/ 14 December 2022

Eskom’s De Ruyter resigns on day of tariff hike decision delay

Dark days: An Eskom employee dismantles an illegal electricity substation during an operation in Diepsloot, Johannesburg, in September 2020. Photo: Michele Spatari/AFP

A newly rudderless Eskom’s efforts to have a 32% tariff increase approved by the National Energy Regulator of South Africa (Nersa) have been delayed once more. 

In what was supposed to be the final subcommittee meeting on Wednesday on the tariff increase, Nersa said it was not ready to deliver the decision. “Eskom’s submissions were received in September […]. Certain numbers didn’t tally and the regulator was asked to expand the work; there are vast areas that need improvement,” Nersa said.

De Ruyter resigns

On the same day, André de Ruyter resigned as the utility’s chief executive in a surprise move. 

Just a year ago De Ruyter was adamant that he would not resign of his accord. Instead, he said he and his executives had been appointed by the Eskom board and served at its discretion, adding that the board had not “so far” had conversations on dismissing anyone.

“It is probably more important to have continuity of management rather than to fall back into the trap that Eskom has been in over the past 10 years when we had 11 different chief executives; that lack of continuity clearly has contributed significantly to instability in the organisation,” De Rutyer said in 2021 after South Africa was once again forced to move to stage four load-shedding.

Efforts to recoup funds 

Eskom is hoping Nersa will look favourably on the utility’s efforts to recoup funds owed to it by municipalities and other clients that are behind in their payments, said Hasha Tlhotlhalemaje, the general manager of regulation at Eskom.

“Any regulator’s role is to determine what the efficient cost is of producing that electricity … Nersa needs to define the efficient cost and what it would allow to be recovered by the consumer,” she said.

Municipalities currently owe the utility around R50 billion. 

Earlier this year, Deputy President David Mabuza warned municipalities that total debt to Eskom surged by R5 billion in four months to July. 

Eskom is once again seeking to implement annual tariff increases of about 32% in 2023 and 9% in 2024. The hike has been rejected by municipalities and civil societies for being too expensive to be affordable. 

“Any amounts that Eskom is allowed to claw back via the regulatory clearing account in a given year are added to its allowable revenue for that year,” Tlhotlhalemaje said.

Nersa uses a formula to determine Eskom’s return on assets, which in turn determines what it can claim for depreciation through the tariff. 

Eskom believes that Nersa made a mistake in evaluating its return on assets in its 2022-23 tariff application and has taken the regulator to court for a review. Nersa has not opposed the application.

The large increase is another attempt by Eskom to persuade Nersa to grant cost-reflective tariffs. 

As South Africa battles with stage five rolling blackouts, the power utility desperately needs to recoup funds to cover its operational needs.

But it remains Nersa’s responsibility to decide what a fair tariff would be. The price increase has been in the works for some time, with a subsequent request for an additional 10% increase already in the pipeline.

The regulator has previously given lower increases than requested, though it may tweak the methodology it uses to make these decisions. Eskom, for its part, says it needs the price increase to keep operating.

Nersa previously approved a 9.6% increase in the standard electricity tariff for 2022-23, which came into effect in April. The increase was about half of what Eskom requested.

‘Our electricity is too cheap’

During public hearings hosted by Nersa in September, Eskom chief financial officer Calib Cassim said the allowable revenue the utility was hoping to recover for the two financial years in question had not changed compared with the original submission. 

The original request was for it to be allowed to recover R335 billion for 2023-24, and R365 billion for 2024-25.

De Ruyter came under fire for suggesting electricity was too cheap during the Joburg Indaba in October.

“Our electricity is still too cheap,” De Ruyter said at the time. “Something that is cheap gets wasted; something that is expensive gets treasured.”

De Ruyter also defended Eskom’s proposed 32% price increase as part of a “mechanical exercise, we don’t sit and suck up this very daunting number of a 32% increase”. 

“This is the extent to which we’ve pushed this can down the road, and we are now at a point, when you plug in the numbers, that’s what you get.”

Diesel fund depleted 

Eskom’s rolling blackouts that have left businesses and households without power for eight to 10 hours a day are caused by lack of funds to buy diesel. The utility depleted its diesel budget for the 2022-23 financial year seven months into the financial year.

Eskom uses diesel to power two open-cycle gas turbines, which serve as emergency backup when the grid is under strain. Eskom says these units can spare the country from two stages of load-shedding when running at capacity.

While Eskom previously budgeted R5 billion for diesel in 2023-24, the cost was more likely to be R16 billion. Eskom has already spent R11 billion on diesel in the current financial year — more than double its budget.

This led to a decision to stop running emergency generation and rather increase load-shedding.

That, in turn, resulted in intervention from Public Enterprises Minister Pravin Gordhan, whose department secured 50 million litres of diesel for Eskom from PetroSA, which allowed a drop down to lower load-shedding stages.

Energy availability factor

Related to increased diesel usage is a dramatically revised view on Eskom’s electricity availability factor (EAF). EAF is the difference between the maximum availability and all unavailabilities, expressed as a percentage.

When Eskom first made this tariff application in June 2021, it estimated the EAF would be 72%. In January, it revised this to 62% and now believes 59% is a realistic estimate. 

The second increased cost area is energy purchased from independent power producers (IPPs). This will make up 9% of the overall increase, a result of Eskom buying more electricity from IPPs as more come online. 

The regulator has already drifted from its original timeline, delaying the announcement of its decision on the tariff application from the original 7 November deadline.

Experts conflicted

Energy analyst Clyde Mallinson said he expects the regulator to do what it has in the past: to try to find a balance between the increase that Eskom has asked for and the prevailing rate of inflation, 7.6%.

But Intellidex head Peter Attard Montalto told M&G that Nersa had limited room to manoeuvre for a significantly smaller price increase.

That is due to “Eskom winning several court cases against the regulator, after being granted much smaller price hikes than it was entitled to under the multiyear price determination”. Montalto said he expected an increase of 25% to 30%, which would be unaffordable to the economy. 

He argued, what the tariff increase would ultimately decide is the size of the bailout Eskom would need from the government, given that it had argued at the public hearings that even if electricity rates were to increase 32% next year, the tariff would still not be cost-reflective.

“A larger increase [in the tariff] will mean Eskom will need a smaller bailout, and a smaller increase will mean they will ask for a larger bailout.”

Mallinson said successive above-inflation increases added momentum to the “energy death spiral”.