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Why you’re paying 450% more for electricity since load shedding started

| Economic factors

Since the start of load shedding in 2008, Eskom’s tariffs have increased by 450%, mainly because of the utility’s capital expenditure and declining demands for its services, while operating costs and municipal pricing have put further pressure on tariff increases.

This is according to an economic bulletin published by the South African Reserve Bank (SARB) – written by economists Zaakirah Ismail and Christopher Wood.

The report showed that the current electricity pricing regime ties prices to Eskom’s costs, with decades of mismanagement and crisis spending passed to consumers.

Between 2007 and 2017, the average Eskom tariff increased by 333%. By 2022, it had increased by 450%Inflation over the same period was recorded at 98% – meaning tariff hikes more than quadrupled that of headline inflation, outstripping it by 352%.

According to the economists, this massive increase in tariffs results from the significant impacts on Eskom’s capital expenditure (due to decades of neglect of its fleet) and declining sales as consumers move away from the utility’s services. Other price pressures come from Eskom’s operating costs and municipal pricing.

Capital expenditure

From 2007 to 2021, Eskom spent R680 billion on capital expenditure but achieved poor results. Projects included reviving three old power stations, building two peaking plants, and constructing two new large power stations, Medupi and Kusile.

The two power stations were riddled with cost overruns and breakdowns – still requiring an additional R33 billion to complete. The economists noted this resulted from a severe lack of technical knowledge in a utility that had not built a new power station in 20 years.

“This resulted in significantly high costs and a substantial debt burden for Eskom. By the end of 2022, Eskom’s annual gross finance costs were R44 billion, exceeding employee costs (R33 billion) and equalling about half the value of the utility’s own generation costs (R84 billion),” they said.

“Eskom’s capital expenditure and debt burden significantly impact the costs underlying the electricity tariff, and in the absence of meaningful cost-saving measures, Eskom will have to continue increasing prices to cover its debt costs,” they added.

Declining sales

Eskom’s ability to generate sufficient revenue plays a vital role in the Multi-Year Price Determination (MYPD) methodology used by Nersa when considering tariff adjustments. According to the report, Eskom must be able to generate enough revenues through sales to cover costs and reduce its reliance on debt.

However, Eskom’s sales are declining. Since 2006, Eskom’s sales have reduced by an estimated 0.5% per year. The SARB data shows that Eskom’s largest sales losses have come from critical economic sectors – including Rail (-40 %), Industrial (-30.3%), Mining (-17.2%), and local distributors (-10.5%).

The economic report noted that this was a direct result of load shedding and global shocks such as the Covid-19 pandemic. At the same time, declining sales were exacerbated by a wide-ranging shift to energy-efficient technologies in response to the first wave of load-shedding.

“Declining sales volumes present a sustainability risk for Eskom and compound the reliance on price increases as a source of revenue growth,” said the report. However, Eskom’s existing monopoly on energy supply means there is limited scope to restore sales volumes without greater underlying economic growth.

Operating costs

While growing capital spending costs in the context of declining energy demand are the central driver of higher electricity tariffs, growing primary energy costs and operating expenses have put pressure on electricity prices.

The report highlighted that costs have increased dramatically for the utility due to declining efficiencies in coal production, increased use of diesel and the high prices associated with early-phase independent power producers (IPPs).

A central concern is the spending on diesel to run its open-cycle gas turbines (OCGTs) as its power stations struggle to keep up with demand.

To stave off higher stages of rolling blackouts between 1 April and 24 July, the power utility spent R12.4 billion of its total diesel budget on its emergency diesel-powered generation fleet to keep the lights on. To put this into perspective, it took eight months for Eskom to spend R12 billion on diesel last year, while the same amount has now been blown in less than four.

Additionally, despite the decrease in the cost of renewable technologies, the total cost of independent power production to the consumer has increased significantly due to higher prices being locked in during the first bid windows when the technology costs were still high, further adding to Eskom’s costs bill.

Other notable cost drivers are maintenance spending and employment compensation. Maintenance costs reached an all-time high of R32.5 billion in 2022, driven by the increasing needs of an ageing fleet, the need to address serious design flaws in new build stations and an explicit policy by Eskom to increase maintenance hours in an attempt to reduce breakdowns – and this is expected to increase considerably over 2023, noted the report.

Employment spending has consistently been identified as a potential cost-saving point for Eskom, driven in part by criticism of the cost and scale of employment by Eskom at a time of widespread failures in performance.

“A widely cited World Bank study found that South Africa’s staff costs were higher than the norm in Africa, at 20% of operating expenditure against an average of 14%, and argued that Eskom was 66% overstaffed relative to a baseline of employee per client,” noted the report.

Over the next three years, overall operating costs are forecast to grow by around 5% per year, but in its latest wage negotiations, Eskom and union leaders reached a wage increase agreement of 7%, which could put the costs forecasts even higher.

Municipal pricing

The economists said that higher electricity prices have also been attributed to municipalities’ pricing policies, and municipalities have been accused of ‘profiting’ unduly from electricity surcharges.

“Because the revenue is not ringfenced, revenues from electricity tariffs can be used by municipalities to subsidise other services,” they said.

Research done by PrimaResearch shows that between 2008 and 2018, the Eskom tariff increased by 14.4% as a compound annual growth rate.

The research noted that due to the markup charged by municipalities on top of Eskom’s increase, estimated excess profits to municipalities amounted to around R46 billion between 2008 and 2018. The excess was not evident for all municipalities, as there are signs that some cities partially absorbed the Eskom tariff increases.

The report also noted that municipalities risk Eskom’s financial position. “Outstanding municipal debt, which has grown to R63 billion as of August, up from R56.3 billion in December 2022, is a systemic challenge to the electricity industry as a whole”.

So far, Eskom has exercised leniency towards defaulting municipalities, and the poor collection rate means that Eskom cannot service its debt load and will be forced to ask the government for more bailouts, increasing pressure on tariff adjustments.

However, another concern for Eskom is that electricity might quickly become too expensive for municipalities, resulting in them looking towards cheaper alternative electricity sources to reduce operating costs – feeding into a utility death spiral.

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