Nersa’s totally foreseeable unforeseeable consequences

In economics and sociology, there is a concept known as the law of unintended consequences, or, you could say, unforeseen or unanticipated consequences too. Perhaps the most significant unintended consequence in recent times was the decision to publish the salaries of executives. The intention was to reduce salaries by shaming high earners. Executive pay has just exploded since that decision because no board or executive wants to acknowledge they are not worth the highest salary being paid.

But what if the unintended consequences are entirely foreseeable? Would that then be the law of deliberately imposing unintended consequences? Or would that be the law of foreseeing unintended consequences, but blundering on anyway?

This complexity crossed my mind recently when the National Energy Regulator of SA (Nersa) published its proposed new methodology for tariffs. Like all instances of the application of the law of unintended consequences, the logic starts off absolutely fine.

The electricity-generation mix is changing in SA, where the capacity to generate power has been so destroyed that the only way to keep vital parts of the economy moving is to allow those parts to generate their own electricity. There is also the small issue of the climate emergency.

The problem, as Nersa correctly points out, is that SA is in the midst of an energy dilemma. The current methodology is based on determining the average price by dividing allowed revenues, largely determined by a generator’s declared costs, with Eskom forecasted sales. “This approach means Eskom’s declared costs have been increasing, triggering applications for increased revenues.”

But it’s not the formula that has led to Eskom wanting higher tariffs, it’s that the construction of its new power plants have been out of budget, and that has forced them to charge more. Nersa says that, as Eskom has increased prices, its sales have declined. Increase the electricity price from 30c/kWh to 110c/kWh between 2010 and 2020, and you are going to lose a few customers. That Eskom lost so little in sales – from 211,594GWh in 2009/10 to 206,572GWh in 2019/20 – shows how much of a grip it has on the consumer.

But Nersa is right that the system involves weak price singles that drive poor consumers’ choices. At the moment, a variable charge is applied for peak-use electricity that can be around eight times the lowest price.

The problem, says Nersa, is that this system does not encourage economic growth and is anti-poor. It would be easier for industrial users (and consumers) who are using electricity through the day cycle to be charged a single rate. They can then plan properly and won’t be incentivised to switch off generators, for example, at peak periods.

Hence, it would be better to split the pricing system into three categories: base-load users; “day or mid-merit demand” users; and variable users. And here is the crucial sentence: “Variable load requires expensive sources of power generation and should not be socialised as that would put a lot of price pressures on both the poor [who can’t afford self-generation] and industry [who actually do not contribute to this cost]. This tariff is likely to be in the order of R3.50 per kWh.”

That compares the existing average price of R1.10c per kWh, or three times the existing average price. A later clarification document uses the same terminology but increases the proportion even more. It says: “The tariff for variable load is likely to be in the order of 5-10 times the baseload tariff, depending on the economies of scale achieved, which will largely be a function of the load profile and technology used to the supply load.”

These “variable price users” will be shopping centres with grid-tied solar systems on their roofs, mines with new solar-generation systems and people who have solar panels in a grid-tied format.

What is really going on? My guess is that Nersa is panicked at the prospect of users deserting the grid, so it’s trying to anticipate a revenue decline by changing the tariff structure and forcing “deserters” back into the system – at a higher rate.

It is indeed more expensive for electricity providers to generate electricity for irregular use rather than regular use. But slamming in an increase of this size would result in foreseeable unforeseen consequences. Instead of recouping the cash, it would force commercial systems to go off the grid.

Having messed up electricity supply, it’s difficult to regain users’ faith in the system, and commercial consumers are desperate to find alternatives. Toying with the pricing system is not going to solve that problem, especially if the unforeseeable consequences are so obvious they cannot be said to be unforeseeable.