There will be major changes to future electricity prices as the electricity minister commits to a new electricity pricing scheme.
But the best way to limit electricity price increases is to increase transparency around the methods used to determine price changes and cost cross-subsidies.
That’s feedback from energy analyst and EE Business Intelligence managing director Chris Yelland, who says rising electricity prices will hit the poorest hardest.
Yelland’s comments came in response to Power Minister Kgosients announcing his intention to develop a new electricity pricing scheme in South Africa.
Ramokgopa said the scheme was aimed at addressing rising electricity costs in the country as electricity prices significantly outpaced inflation.
These increases were implemented at a time when Eskom’s performance had declined significantly, resulting in South Africans paying significantly more for a less stable electricity supply.
“Our electricity pricing program needs to start and that is the ministry’s main focus now, working with Eskom’s distribution arm and municipalities,” Ramokgopa said.
The Department of Power will also interact with South Africa’s energy regulator NERSA to propose ways to cap future electricity prices and expand access to affordable energy.
However, the minister’s plans to reduce electricity costs are unclear and no specific proposals have yet been outlined.
The first step, Yelland said, is to be more transparent about how electricity prices are determined.
This will help create appropriate methodologies to identify price increases and uncover the underlying drivers of energy price increases in South Africa.
In a recent study, Reserve Bank economists Zaakirah Ismail and Christopher Wood revealed the main drivers of the increase in tariffs.
The study found that the electricity price increase has occurred as Eskom needs extra cash to repay its soaring financing costs, which have more than doubled in the past decade.
Although these rapidly escalating costs result from poor management and insufficient capital allocation, it is difficult to identify the precise sources and outline ways to mitigate them.
A second way in which electricity price increases may be limited is due to greater transparency across South Africa’s electricity sector.
Cross-recharge refers to the way in which different South Africans bear the price of electricity to ensure access to energy.
For example, large customers subsidize electricity use by smaller customers, while wealthy South Africans subsidize poor citizens.
The lack of clarity has resulted in rising electricity prices having a greater impact on poor households, despite government policies to ensure that other policies have a greater impact on poor households.
Yelland also noted an increase in the number of municipalities implementing fixed monthly electricity charges, often to make up for revenue shortfalls.
The poorest of these methods are the hardest, with some households seeing their electricity bills increased by 60% due to the City of Johannesburg’s R230 flat fee.
“These are inherently political decisions, so public participation in these policy recommendations is necessary. Although it is difficult, it will bear fruit in the long run.”
The key is to better understand what drives the cost of electricity generation in South Africa and how this is passed on to consumers.
The good news, Yelland said, is that Eskom’s bundling will reveal where costs are increasing, both in the generation of power generation and in transmission and distribution.
Additionally, electricity costs should fall after the utility unwinds, as it will compete in Eskom’s generation sector for the first time.
In the long term, this will allow customers to choose the source of their electricity and force competing generators to reduce the cost of producing energy.
