Feature Article: How to avoid a 405% above-inflation increase in electricity prices

Invalid assumptions about who should provide SA’s future electricity needs could plunge the economy into unnecessary decline. Eskom’s MYPD 3 price application to Nersa is based on the false imperative that the state-owned enterprise (SOE) should be the sole source of core electricity generation for decades to come. In order to achieve this objective it is requesting the continuation of a price path that amounts to a financial assault on the country’s electricity consumers.

Tracking price increases from 31 March 2009, when the average price was 22.10 cents per kilowatt hour (c/kWh), we find that the following percentage increases occurred: 1 April 2009 14.2%, 1 July 2009 31.3%, resulting in a price of 33.14 c/kWh (an increase of 49.95% on the year’s opening price in the midst of a worldwide recession). Price increases in 2011, 2012 and 2013 were 24.8%, 25.8% and 16% respectively, bringing the current Eskom average price to 60.67 c/kWh, which with the “magic of compound interest” was raised in four years to 173% above the price on 31 March 2009, and 147% above the inflation rate. If the MYPD 3 price application for 16% price increases for each of the next five years is approved, the price will rise to 128 c/kWh in 2018, which for the nine year period will be an increase of 473% above the 2009 price and 405% above the compound inflation rate of a mere 68% over the nine years. This, surely, must represent a world record for above-inflation increases in administered electricity prices!

The application for above-average price increases has been explained for several years by the fact that, “SA’s electricity prices are among the lowest in the world”, but an increase of 147% above inflation in the past four years must have changed matters. Can another 16% per annum, which will take the increase to 405% above inflation in nine years, really be justified?

Eskom’s Brian Dames has said that the SOE needs to finance an expansion programme of R337billion that aims to “keep the lights on”. Eskom should be relieved of that responsibility. If the additional generating capacity required by SA electricity consumers in the future is supplied by competing independent power producers (IPPs), R337billion can be cut out of Eskom’s future cash flow requirements, and the tariff substantially reduced. Part of the provision for expansion is probably contained in the inflated depreciation charge of R185billion, based on replacement cost, reflected in the five year MYPD 3 cost estimates.

One of the major benefits of having IPPs supply all future generation capacity would be that they would provide the capital investment required and remove that burden from Eskom, consumers, government and taxpayers, a major benefit in the current uncertain economy. Another would be that it would reduce Eskom’s budgetary requirements and the pressure for above-inflation price increases. Eskom or the proposed Independent System and Market Operator (ISMO) must not be compelled to buy electricity produced by the IPPs but the new generating companies must have ready access to the grid at a reasonable price for the purpose of selling electricity to customers.          

Given the struggling economy, the hardship being endured by many electricity consumers, and the negative impact that an untoward increase in the price of electricity will have on the general population, every effort should be made to contain electricity price increases. The R186.8billion that is included in the cost estimates as a return to the shareholder (government) should be reconsidered. If this amount is intended to provide financing for the expansion programme, it can also be slashed from the budget and replaced by IPPs rapidly entering the electricity market to provide all the new-build capacity that the country needs.

A start can be made in reducing the burden on Eskom if the hold-up in facilitating the wheeling of electricity from IPPs to their customers across the Eskom grid can be finalised. Objective rules, including costs, need to be established by NERSA and incorporated in agreements between grid owner and grid user, allowing connections to be swiftly concluded. The next step is to change or replace the ISMO Bill to make it clear that ownership and control of the grid will be transferred to a new independently owned and operated SOE, as has been done in many other countries, as part of the process of establishing competition, electricity trading, and greater efficiency in the utilisation of available electricity.      

Without competition in the electricity business it is not possible to know what the price of electricity “should be”. Prices set by a regulatory committee cannot tell us what they would be in a fully functioning electricity market with competing electricity providers vying with each other for the custom of purchasers of electricity.

In 1993/94 the New Zealand government addressed this problem by removing statutory monopolies in the distribution and retailing of electricity. Now the country has 29 distribution companies and 20 retail brands, with up to 9 or more competing brands in some areas. The NZ Electricity Authority urges customers to shop around for lower prices and the average number of business days for customers to switch between traders has plummeted in the past five years from fifty days to two days, with many switches taking not more than 24 hours. SA should be aiming for a similar competitive, customer-friendly, and efficient electricity environment.     

Eskom’s MYPD 3 application to Nersa is scheduled to result in what can be described as a five year, R1trillion compact between Eskom and the country’s electricity consumers, which means the entire nation. The implications for the economy are massive. A great responsibility rests on the shoulders of the members of Nersa. Any company entering into an agreement of such proportions would be employing independent experts to carry out a due diligence examination of the supporting figures. It is not a matter of trusting or distrusting Eskom’s figures. It is a matter of properly carrying out the unenviable task with which Nersa has been entrusted.

Once Nersa takes a decision on the pricing, the responsibility for the consequences over the next five years is theirs, not Eskom’s. Similarly, the responsibility for the current electricity crisis in the country rests in the final analysis with government and Parliament, not Eskom. They are responsible for the fact that we do not have a system such as New Zealand’s in which the Electricity Authority’s role is to “promote competition, efficiency and reliability of supply for the long-term benefit of consumers”.


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