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Electricity costs will rocket way beyond 13.8%. Here’s why


Mike

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.........On Thursday, an audible sigh of relief went up across the land – Eskom was granted only a 13.8% increase for 2019/20 by the regulator instead of the 15% it had applied for.

With a previously approved 4.4%, the additional 9.41% approved for 2019/20 will amount to a total of 13.81%.

Don’t sigh with relief too quickly. You will pay much more than that for the landed cost of electricity to your home or business. And 13.8% is already significantly higher than CPI. Residential customers make up an estimated 20% of total electricity sales.

For one thing, the allowable tariff increase announced by the National Electricity Regulator of SA (Nersa) on Thursday does not include VAT. So that needs to be added. If you get your electricity from your local municipality rather than directly from Eskom, then you will pay an additional surcharge. 58% of all consumers buy directly from the electricity utility while 42% buy from municipalities.

If you buy from a municipality, hold onto your seat, as your power costs may go up significantly higher than 13.8% plus VAT – although this is only likely to kick in from July 1.

'We are in trouble'

"If you are an Eskom customer, you will pay (the announced tariff) plus VAT. If you are a municipal customer, you are paying the NERSA tariff, plus VAT plus a surcharge.

READ: Eskom on new tariffs: We will decide how to address revenue shortfall

"If you have a vendor (that is, if you are a prepaid customer), they also add an admin fee of 5% to 10%. We are in trouble," says Ronald Chauke, OUTA’s portfolio manager on energy.

On Thursday, Nersa announced only the top-line tariff adjustments.

By April 1, Nersa will announce its retail tariff adjustment and then municipalities must apply to the regulator with their requests for the allowable surcharge. If you are a customer, you have to look at what the surcharge is that your municipality adds on.

Eskom spokesperson Khulu Phasiwe says these surcharges can vary, but that it is also a regulated and not a free-for-all market. He says that municipalities, like Johannesburg, which have their own power stations, may not pass on the full increase.

A Deloitte study on electricity pricing done for Eskom two years ago shows that you can be fleeced at this point.

"A comparison of the standard electricity tariffs charged by 7 of the 187 municipalities was sufficient to show that there are large discrepancies in the tariff charged by municipalities," the authors found.

READ: Eskom tariffs: Will electricity prices go up by a whopping 21%?

Ekurhuleni, on Johannesburg’s East Rand, for example, added surcharges so high, it took costs to among the highest in the world. At the time of writing, Ekurhuleni’s tariffs were 85% higher than Johannesburg’s, the 2017 Deloitte study on electricity consumption found.

The municipalities have a constitutional right to set tariffs, which means they can override Nersa, according to the Deloitte study.

"Roughly 42% of Eskom's total sales of electricity are distributed to end-consumers via 187 municipalities who as re-distributors. Nersa's authority to regulate the tariffs charged by municipal distributors however is not clear - while the Electricity Regulation Act of 2006 gives Nersa the responsibility to regulate electricity prices and tariffs, the Constitution gives local government exclusive jurisdiction over electricity reticulation.

"The Municipal Systems Act of 2000 requires that municipalities determine their own tariff policies for municipal services."

From cheap to dear

For the longest time, the cost of electricity in South Africa, in fact, fell year on year. "Between 1978 and 2004 the real average price of electricity fell by more than 40%,” Deloitte found.

After the first countrywide blackouts of 2008, the price of electricity more than doubled in real terms, as Eskom and the government began to budget for maintenance and for the construction of more power stations after ignoring these needs for a long time.

READ: Electricity prices to increase by 9.41%, says Nersa

From this time, Nersa began granting increases that outstripped consumer price inflation even though these have been historically lower than Eskom’s requests for increases, set at well over 10 percentage points above inflation.

In a statement at hearings Nersa held around the country on Eskom’s requested increases, OUTA said that electricity tariffs have shot up by 500% over the past 11 years. "This is largely due to poor leadership, political meddling and corruption which has permeated the largest state-owned entity and caused a rapid rise in operating costs," the anti-tax abuse organisation said.

Paying the costs of state capture

The rapidly rising electricity tariff is the clearest way in which the consumer bears the costs of state capture. The regulator said as much on Thursday. "The energy regulator also considered that Eskom conceded that certain governance failures occurred in Eskom… however, at the time the (tariff) adjustments were affected, the extent of the governance failures or amounts associated therewith had not been fully quantified.

READ: Nersa mulls own probe into Eskom's 'governance failures'

"The Energy Regulator may initiate its own investigation into the governance failures in Eskom and may effect adjustments to Eskom’s revenue based on the relevant outcomes of its investigation or those by…Eskom, the National Treasury, the Special Investigating Unit, the Hawks, Parliament or any Commission of Inquiry…"

Nersa said when a costs sheet (of the governance failures) had been drawn up, this may have an implication on future tariff decisions. OUTA reads this to mean that if monies are recovered, it will be returned to consumers. The only state-owned enterprise which has recovered costs unlawfully incurred is Transnet.

High tariffs are here to say

The Nersa allowable tariff pares down from next year and over the medium-term, but Eskom is allowed adjustments to the tariff to account for unforeseeable expenses or lower than expected electricity sales.

