Eskom has South Africa in a corner

Power utility Eskom has consumers and energy regulator Nersa in a corner, analysts say – burning through expensive diesel far above-regulated rates, with the ability to freely recover the costs later through massive tariff hikes.

However, with the private sector finding space to provide alternatives thanks to the failure of energy supply, the national power utility will likely end up pricing itself out of an increasingly open market if it carries on this way.

This is according to independent energy analyst Pieter Jordaan, who noted this week that Eskom has failed to meet key conditions placed on it by Nersa aligned with its price determinations.

According to Jordaan, due to the high cost of the diesel fuel used in Open Cycle Gas Turbines (OCGTs), an average utilisation rate – also called a load factor – of 1% is typically regarded as the utility-scale standard for this energy supply.

In Eskom’s fifth multi-year price determination (MYPD5), given the deteriorating power situation in South Africa, Nersa relaxed the 2023/24 load factor to 6%.

This leniency was on condition that Eskom’s breakdowns (UCLF) were reduced from 31% (2022/23 FY) to 20%, and plant availability (EAF) was improved from 57% (2022/23 FY) to 65%.

However, for the 2023/24 financial year to date, Eskom has failed on all these conditions, recording averages of 33% for UCLF, and 55% for EAF.

Meanwhile, Eskom’s OCGT load factor is at 20%.

Breakdowns (UCLF)31%33%
Energy availability (EAF)65%55%
OCGT Load factor6%20%

According to Jordaan, despite failing to meet the conditions, Eskom has consumers and Nersa “cornered”.

“By using a loophole in the tariff determination…the utility (is able) to unabatedly claw back additional diesel expenses in future tariff hikes,” Jordaan said.

“Without a counterbalance, the Regulator is powerless to stop this abuse or incentivize Eskom to improve the reliability of its coal fleet.”

Worryingly, for Eskom, this is likely to come back to bite it in the long run.

Former Eskom CEO Ande de Ruyter recently noted that Eskom is likely to end up in a situation where it does not have the required paying customers to be sustainable.

De Ruyter said that Eskom’s current path would see an end-point where the utility will eventually be left with a customer base of people who cannot afford electricity and, therefore, don’t pay for it.

This comes as more South Africans have turned to energy sources like solar panels as a more reliable alternative to the state-owned power utility.

Echoing similar sentiments, Jordaan said the recent democratisation and decarbonisation of electricity production, driven by the private sector, means that future price hikes will price Eskom out of the market.

This is because the utility is likely to price in “waste-reflective-tariffs” of its diesel usage rather than the “cost-reflective-tariffs” it advocates.

Changes are coming

Nersa is currently in the process of changing how Eskom is allowed to determine its future price hikes – and one of the biggest proposed changes is dropping the revenue guarantees that have been hugely beneficial to Eskom.