For Eskom to succeed, power prices will have to rise even further

In 2002 Eskom was named the top utility company in the world. Two decades later it is fighting to keep the SA power grid from collapse as a series of damaging factors combine to leave South Africans planning their days around load-shedding schedules.

As Energy Month drew to a close many have been asking how we got to this point. Three significant events contributed to Eskom’s state of affairs. The 1998 white paper on energy policy suggested significant reforms for the electricity sector, including the restructuring of Eskom into separate entities. Private sector involvement for new generation was also heavily favoured by the government in its planning framework. The white paper suggested that without new generation SA would run out of electricity within 10 years. This was also when Eskom started to raise concerns about insufficient capacity to cover the forecast growth in electricity demand.

However, despite the urgency required and an open invitation to private investors to inject new generation capacity into SA, no new projects had broken ground by 2004. The government was forced to rethink its stance on allowing Eskom to be part of the new build programme, and commissioned Kusile and Medupi, albeit it far too late. Overoptimistic build times combined with design, budget and corruption issues meant it was always a case of when, not if, load-shedding would strike during the late 2000s.

The recently concluded Zondo commission of inquiry has confirmed what has long been known: the state capture project during the 2010s was a cruel blow to SA’s socioeconomic development goals. Corruption and mismanagement at the highest levels of Eskom negated any chance the power utility had to achieve its generation capacity and financial stability goals, and turned public sentiment against the once admired utility. While state capture and the erosion of key institutions were not the reason load-shedding started, it is a big part of the explanation for why it is still a part of our everyday lives.

One of our recent studies showed that improved institutional quality stabilises markets and leads to higher electricity supply efficiency. Eskom and the government would do well to implement the lessons from that research and related literature. The general decline in SA’s ability to fight corruption and provide effective service delivery has been well documented. It is therefore imperative that the authorities arrest the decline in the quality of institutions, restore the rule of law, and hold those responsible for state capture accountable.  

The National Energy Regulator of SA (Nersa), established in 1995, undertook its role to regulate and determine electricity tariffs from 2000. Nersa’s pricing scheme ensures that in principle the utility remains “functioning and sustains itself economically”. In discussions between Eskom and key stakeholders — including Nersa — as far back as 2008, broad agreement was reached that electricity prices received by Eskom needed to increase considerably in real terms to ensure its financial sustainability. However, after the 2008/2009 recession this agreement no longer seemed politically and socioeconomically viable.

The combination of extremely poor GDP per capita growth during the 2010s, rising unemployment and inequality and souring public sentiment due to mismanagement, meant there was little appetite to impose higher electricity prices on already struggling consumers. Year after year Nersa rejected Eskom’s multiyear price determination application for higher tariffs that could have allowed them to reach a cost-reflective level. As a result, the price gap remains. The continued underpricing of electricity has not done justice to Eskom or consumers seeking a stable supply of electricity.

The reality is that various electricity pricing structure reforms, including an increase in the price itself, are required if Eskom is to be financially sustainable. There is a direct link between Eskom’s financial problems and its inability to maintain its generation fleet. Despite all the cost-cutting measures imposed since the late 2000s Eskom is still forced to sell electricity at below cost-reflective levels when the full systems cost is taken into consideration. It must be emphasised that even removing the historical and current cost of corruption and inefficiencies will not be enough to allow Eskom to achieve financial sustainability on the price path now allowed by Nersa.

If Eskom wants to be run as indicated in the National Development Plan — on a self-sufficient basis following the user-pays principle — this must be reflected in the price it is allowed to charge for its output. If not, the government needs to make a clear policy decision to abandon the user-pays principle and explicitly subsidise Eskom, or its customers, as part of an effort to artificially keep electricity prices low. This would essentially institutionalise the annual bailouts Eskom has received from the Treasury in recent years.

It is worth remembering that Eskom still produces some of the cheapest electricity in the world as measured against international benchmarks. This is often lost on the average consumer as municipal surcharges — in effect a wedge between the price Eskom receives and the final household price consumers pay — can be substantial.

Unfortunately, there are no quick fixes for any of the three issues briefly discussed above. In the very short term load-shedding will be unavoidable. In the medium term policy certainty and cutting red tape — for which the minister needs to take responsibility — backed by strong institutions, will attract more investment in generation capacity, including renewables, that would help alleviate the problems Eskom faces.

As the National Prosecuting Authority starts to tighten the noose around those responsible for the incalculable damage to the economy and Eskom in particular through state capture, a strong message will hopefully be sent that SA’s institutions are not for sale. However, a lot of resources will be required to reverse the damage done to Eskom’s operations.

A revised pricing structure is perhaps the lowest hanging fruit in terms of implementation, but it will not be a popular choice until consumers feel justice has been done for the crippling of Eskom. If the utility is to have any success in achieving its desired price path it must earn back the trust of the public. This in turn will not be possible unless its generation performance improves. A Catch 22 indeed.

Honest communication to the public about its challenges, realistic solutions that prioritise internal efficiency and maintenance, and a renewed call for the institutional support it needs to succeed — including bringing those responsible for reported cases of sabotage to book — are nonnegotiable. In the meantime, South Africans need to brace themselves for a cold and dark winter.

The lessons of the past should guide us to ensure future generations do not ever have to face a similar situation. Only by making smart decisions, even if that means some short-term pain, and by holding authorities to account for their actions through a combination of civil discourse and the ballot box, will South Africans be able to see light at the end of the tunnel.

• Inglesi-Lotz is a professor, and Bohlmann an associate professor, in the economics department at the University of Pretoria.