At the end of January, the National Energy Regulator of South Africa (NERSA) announced that Eskom can implement tariff increases of 12.7%, 5.36% and 6.19% over the next three financial years. This decision represents a significant downward adjustment from the 36.14%, 11.81% and 9.10% increases that Eskom originally requested.
NERSA’s decision might affect Eskom’s ability to meet its objectives. As a result, Eskom may introduce steeper increases in the future to recover required funds. Additionally, budget restructuring could reduce diesel funding, leading to more load shedding.
NERSA’s tariff decision and Eskom’s future pricing
NERSA has yet to provide detailed reasoning for its decision. Without this information, a complete analysis remains incomplete. In the meantime, we has been analysing MYPD6 and future Eskom price path scenarios for its clients. This analysis includes calculating probable future increases based on macroeconomic and political factors. It also considers capital expenditure projections.
We have adopted a scenario-based approach to assess possible outcomes. This approach includes evaluating changes that may arise when a Multi-Market model, such as the “Day Ahead Market”, gets introduced.
NERSA’s approved increases seem low from a high-level perspective. Compared to Eskom’s submission, NERSA reduced the revenue asset base by R610 billion over three years. This amount serves as the base for return calculations. Additionally, NERSA lowered depreciation and operating costs by R124 billion. The approved sales forecast increased by 29,253 GWh.
Eskom revenue adjustments
The impact of these changes on Eskom remains uncertain. Whether the company can cover its interest debt with lower returns also remains to be seen.
NERSA approvals for the next three years:
| Period | Allowable Revenue Approved | Allowable Revenue Requested by Eskom | Tariff Decision (Increase) |
|---|---|---|---|
| FY25/26 | R385 billion | R446 billion | 12.74% |
| FY26/27 | R410 billion | R495 billion | 5.36% |
| FY27/28 | R437 billion | R537 billion | 6.19% |
NERSA adjusted the Allowable Revenue (AR), which includes allowed costs plus returns for each Eskom entity per period. These adjustments were based on Eskom’s application. This adjustment results in lower tariff increases now. However, Eskom’s submission figures reflect its projected operational needs. Future tariff increases may therefore be steeper.
NERSA largely kept the National Transmission Company of South Africa’s (NTCSA) AR intact. However, it adjusted the Regulated Asset Base (RAB) across all Eskom entities. Eskom Generation’s RAB received the largest adjustment, while the NTCSA and Eskom Distribution remained mostly unchanged.
Load shedding predictions
NERSA factored in the NTCSA’s capital expenditure program. Due to past execution challenges, the regulator now requires quarterly reports. Costs have been smoothed in the second and third years, according to NERSA. While NERSA ringfenced funds for each entity, concerns remain about how Eskom Holdings will manage this allocation.
On load shedding predictions, Ahmed points to increased pressure on the coal fleet. This strain could impact supply during periods of low renewable energy production. The dispatchable nature of Open Cycle Gas Turbines (OCGTs) plays a crucial role.
Eskom relies on OCGTs to prevent load shedding. However, NERSA reduced the OCGT load factor, leading to a downward adjustment in Primary Energy.
Having worked on previous Eskom price applications, I have observed a key difference in approach between Eskom and NERSA. NERSA increased the projected sales volumes, which in turn reduces the average tariff increase. The formula for calculating the tariff is straightforward:
Tariff = Allowable Revenue / Sales
I question the basis for NERSA’s decision. Did the regulator deliberately adjust Eskom’s forecast to lower the average price increase?
– Shirley Salvoldi, a former Corporate Specialist in Retail Pricing at Eskom and now a Cresco Advisory Consultant
NERSA justified this decision by approving coal costs while expecting higher production. Additionally, the regulator assumes a 75% Energy Availability Factor (EAF). Without detailed reasoning, concerns persist over this approach. Linking demand to supply may lead to disputes. Eskom could argue that reduced demand would result in lower sales.
Power pricing regulations
Our projections show that sales volumes may decline. More Independent Power Producers (IPPs) in the private sector are achieving operational status. As a result, Eskom’s sales could suffer.
NERSA’s tariff decision did not approve arrears debt. This decision lowers tariffs but pressures Eskom’s financial position. Eskom must improve bad debt collection. However, municipal debt remains a challenge. Eskom has little to no control over these unpaid amounts.
While managing bad debt is necessary, it remains a systemic issue. This challenge also jeopardises the future South African Wholesale Market (SAWEM). Additionally, it threatens Eskom Distribution’s ability to participate in this evolving market.
We note that NERSA did not approve an allowance for carbon tax. This may indicate a reconsideration of Eskom’s carbon tax obligations. However, further clarification is necessary.
Finally, no finalised impact assessment exists for the Eskom Retail Tariff Plan. The impact of the tariff increase remains unclear.
In conclusion
I doubt whether Eskom will update rates in time. NERSA’s tariff decision must align with the price increase deadline. The March 15 MFMA tabling in Parliament adds further constraints.
We believe one possible scenario is that NERSA approves principles for tariff changes. Eskom might then need to redo a cost-of-supply study using MYPD6 figures. The company would then resubmit this study to NERSA.
Applying MYPD6 numbers in the study would affect the weighting of all rates. This outcome could significantly alter Eskom’s final tariff structure.
Furqaan Ahmed | Manager | Cresco Group | mail me |