These amounts are allocated to Eskom’s Regulatory Clearing Account (RCA) and for this year (2019/20), the additional costs put an effective 20% surcharge on the tariff that Nersa allowed Eskom.

If you consider, for example, that Eskom is currently using the diesel-fuelled open-cycle gas turbines to keep the lights on, it’s clear that the RCA is going to keep ensuring that tariffs increases are high over the medium term. And if South Africa does not break the low-growth pattern, then Eskom’s predicted sales to the industry are likely to be over-stated which also means the costs are passed back to consumers through the RCA. It’s a cruel bind.

The Deloitte long-range study of electricity prices recommends that Eskom must begin to price electricity according to its true cost and that it should make more clear the value of subsidies in how it bills and how it reports its accounts.

"Branko Terzic, a former commissioner at the US federal energy regulatory commission, recommends that during South Africa’s transition to cost-reflective tariffs, all implicit subsidies should be exposed.

"This might require that the regulator identify the portion of disallowed revenue that will need to be recovered via an implicit subsidy rather than the tariff and to inform the public about the level of the subsidy via the billing system."

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14 hours ago, Mike said:

'We are in trouble'

Read a article somewhere recently that NERSA not giving the right increase, that it is hampering Eskom's recovery, they are therefor part of the problem. 

It is complicated NERSE vs Eskom relationship.

But charging like Ekurhuleni does and others are doing  ... I call BS!

 

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@Mike the municipalities have to obtain approval for their increases from NERSA as well. Our tariff will probably increase by less than the Eskom increase as the municipality's increase in costs may be less than the Eskom increases where one has to factor to in all the inefficiency costs and theft. Fortunately for us in Swartland,  those are not concerns here. Since the municipal surcharge and costs are already factored into the price we pay, I would expect our increase in tariff to be less than the Eskom percentage. Contrary to sloppy media reporting,  municipalities make relatively little nett surplus on electricity sales, about 15% for the current  year in our case but I will check again. That said,  I just read the news report regarding Eskom increases for the next 3 years and it calculates to nearly 30%. Solar is just  becoming more affordable and attractive. However with all the pending legislation and standards,  we should all vociferously object to the government thereby actively discouraging renewable energy usage. Both president Ramaphosa and energy minister Jeff Radebe have declared their support of renewable energy. Or was it perhaps yet another political lie. One would hope not but we all need to fight all this unnecessary nonsense. If Axperts are acceptable in Australia, then I cannot fathom why there should be objections here. 

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58 minutes ago, The Terrible Triplett said:

Read a article somewhere recently that NERSA not giving the right increase, that it is hampering Eskom's recovery, they are therefor part of the problem. 

It's a position held by some economists, most notably Dawie Roodt. If you have the time (you need about an hour for the main talk), watch this. The solution, so he says, is this:

1. The state will have to assume 240Bn of Eskom's debt (move it over to their balance sheet).

2. This will most likely trigger a downgrade, which we'll simply have to sustain.

3. Immediately fire/retrench 30 000 employees, that's about 70% of them.

4. Increase electricity prices even more (it's better than to fund it via bailouts aka tax, which means 40% of it comes from personal income tax payers).

Increasing electricity prices will then also immediately make IPPs more profitable.

His opinion on splitting up Eskom is also pretty interesting. Not much you can do with generation. The stations are old and needs lots of maintenance. Nobody's going to buy those. The only real place to make a difference is the distribution side, where IPPs can also get in.

And SAA... well you can't get rid of SAA. You can't even give it away, you'll have to pay in before you can give it away 🙂

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53 minutes ago, plonkster said:

It's a position held by some economists, ...

I don't have a problem paying more for electricity per se, IF I KNOW that it solves the problem.

And I would then also expect to be included in the solution i.e. allowed to feed back at same rate as Eskom sells at, power to the City I live in.

Then I'm a happy Chappy - man I used to love those Chappies, and the Coke toffees!!! 1c and before that 1/2 cent.

Any case, nothing costs 1c anymore, too many cooks in Eskom kitchen and I'm not going to be allowed to be part of the solution. 🙂 

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As I live in the jurisdiction of Swartland Municipality I have checked their approved budget for 2018/19 to ascertain electricity tariff information. Electricity tariffs for the current financial year, for residential consumers,  increased by 6.84% compared to the previous year. Their net surplus amounted to 11% which is irrefutable proof that municipalities do not make a great deal of profit on the supply of electricity, notwithstanding media reports to the contrary. It would seem that the media reporters and perhaps other commentators do not understand the difference between revenue and income or surplus in the case of a municipality. Revenue is usually the largest portion of revenue or turnover of a municipality but what the confused commentators miss is that most of the turnover has to be be paid to Eskom as cost of sales of the municipality's electricity sales. After deducting the cost of distribution and administration our municipality ended up with a meager 11% of revenue. Since Section 28(6) of the Municipal Finance Management Act forbids increasing of any tariffs during the financial year except for financial reconstruction, in which case the municipality would most likely be bankrupt, municipal electricity tariffs may only be increased from 1 July 2019. Considering that Eskom was granted an increase of 13.8% by NERSA, the municipal increases may reasonably be expected to also significantly exceed the inflation rate, but will probably be less than the Eskom increase. With all these unaffordable increases not to mention corruption and theft of taxpayer money, a Venezuela/Zimbabwe style implosion cannot be ignored.

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