Nersa to decide on Eskom’s tariff increase

Energy regulator Nersa will decide on Wednesday what Eskom is entitled to in terms of revenue, which will form the basis upon which tariffs will be calculated.

The Electricity Regulation Act provides that the allowable revenue must be set to enable an efficient licencee – in this case Eskom – to recover the cost of its service as well as a reasonable return on assets.

The allowable revenue forms the basis for the calculation of consumer tariffs. At a recent meeting of Nersa’s electricity subcommittee, much of the discussion centred on the regulatory asset base (RAB) that forms the basis for the calculation of such reasonable return.

This committee makes recommendations to the energy regulator meeting, where the final determination will be made tomorrow. During the previous tariff period (MYPD4), covering the period 2019-20 to 2021-22, the RAB was R875 billion.

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In the current application for the next three financial years (MYPD5) Eskom has based its calculations on a RAB of R1.263 billion following a revaluation.

Eskom said in its application it has followed the electricity pricing policy and the prescribed methodology by determining the value of its assets on the basis of modern equivalent asset value. The Association of South African Chambers (Asac), among others, is critical of the increased valuation. In its submission to Nersa, Asac said Eskom’s generation business was shrinking so it would not make sense to provide for the replacement of all assets.

“Asac disagrees with the RAB proposed by Eskom Generation in the application and considers this as substantially overinflated given the future needs of the business,” it stated.

But during the electricity subcommittee meeting, discussion centred on the poor performance of Eskom’s generation assets. Eskom initially based its application on the assumption that its generation fleet would perform at an availability factor of 72%, but in the public consultation it cut it to 62%, without reducing the allowable revenue applied for.

The committee members agreed that consumers cannot be expected to pay through high tariffs for power stations that are not generating electricity. If the regulator accepts the committee’s recommendation, it may approve a reduced amount of revenue.

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Nersa was also awaiting the study by a consultant on the social and economic impact of the proposed revenue decision. This will inform its final determination, as its mandate is to balance the needs of the licencee (Eskom) with those of consumers and the economy. Another aspect of the upcoming revenue determination that is unclear is whether Nersa will add R23 billion that relates to MYPD4 to Eskom’s allowable revenue for the coming financial year.

This is part of R69 billion that Nersa deducted from Eskom’s allowable revenue during MYPD4 in lieu of three annual payments of R23 billion each that government allocated to the utility over the same period as equity injections. A high court set aside this decision by Nersa and ordered the money be added back, which means tariffs will have to increase to provide this revenue.

Eskom recovered R10 billion of the R69 billion (in 2021). Nersa appealed aspects of the judgment and the appeal has not yet been heard.

It indicated it may add R23 billion back in the year starting 1 April, but Eskom believes the appeal should first be finalised. The additional R23 billion will translate into an extra 10 percentage points increase.