The massive tariff increase granted to Eskom this week by the energy regulator will have a ripple effect throughout the economy, impacting big business, small firms and farmers already facing extensive power cuts that are hobbling production and employment.
Economists and business lobby groups warned on Friday that the hike will drive up business costs, make finished goods more expensive and risk undermining food security.
Eskom applied for a 32% hike for 2023-24, but the approved hike of 18,65% is still well above inflation. It comes into effect in April.
Sakeliga CEO Piet le Roux said the increase, despite lower reliability and availability of electricity, was “absurd”, adding that while businesses always find a way to deal with state failure, some will not make it.
“It is the absurd result of a state insisting on being energy producer through Eskom, determining prices through Nersa, and hamstringing private energy production around every possible corner.”
Le Roux advised businesses to keep their eyes on the future and “convert every possible opportunity into a victory for more decentralised and stateless electricity production”. As state failure increases, the state’s ability to stand in the way of alternatives will also diminish, he said.
The combination of a reasonably well-behaved rand and a lower oil price has led to an improved inflation profile for 2023. That said, food-price inflation remains an upside risk alongside Nersa’s decision on the 2023-24 financial year’s electricity tariff increase
— Carmen Nel, economist and macro strategist, Matrix Fund Managers
Alan Mukoki, CEO of the South African Chamber of Commerce & Industry, said small businesses are being devastated by the scale and unpredictability of load-shedding.
“When you’re constantly moving from stage 4 to 6 and even 8, which is looking possible, the disruption is huge.”
Even if businesses survive, they can’t expand or create more jobs because they can’t take on more customers and risk making commitments they don’t know they’ll be able to fulfil. Not fulfilling them is a disaster because for most small businesses reputation is everything.
Transvaal Agricultural Union of South Africa (TAU SA) general manager Bennie van Zyl warned that even the largest farmers faced irreversible losses due to power cuts and tariff hikes. He said the organisation invited agriculture, land reform & rural development minister Thoko Didiza to hear their concerns.
TAU SA would demand the government consider agriculture as an essential service, exempting it from load-shedding, he said.
Minerals Council of South Africa chief economist Henk Langenhoven said higher electricity costs meant the share of energy in intermediary inputs will increase from 24% to 38% in gold mining, 22% to 37% in iron ore mining and 13% to 19% in the platinum group metals sector.
“These increases ... fundamentally shift the intermediary cost structures in mining. Due to the different electricity consumption densities of various mining commodities, the impact is not the same across the sector, but this is deeply concerning,” said Langenhoven.
The Minerals Council said the private sector needed to expedite its 9GW pipeline of renewable energy projects to give Eskom room to upscale maintenance and refurbishment of power plants.
Economist and macro strategist at Matrix Fund Managers Carmen Nel said the increase would be significant enough to undermine improved rand performance and inflation prospects.
“The combination of a reasonably well-behaved rand and a lower oil price has led to an improved inflation profile for 2023. That said, food-price inflation remains an upside risk alongside Nersa’s decision on the 2023-24 financial year’s electricity tariff increase,” she said.
‘Budgeting for load-shedding’
Nersa electricity regulation subcommittee member Nhlanhla Gumede said the regulator and the South African economy were in a predicament which forced Nersa to approve above-inflation tariff hikes for the power utility even though there was no improvement of supply in sight.
Even though electricity tariffs have risen by 175% since 2011, Eskom’s sales declined by 15% between then and 2021, putting the power utility in a position where it needs high tariff hikes to compensate for the decline in revenue due to load-shedding and as more households shift to alternatives such as solar power.
“It is unfortunate that we are put in a situation where we are between a rock and a hard place ... We could be seen to be budgeting for load-shedding,” said Gumede, adding that the number of Eskom units that go down regularly underscored “a problem that goes beyond [the] age” of its fleet. He said capitulating to steep tariff applications was akin to “asking consumers to pay for plants that are not working”.
Yet Nersa's decision to grant the higher than inflation increases was informed in part by it not wanting another court challenge from Eskom, such as in 2021.
It is unfortunate that we are put in a situation where we are between a rock and a hard place ... We could be seen to be budgeting for load-shedding
— Nhlanhla Gumede
On Friday Eskom said it “appreciated ” the difficult position Nersa was in, adding: “The revenue determination of R319bn and R352bn for the financial years 2024 and 2025 will allow a further migration towards a price level that reflects the efficient cost of producing electricity.
The state scrambles
Speaking during a pre-World Economic Forum (WEF) breakfast in Johannesburg on Thursday, finance minister Enoch Godongwana said the government would ensure Eskom had a healthy balance sheet.
“We want to resolve the Eskom issues as soon as possible and part of that is to make sure [it has] a healthy balance sheet so [it can do what it does best]. In our view [Eskom] should be prioritising sorting out what [it has], not what [it does] not have.”
Godongwana said the government would take on Eskom’s debt and announce a plan to do so during next month’s budget speech. He said Nersa’s tariff announcement was a variable that the state had to take into account when assessing how to assist Eskom with cash flow.
The Presidency said President Cyril Ramaphosa “deeply regretted” stage 6 load-shedding, which gripped the country this week.
The government would continue to assess challenges at power station level, improved availability of expertise from Original Equipment Manufacturers and the bolstering of security to address sabotage, theft and fraud at Eskom.
– Additional reporting by Chris Barron
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