Eskom yesterday shed light on its pressing financial situation, revealing a substantial R40 billion shortfall in the 2023/2024 year determination that necessitates significant changes in its electricity tariff structure.
As the utility engaged with the media regarding its Multi-Year Price Determination (MYPD 6) application, it is clear that its financial landscape is marred by uncertainties, ballooning debts, and new regulatory challenges.
As Eskom navigates this complex financial landscape, it faces not only the challenge of justifying necessary tariff increases but also the imperative to ensure a stable and sustainable energy supply for South Africa’s economy—a balancing act that will require attentiveness from both the utility and its regulators.
Eskom is proposing a steep increase in tariffs: a 36% hike for direct customers in the first year in 2026, followed by a 12% rise in the second year in 2027, and another 9% in 2028.
These adjustments, according to Eskom’s chief financial officer, Calib Cassim, are vital for transitioning to cost-reflective tariffs amid numerous external challenges.
Chief among these are the R480bn debt-relief programme sponsored by National Treasury, carbon tax provisions, and the mounting municipal debt, which is projected to surge from R85bn to over R200bn by 2028, unless tackled decisively.
“These four factors need to be addressed simultaneously and in a short period as well,” Cassim said, emphasising the urgency of the situation.
With Eskom’s projected revenue requirements escalating from R446bn in the first year to R537bn by 2028, the implications of this are profound for both the utility and its customers.
Currently, the National Energy Regulator of South Africa (Nersa) maintains the return on regulatory asset base at a mere 1.58%, a figure that Eskom deems unsustainable given its cost of capital is forecast at 10.5%.
Moreover, the integration of a carbon tax liability totalling R5.5bn in the first year paves the way for substantial increases as the Carbon Border Adjustment Mechanism (CBAM) comes into effect.
This financial strategy, however, is not without contention. Eskom has requested a 2% allowance for revenue in arrears debt when, in reality, it should be around 4 to 5%, highlighting discrepancies in current regulatory frameworks.
Cassim underlined the complexity behind the application, acknowledging that the proposed 36% increase may seem exorbitant, particularly in a challenging economic climate.
“There have been several special negotiated pricing adjustments for commercial and industrial customers since the last determination, which impacts the overall pricing structure,” Cassim noted.
He reiterated the need for clarity and predictability in cash flows as part of their financial recovery plan, which aims to reduce Eskom’s towering debt from R480bn to an estimated R250bn by the end of the determination period.
“There is a significant concern regarding a R40bn discrepancy in Nersa’s determinations in the 2024 application, which indicates an about 10% shortfall in revenue that needs to be addressed before moving forward with the new application,” Cassim said, shedding light on the intricacies involved in restructuring Eskom's tariffs.
Further complicating matters, Cassim acknowledged that Eskom has only about 50% control over its production costs, with external variables such as exchange rates affecting diesel prices significantly.
The current tariff structure purportedly misrepresents generation costs, failing to account for the comprehensive costs associated with coal, water, nuclear energy, and Open Cycle Gas Turbines (OCGTs).
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