NEVA MAKGETLA: Eskom the 800-pound gorilla that does what it wants

A classic metaphor for monopoly power asks where an 800-pound gorilla sits. The answer: anywhere it wants. Eskom thinks this is a prescription rather than a warning, judging by its request for a 36% increase in tariffs for next year.

That comes on top of 15 years of extortionate price hikes. Higher tariffs cannot solve Eskom’s growing financial crisis. Indeed, they are likely to aggravate it as both businesses and households flee to cheaper, more reliable energy sources.

In constant rand terms Eskom’s average price per kilowatt-hour rose 220% from 2008 to 2023, after 15 years with no real increases at all. Soaring electricity costs have increasingly burdened both producers and households. In 2008 Eskom’s revenues equalled just 1.7% of GDP. By 2023 they had climbed to 3.7%. Yet in 2023 Eskom was generating almost 20% less electricity than in 2008, with output at levels last seen in the early 2000s. Its share in the national grid fell from 97% in 2008 to 86% in 2023.

The problems with Eskom reverberate beyond their direct economic effects. Cheap, reliable infrastructure has long been central to SA’s case to investors. The national electricity supply still outperforms most other developing countries, where businesses and households have relied largely on off-grid sources. Moreover, SA’s electricity tariffs are still not far above the global average. But other economies offer faster growth, larger local and regional markets, and often less conflict around economic decision-making.

Eskom has got away with soaring prices because SA’s regulatory framework, in effect copied from larger, more industrialised countries, isn’t fit for purpose. It presumed that regulators, backed by the state, could make Eskom control costs despite its hugely dominant market position. In practice though, the regulator, Nersa, has power to set prices, but not to improve Eskom’s efficiency. Whenever Nersa has tried to hold the line, Eskom has merrily run up huge losses, then used them to justify renewed demands for higher tariffs.

Over the past 15 years Eskom’s unit costs have soared, mostly due to extraordinarily weak procurement policies for both capital expenditure and coal. The company took on staggering debts to pay for new capacity in the early 2010s, and then could not deliver the new plants on time or with the promised output. In constant 2023 rand terms Eskom’s losses in the past three years averaged R23bn. In the same period it paid almost R50bn a year to its creditors, five times as much as in the early 2010s. For every rand it earns in tariffs it now pays close to 20c for financing.   

The negotiations over tariff hikes point to a fundamental misalignment of power within the state. Eskom still dominates the national electricity supply, despite its shrinking share. Whenever the government or Nersa suggests it might do things differently, its representatives intimate, in a tone of profound regret, that the result could be a national blackout. That makes it hard for critics to persist. Eskom’s lack of transparency about its actual costs, especially the unit price it pays for coal, aggravates their uncertainty.

Still, in the long run even the strongest monopolies run into pushback if they go too far as political and economic responses gradually undermine their power. Today, Eskom’s business model is falling apart as increasing numbers of both producers and households abandon the national grid. From 1980 to 2018 Eskom reported only profits. Since then it has only made losses. 

This is what a utility death spiral looks like: high investments lead to high tariffs, which leads to reduced demand and consequently higher unit costs. Ultimately, a more decentralised electricity system, especially given SA’s abundance of renewable energy, should boost the economy. But Eskom’s role in that halcyon future is unclear. SA needs a strategy to manage the unavoidable transition, rather than trying to turn the clock back to Eskom’s long-gone heyday.   

• Makgetla is a senior researcher with Trade & Industrial Policy Strategies.