Eskom: Possible future restructuring of tariffs explained

Conversation with Jeremy Maggs

Below is my conversation with Jeremy Maggs from Moneyweb.

JEREMY MAGGS: It’s a double whammy price increase week. Eskom’s 12% electricity price increase for the 24/25 financial year has kicked in from this week and given the inconsistency of supply, most consumers are still questioning the above inflation increase. Petrol is up at midnight.

Read: Another fuel price hike in April

Energy commentator Hügo Krüger is first out the blocks on the programme today. Hügo, how do you believe this tariff hike then is going to impact business, particularly in terms of their monthly energy bills?

HÜGO KRÜGER: Ja, that’s right, Jeremy. It was expected and the formula, as far as I know, was approved two years ago by Nersa [National Energy Regulator of South Africa], so it was expected. But I’ve got sympathy for the average consumer because what do you do, you can’t really escape it for most people.

JEREMY MAGGS: So there have got to be steps put in place to try and mitigate the impact. A lot of people are talking about renewables in that respect, but it’s slow and costly, isn’t it?

HÜGO KRÜGER: It is and there’s a difficult conversation that is not occurring at the moment, is the economists talk nowadays about what is called the “missing money problem” (in) electricity. To explain to people, in the past, when you had vertically integrated utilities, it was relatively simple, everyone paid a price in kilowatt hours. Let’s say you pay R6 000 at the end of the month, then only R2 000 was actually for electricity, R4 000 was for transmission distribution. But now, when more people go off-grid, or actually what we call grid-tied, partially off-grid, the question becomes who pays for transmission distribution (if the richer folk are offsetting the forecast to the end user). Now it’s not to blame them or anything, just to explain the phenomenon.

So what is currently occurring with linear tariffs at Nersa is that the bulk users are basically running away from Eskom and then that transmission and distribution cost is being passed onto the poorest households.

How do we mitigate that? How do we find a pragmatic solution because you don’t want to destroy the solar industry. I don’t want to point fingers and say they are to blame for this because they’re not. It’s a disruptive technology and we need to come with a different way as to how we price electricity. That’s my view.

There are certain options on the table. I don’t have a strong view on which one to take, but one is what we call capacity charges, fixed tariffs, everyone pays R400 to R600 a month, for example, or times of usage tariffs, which is common in many European countries. We have a daytime rate and a nighttime rate. So when there’s high usage at night, that’s where Eskom tries to recover their bulk volumes, and that to me would be the pragmatic approach to this.

JEREMY MAGGS: How difficult would it be, Hügo, to implement either of those solutions then?

HÜGO KRÜGER: Politics is the biggest obstacle. So the City of Cape Town, for example, tried this recently, they proposed, I think it was R600, and the consumers of renewables tend to be their voters because it’s just (their) voting block, they pushed back against that. So I can see that’ll be difficult.

The time of usage one might be a little bit easier, but the biggest obstacle, in my view, is Nersa.

Nersa has to relinquish the powers to set tariffs because they now have a market of electricity. We have an unbundled system, and in an unbundled system, in a free market, you don’t set tariffs, you monitor tariffs.

So the regulator has to understand that their new role is to monitor tariffs for uncompetitive behaviour, for corruption, all of those things, collusion, but they cannot set it. Eskom should have the power to set its own tariff, and then the municipalities must obviously cooperate with them because the municipalities under the current tariff system are forced into bankruptcy. So clearly, something is not sustainable.

JEREMY MAGGS: So how would you then change the mindset or the modus operandi as far as Nersa is concerned?

HÜGO KRÜGER: This is the big question because even the Electricity Regulation Act that has been passed gives Nersa the possibility to set tariffs. So first of all, there must be a political reform, that cannot be in that act. Now, I flagged this when I went to the Energy Portfolio Committee to oppose the unbundling. Initially, I opposed it, but I said, okay, now that it’s unbundled, let’s go with it. So I didn’t have a strong view against it.

But then if we accept market conditions, you must accept a regulator can’t do it. It’s more of a political mindset because it means something else, which I think is difficult for the ANC to accept under a market system, in a business environment, bankruptcy is part of creative destruction.

So inevitably you have to accept that some guys who are in electricity trading will go bankrupt and some will win, some will lose. That’s how business works. So it’s part of that mindset that needs to change.

JEREMY MAGGS: What about the risk attached to fixed tariffs?

HÜGO KRÜGER: There is a risk, which is also cited in the literature, I can refer to the work of Paul Joskow at MIT (Massachusetts Institute of Technology), who I follow quite closely on this, who says the risk is that if you have a fixed tariff, then you basically assume that transmission distribution won’t have innovation to it. So do we have another clever way of funding transmission and distribution, this is the where the debate comes in. Do you have a fixed tariff, or do you have a time of usage tariff, and different European countries have different solutions to it. So whichever policy decision you go with, there are risks and benefits.

JEREMY MAGGS: Do you think that the authorities at this point are grappling with those ideas that you are raising or is it something which is beyond the scope at the moment?

HÜGO KRÜGER: I know of people in Eskom transmission who schooled me the most on this. They don’t want me to name their names because they’re scared of losing their jobs sometimes, but I know that many of them have presented to the Presidency themselves. So I can confirm that. So they should be aware of the situation. The issue is politics.

We have an election year, and nobody wants to say to people during the election year, whether it’s the business interest, who fund some of the political parties, or whether it is the voters, that something has to change in your tariff structure, and when that happens, somebody wins, somebody loses.

So I think the reality will probably set in after the election. But I do know personally that the municipalities have thought of this. I’ve spoken to people in Pretoria, it’s not a one-party thing, I’ve spoken to people in the ANC, and they all are aware of this, but they don’t know how to sell it to the voters. So I’m being the person (providing) the uncomfortable truth at the moment.

JEREMY MAGGS: Well, let’s see what happens after May 29. Hügo Krüger, thank you very much for talking to me today.