It’s time to scrap the backward-looking electricity price top-up system

OUTA calls again for the scrapping of the Regulatory Clearing Account (RCA) pricing process, which allows Eskom to get the National Energy Regulator (NERSA) to approve price increases to cover historical losses.

OUTA’s comments are in a submission to NERSA as part of the public participation process on Eskom’s RCA application for 2020/21, which NERSA is currently considering.

Eskom has asked NERSA for R10.720 billion in additional revenue for 2020/21, which would be added to future electricity prices.

“The current overall methodology allows Eskom to regain revenue lost due to lower demand for electricity and lower economic growth. These trends are likely to continue, leading to a cycle of decreasing electricity sales and increasing electricity tariffs. It appears that there is a need to review the methodology as in its current state, there is no incentive for Eskom to apply its mind to solving the problem, as it can always rely on the RCA to bail it out,” says Liz McDaid, OUTA Parliamentary and Energy Advisor, in OUTA’s submission to NERSA.

OUTA has made this criticism before, as have others commenting on the RCA applications.

This system adds to the economic uncertainty in South Africa.

“OUTA therefore recommends that Eskom is not awarded any further increases in electricity tariffs and that the entire RCA mechanism should be reviewed and potentially scrapped. This would ensure increased certainty and consistency in the price path of future electricity tariffs,” says McDaid.

OUTA hopes that the proposed electricity pricing policy, currently out for public comment, will help resolve this issue. 

OUTA is also concerned that Eskom’s application cites the lower electricity sales due to Covid-19, but still had to loadshed so overspent on expensive diesel generators. Eskom has said it would not pass through the costs of Covid-19 and loadshedding to consumers, but OUTA is not certain that the methodology Eskom uses to calculate these costs covers the extent of the expenditure. “NERSA should therefore be cautious in granting any RCA-related increases,” says McDaid.

Many of OUTA’s criticisms have been made previously in comments on previous Eskom applications.

This is also one of a series of pricing decisions underway on Eskom, due to disputes between Eskom and NERSA, which are expected to add to price hikes.

Eskom and NERSA have clashed over previous RCA applications, with Eskom successfully challenging NERSA decisions for 2015, 2016 and 2017 in court, and currently challenging the 2018 and 2019 decisions. The 2020 RCA application was submitted more than a year ago and a decision is still awaited.

OUTA comments to NERSA include:

• The RCA process should be reviewed as it has outlived its usefulness. “This process effectively allows Eskom to overstate its sales predictions and understate its operating costs, then go back to NERSA to get the extra funds.”

• Eskom routinely overstates sales predictions. “This is because Eskom does not pay attention to realities, where higher electricity prices and the increasing use by customers of embedded generation lowers the demand.” Sales are expected to be stagnant for the years ahead.

• Eskom’s cost calculations are questionable. “The future of South Africa’s economy depends on choices which Eskom makes. Costs incurred due to incorrect calculation of energy production costs cannot be passed through.”

• Medupi and Kusile are years behind schedule and over budget and have problems, resulting in lower generation capacity than expected and higher costs.

• Staff costs still need attention.

• “Eskom assumes that whatever price it charges, customers will pay.”

• Eskom is patently clearly not an efficient operator, and customers should not have to pay for this.

More information

OUTA’s submission to NERSA is here.

A soundclip with comment from Liz McDaid is here.