Eskom’s Setback: What It Means for South Africans

In a significant move on 30 July, the National Energy Regulator of South Africa (Nersa) made the decision to slash nearly R16 billion from Eskom’s requested revenue recovery. During its public meeting, Nersa approved only R8.1 billion of the R23.9 billion Eskom sought.

While this reduction might seem like a setback for Eskom, the implications for South African consumers are far from favorable. The substantial amount remaining in the Regulatory Clearing Account (RCA) suggests that electricity price hikes are inevitable, and they are likely to be felt for several years.

This meeting was part of Eskom’s ongoing process to finalize its fourth Multi-Year Price Determination (MYPD) RCA for the 2021/22 financial year. The RCA plays a crucial role in South Africa’s electricity pricing structure, as it reconciles the actual revenue Eskom earned against what Nersa had originally approved for that financial year.

Eskom uses the MYPD methodology to request future tariff increases, based on its projected costs and revenue generation. The RCA tracks the differences between regulator-approved costs and revenues and Eskom’s actual financial performance. If there’s a discrepancy—whether due to higher costs or lower-than-expected revenue—Eskom is entitled to recover the shortfall, or conversely, return the surplus to consumers if they underspent.

However, with Eskom’s ongoing financial struggles and operational inefficiencies, the RCA has frequently indicated that the utility’s expenses surpass its income, leading to the necessity for tariff increases to cover the deficit.

This decision underscores the financial challenges Eskom continues to face and signals more burdens for South African electricity consumers, who can expect higher electricity bills as the power utility attempts to stabilize its finances.

Eskom has consistently requested higher tariff increases each year, though these are typically reduced by Nersa. The reduction, however, only delays the financial impact, which is eventually addressed through the Regulatory Clearing Account (RCA).

Nersa has stated that “An implementation plan for the 2021/22 RCA balance will be developed for approval by the Energy Regulator.” This indicates that the approved RCA balance will be recouped from various customer categories, including standard tariff customers, Special Pricing Arrangement (SPA) customers, and international clients.

The RCA has sparked considerable controversy within South Africa’s electricity pricing framework. It has been the focus of several contentious legal battles between Eskom and Nersa, with Nersa frequently on the losing side.

One of the most notable disputes involved Nersa’s failure to recognize a R69 billion government bailout as part of Eskom’s revenue. The courts ruled that this exclusion was unlawful and mandated Nersa to reintegrate this amount into its calculations, beginning with R23 billion in the 2021/22 financial year, with the remainder to be included in subsequent RCA adjustments for 2022/23 and 2023/24.

This ruling has already impacted the latest RCA approval. Although Eskom’s actual revenue for 2021/22 exceeded the approved amount by R13.3 billion, the court-ordered RCA adjustment of R22.8 billion resulted in a R9.5 billion balance in Eskom’s favor.

The implications of this court decision are expected to continue influencing RCA balances in the years ahead.

In January 2023, Nersa approved a 12.74% electricity price increase for Eskom for the 2024/25 financial year. This decision was made alongside the approval of the previous year’s 18.65% increase, which was notably lower than the 32.02% hike Eskom had initially sought.

Nersa’s approval set Eskom’s revenue targets at R318 billion for 2023/24 and R352 billion for 2024/25. While Eskom had hoped for a more substantial figure, the utility still welcomed the decision. Eskom’s chief financial officer, Calib Cassim, remarked that the revenue determination would help the company gradually align electricity prices with the actual costs of production.

Looking ahead, Eskom has reportedly applied for a steep 36.15% tariff hike for the 2025/26 financial year, which could cause electricity costs for some municipality-supplied customers to surge by up to 44% per kilowatt-hour.

A confidential draft from May 2024 outlines Eskom’s planned price increases for the 2026 to 2028 financial years, which are set to be submitted to Nersa. The document suggests Eskom is aiming for a standard tariff increase for non-municipal customers of 36.15% in 2025/26, followed by 11.81% in 2026/27, and 9.10% in 2027/28. For those supplied by municipal power utilities, the proposed increases are 43.55% in 2025/26, 3.36% in 2026/27, and 11.07% in 2027/28.

However, these figures may be adjusted based on Nersa’s Regulatory Clearing Account (RCA) determinations.

Eskom has projected that it could generate revenues of R446 billion, R495 billion, and R537 billion in 2026, 2027, and 2028, respectively. The utility has pointed to delays in South Africa’s renewable energy program as a key factor driving the need to boost its generation capacity. According to Eskom, over 8,000MW of intended capacity from wind and solar sources was unavailable between 2019 and 2023, as outlined in the Integrated Resource Plan of 2019. Consequently, Eskom has had to rely more heavily on its coal-fired power stations to bridge the gap in energy generation.