South Africa’s energy landscape is set for a transformative change as the National Energy Regulator of South Africa (Nersa) recently greenlit the Energy Price Determination Rules (EPDR) following an extensive consultative process with stakeholders throughout 2023. The momentous decision was made during Nersa’s meeting on December 14, 2023, and the regulator has now made available comprehensive insights into the engagements with key stakeholders, including Eskom. This move is poised to revolutionize the energy pricing structure in the country and marks a significant departure from the current Multi-Year Price Determination (MYPD) methodology.
The crux of the matter lies in Nersa’s quest to deviate from the MYPD, which has led to substantial tariff increases over the past years, with another double-digit hike anticipated in 2024. Among the pivotal changes introduced in the EPDR is the removal of the Regulatory Clearing Account (RCA) component, a move expected to reshape the dynamics of energy pricing in South Africa.
Under the existing MYPD methodology, Nersa permits Eskom to request future tariff hikes based on operational costs and projected revenue from sales. The RCA, designed to monitor uncontrollable costs and revenues, has consistently favored Eskom, resulting in a trend of escalating tariff hikes annually. This trend reached its peak in the latest round, where Nersa reluctantly sanctioned an 18% increase for 2023/24 and a 12% increase for 2024/25, based on the RCA clawback, albeit lower than Eskom’s requested percentages.
The primary critique from various stakeholders, energy experts, and analysts is that the RCA fails to incentivize the efficient use of generating capacity. Nersa has even accused Eskom of misusing the clawback, allowing for costs such as coal burn costs, independent power producer costs, levies, and notably, Open Cycle Gas Turbine (OCGT) costs.
The inclusion of OCGTs has drawn particular ire due to Eskom’s significant spending on these expensive power generators. In a bid to address load shedding, Nersa reluctantly permitted Eskom to increase its OCGT load factor to 6% in 2023, but Eskom exceeded this, incurring substantial costs. With Eskom posting a staggering R20 billion loss in 2023 and projecting similar financial challenges for 2024, the recovery of these costs becomes a pressing concern.
In a strategic shift, Nersa’s new methodology steers away from the RCA, emphasizing revenue and sales as key indicators for tariff structures. The regulator aims to promote the efficient use of available capacities, marking a departure from the contentious RCA and the resulting price instability under the MYPD methodology.
Recognizing the need for a gradual transition, Nersa outlines two plans to implement the EPDR. Plan A involves using the revised EPDR methodology from 2025/26 onwards, with interim tariffs for 2023/24 and 2024/25 determined using the MYPD5 years 2 and 3 revenues. This transitional period allows stakeholders to prepare for the EPDR post-2024/25. Plan B, if Plan A falters, proposes modifications to the existing MYPD methodology, specifically addressing issues like the RCA and accommodating the growing presence of independent power producers in the electricity industry.
While stakeholders generally express agreement or conditional agreement with the new pricing model, Eskom stands out as a notable dissenter. BusinessTech sought Eskom’s perspective on its future path under the approved methodology but received no response at the time of publication. Eskom contends that the removal of the RCA and the proposed tariff determination structure could, paradoxically, lead to increased electricity prices for consumers. The power utility argues that adjustments to the RCA may force conservative assumptions, potentially resulting in higher prices or hindering capital attraction, posing a significant challenge to the economic regulation outlined in the Electricity Regulation Act.
In conclusion, Nersa’s approval of the EPDR marks a pivotal moment in South Africa’s energy sector, promising a shift towards a more efficient and stable tariff determination system. As the nation navigates this transition, the regulator’s commitment to addressing stakeholder concerns and ensuring a seamless shift is evident. The spotlight now turns to Eskom and its response to the new methodology, as South Africa braces for a new era in energy pricing and regulation.