With the Electricity Regulation Amendment Bill (ERA Bill) just a signature away from becoming law, Eskom has applied to the National Energy Regulator of South Africa (Nersa) for a review of the power utility’s tariff structure.
This comes as it seeks to protect its revenue from the opening up of the electricity market and the establishment of the transmission division as a stand-alone business that will service multiple clients.
Speaking to Business Times at the Enlit Africa 2024 conference in Cape Town this past week, Eskom CFO Calib Cassim said that, as the utility’s unbundling continued, the National Transmission Company South Africa (NTCSA) would come into operation in July, and Eskom needed to prepare for the revenue implications.
“We’ve [learned a lot] from our journey on transmission into NTCSA. We would then take that on board as we embark on the distribution unbundling. But the [ERA Bill] is also clear on the TSO [transmission system operator] eventually migrating towards a market.
“It’s important that the regulator is aligned to the ERA Bill, and my understanding is it does allow the regulator to have some transition mechanisms that they would have to announce. Importantly, it goes hand in hand with our next revenue application to the regulator.”
He said Eskom has sent an application to Nersa to guide the utility in “separating the revenues much more clearly and all the costs”. As Eskom unbundles, the tariffs needed to give the correct signal in each division about where the fixed-cost components and variable-cost components resided.
“If we look at our current fixed-cost/variable-cost split, it’s probably about fixed-cost 70% [and] 30% variable. But in the tariff structure, we are charging more than 70% linked to the energy, and 30% fixed. So you see the switch that needs to happen, and it can’t happen overnight.”
He said Eskom expects Nersa to align these tariff structures to the ERA Bill, which could bring changes to the electricity pricing policy.
“In terms of Eskom’s revenue, the first point we’ve always consistently said [is] we must recover the efficient operating cost and the full cost of capital, which we are not recovering. So that first has to be closed.
“No matter what we do from a regulation and a Nersa perspective, once we bill what we are allowed to bill, if we don’t collect [the monies], we will always have a problem. Eskom can’t be carrying R75bn worth of debt, and that becomes a bigger issue, as we alluded to.”
He said the price signal to switch over to the grid has to be corrected in the market, otherwise the few consumers that are consuming from the grid permanently will “carry the burden for people that are tapping into the grid as and when they feel [like it]”.
“One of the big things — for us as Eskom and as a country, as we implement this — [is] getting that clarity on the tariff restructure ... And we’re not going to close it overnight, but at least let’s set the direction of where we’re going to go and what we’re going to do in one year, two years, three years.”
Cassim said South Africa hasn’t made any significant changes to this tariff structure for several years. He said the current cycle for tariff applications will end in March 2025, and Eskom hopes to get a decision from Nersa by the end of 2024.
In terms of Eskom’s revenue, the first point we’ve always consistently said [is] we must recover the efficient operating cost and the full cost of capital, which we are not recovering. So that first has to be closed
“I think collectability is critical. This rate of non-collections [we are facing] cannot continue to increase. Eskom can’t carry that. That’s why it is also in the National Treasury’s interest. That is why they introduced this current mechanism to see the necessary behavioural changes.”
Cainmani regional manager for Africa Frank Spencer said transmission is a serious consideration for Eskom, as that network is “the jewel within Eskom’s fleet” and the backbone of all the electricity transmitted across the country.
“One of the challenges has been for them to raise money to build new infrastructure. So I think there are really two approaches: either Eskom needs to raise the money, or it must come from public funds, or the private sector needs to bring money to help build transmission.”
He said that once the NTCSA is broken out of Eskom, this will allow the power utility to ring-fence its balance sheet to help develop infrastructure. The next challenge for Eskom will be securing the routes to build the transmission lines.
“They need to get landowners’ permission to build the new infrastructure, where every landowner in the path of the envisaged network must agree, or Eskom may end up in court.”
“I certainly don’t think it will ever happen that the private sector will take over transmission. I think transmission will remain a majority public asset and a public-owned entity. But I think where they can help is certain lines — certain nodes to bring private money to enable connection of projects or loads.”
Speaking at the Enlit event, Eskom transmission head Segomoco Scheppers said the transmission development plan of October 2022, which has more than 300 projects, highlights an expansion requirement of 14,000km in new transmission lines.
“As we move towards a separate company, NTCSA, that will take this mandate forward, it’s going to be important that we work with the regulator to also ensure we are able to secure the revenue streams that fundamentally underpin all the investments we have made.”
He said Eskom will collaborate with the state, regulators and the market, quipping that “it’s very tricky, because when you have engineers reading the law, then you know you are in trouble”.
“There is a provision even in the Electricity Regulation Act that says, ‘among the objects is to ensure the orderly development of the system’. I think it’s very important to understand what that means, because you cannot just connect anything anywhere, wherever you want.”
Eskom Group CEO Dan Marokane said its approach towards unbundling is changing slightly, as the transmission entity is at quite an advanced stage.
“The implementation of the unbundling of Eskom in line with the reforms has taken much longer than anticipated. Naturally, that means we have an organisation that is in static mode. It doesn’t take long for an organisation to die.”
Department of mineral resources & energy director-general Jacob Mbele said the passing of the ERA Bill enables the creation of a competitive electricity market, which will go a long way towards ensuring investment in the sector is secured.
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