Busa to Eskom: What are those ‘other’ operating expenses?

A member of the South African Property Owners Association (Sapoa) has told the industry body that if Eskom’s application for a tariff increase of 36% next year succeeds, the impact on its utility cost will be R15.30 per square metre – across its property portfolio of more than 700 000m² .

Sapoa’s comment forms part of a submission by Business Unity South Africa (Busa) to energy regulator Nersa, which is currently considering Eskom’s application for tariff increases of 36.15%, 11.81% and 9.1% in the next three financial years.

Mining companies, preparing for what they consider a “worst case scenario”, have budgeted for an electricity tariff increase of three times CPI (consumer price index) – with CPI at 2.8% year-on-year in October. If Eskom’s application is approved and implemented, mining electricity costs could rise by an additional R8.8 billion to approximately R68.6 billion by the end of 2027, according to Minerals Council SA in the same submission.

The impact is however much bigger than the immediate costs, says the Minerals Council.

“Higher electricity prices will discourage the mining of lower-grade deposits, which are less profitable under rising fixed costs such as ventilation, pumping, and cooling for electricity-intensive operations. This would shorten the life-of-mine for many operations, as reserves deemed economically viable would shrink.

“Over time, this could lead to earlier mine closures, job losses, and a reduction in the industry’s contribution to the economy.”

To mitigate against the rising electricity costs and ensure security of supply while moving towards decarbonisation, mining companies are accelerating their plans for solar and wind energy as well as battery storage.

“This shift will likely further reduce Eskom’s electricity sales, creating a negative feedback loop,” the Minerals Council states.

“As paying customers move away, Eskom’s financial position is expected to deteriorate further unless the utility takes decisive steps to restructure and adapt its operations.”

ALSO READ: Proposed Eskom tariff increase could sink municipalities – report

Scepticism and questions

Busa and its members are not convinced the huge increases Eskom wants are justified.

Operating costs

They question the increase of almost 17% in Eskom’s total operating cost (excluding amounts claimed for arrear debt) in 2025/26, driven largely by what the utility calls “other operating cost”.

This category increases by almost 67% against the projection for the current financial year.

Busa asks that Nersa interrogate these costs and limit the increase to CPI. It says Nersa should insist on transparency, accountability, and fiscal discipline in Eskom’s cost management.

Employee benefit costs

These are projected to increase by 3.65%, 4.43% and 3.47% in the next three financial year.

On the face of it this may seem reasonable as it is in line with inflation, but Eskom’s staff numbers have reduced, as has its energy production.

The Minerals Council notes that most industries adjust their workforce costs to align with changes in production and sales, and Eskom should be required to do the same.

ALSO READ: Nersa publishes Eskom’s request for hefty 36% electricity tariff hike

Arrear municipal debt

Eskom’s proposal to include amounts to compensate it for arrear municipal debt should be disallowed, so that paying customers won’t be held liable for the non-payment of municipal debts that Eskom has not collected due to its inefficiencies.

Coal costs

Busa asks Nersa to interrogate the shift from ‘cost-plus’ coal mines to more expensive medium-term contracts, as well as the rising coal cost despite declining production.

IPP costs

The provision Eskom makes for buying electricity from independent power producers (IPPs) may have to be lowered, because of delayed implementation of these projects, Busa says.

ALSO READ: New Eskom tariff plan ‘needs to face class action suit’

Negotiated pricing with industrial users

Busa cautions that large tariff increases may lead to more negotiated pricing agreements with industrial power users, which will further burden other customers who must subsidise them.

Busa says the increase in these agreements is indicative that Eskom’s tariffs are unaffordable for industry.

Environmental levy and carbon tax

Busa points out that government may make changes to the environmental levy and carbon tax, both of which Eskom has provided for in its application.

If either or both can be excluded, it will lower Eskom’s revenue requirement and therefore a smaller increase will be required.

ALSO READ: 200 days of no load shedding, but electricity price hike looming

Return on assets 

Eskom’s calculation of its regulatory asset base (RAB), which forms the basis of the return on assets (RoA) – and specifically the inclusion of works under construction and transfers to commercial operations in the RAB – must be interrogated, says Busa.

It recommends that Nersa limit Eskom’s return on assets to 3.09% instead of the 4%, 5% and 6% Eskom is asking for the three years to move towards cost-reflectivity.

In the current year it is only 1.58%.

“While we acknowledge that it is essential for Eskom to migrate towards tariffs that are cost-reflective to ensure its sustainability, we argue that improvements in the RoA levels cannot be implemented without clear and transparent operating costs efficiency strategies in place.”

ALSO READ: City Power has no lawful tariffs but cuts power supply

Capex

Busa has several questions about the capital expenditure Eskom wants to fund from tariffs, and asks Nersa to scrutinise it.

It says Eskom provides for several renewable energy projects, while it has been prohibited by National Treasury from building new generation assets.

It is also sceptical of the increase of 125% in capital expenditure on distribution assets in 2025/26.

“Many mining companies are being requested to fund transformers and distribution sites while their demand on these substations barely account for 25% of total capacity. This means that Eskom is requesting capex in [the three-year period] application to refurbish and strengthen the distribution network yet is also asking the sector to fund these costs.”

Nersa is expected to announce its decision on Eskom’s revenue application on Friday 20 December.

This article was republished from Moneyweb. Read the original here.