets at the value of them being revalued, including not adjusting those assets for the assets that are actually not producing, or adjusting in terms of the energy availability factor that we have done before, and all of the other adjustments that we have previously done.

This time we applied the 2016 methodology to the tee. So now we are not expecting any court cases.

FIFI PETERS: All right. Nhlanhla, thanks so much for your time. Nhlanhla Gumede, the regulator member responsible for electricity regulation at Nersa, really explaining the complexities that went into arriving at the tariff, the 18.65% increase in that electricity tariff that will be kicking in as of April.

As complex as the process was, that is the bottom line. We’re going to be paying more for electricity.