Breaking Eskom’s chokehold
SA needs to change the way it favours the utility over electricity consumers
● Nhlanhla Gumede, the head of electricity regulation at the National Energy Regulator of SA (Nersa), says its regulatory framework and methodology for determining electricity prices must change to reflect the interests of consumers rather than suppliers.
This after a court rejected Nersa’s attempt to limit the amount Eskom can claw back from consumers.
“We have a regulatory framework which is designed almost 90% to look at suppliers, not consumers,” says Gumede.
“That needs to be changed. We need to be looking at demand, which is consumers and the economy and the needs thereof. And then say, ‘How best do we protect that and not protect suppliers?’
“Nersa must respond to the needs of consumers and not be led by the needs of suppliers.”
The high court in Pretoria last week set aside three of Nersa’s regulatory clearing account (RCA) decisions that denied the amounts Eskom wants to claw back from consumers in compensation for not getting the tariff increases it applied for in 2015/2016, 2016/2017 and 2017/2018.
Gumede says the high court felt Nersa’s decisions were too subjective.
“We have coal contracts that range from R400 for a ton of coal to R1,000. We say to Eskom, ‘We believe you could have negotiated better.’ That is being very subjective, but we argue that as part of the regulatory framework we do intervene even if it is a subjective thing.”
The court found that even so, Nersa did not give Eskom an opportunity to engage with it after it had made its decisions.
Analysts say the court’s decision could lead to a 53% tariff increase, but Gumede denies this.
Nersa has to come up with another determination but this will not necessarily allow Eskom to claw back more money, he says.
“It is unlikely that Nersa is going to arrive at a different decision. Except that we would have given Eskom an opportunity to engage, so we will have eliminated the issue of procedural unfairness.”
Gumede says Nersa’s latest RCA decision to allow Eskom to claw back “only” R13.2bn of the R27.3bn for which it has applied for financial 2019 is likely to be rejected on the same grounds.
Gumede, 54, a former chair of PetroSA, was appointed to Nersa in April. He is an extractive metallurgical engineer and has an MBA from Wits University. He was with the department of minerals & energy from 2003 to 2008 and has advised international oil
They’re taking our endowment and processing it in China. But we need to develop this country here Nhlanhla Gumede
Head of electricity regulation at Nersa
companies on regulatory frameworks, energy policy and strategy.
He says court rulings against the Eskom tariff decisions do not mean consumers are in effect being told they must pay for Eskom’s mismanagement and corruption. “Definitely not. All the court is saying to us is, ‘Take this thing back and apply your methodology correctly.’
“But even if we engage with Eskom and do what is procedurally fair, it doesn’t eliminate the problems of rising electricity prices, or the problems of Nersa and Eskom disagreeing.”
The fact that there are major differences between what Eskom applies for and what Nersa grants it means there is something fundamentally wrong with the model, Gumede says.
There should be a model that allows greater pricing certainty, not just for suppliers but for people who have to make decisions about whether to invest in SA.
“They need to know what the price path is going to look like. If somebody is going to invest in a factory where 30% or 40% of input costs is electricity, they want to know whether in 10 years’ time this factory will still be profitable. If there’s uncertainty about future tariff increases they won’t invest.”
He says Nersa needs to adjust its methodology for determining electricity prices so that it reflects SA’s changing energy sector.
Is he in effect saying that consumers should not be paying high costs for coal-powered electricity when renewables provide cheaper alternatives?
“No, I’m not even looking at that. There is something called baseload demand. Unless what we’re saying is we don’t need factories, we don’t need to be able to run them 24/7 to be able to compete globally.
“If we’re saying that, then let’s eliminate the baseload. But if we’re saying we need factories and high-productive sectors that are globally competitive and energy intensive, then we need to have a service that responds to that.”
In SA the options for baseload are limited to coal and nuclear, “and we have all sorts of issues with nuclear”, he says.
“There’s very little else that runs on a 24/7 continuous basis and produces the levels of energy necessary to build an industrial economy on.”
SA’s “unacceptably” high electricity prices, which he says have risen more than 500% in 10 years, are the result of policymakers paying too much attention to supply and not enough to demand.
“We’ve been driven by the supply side, but energy must be looked at from demand first. If you don’t look at it that way you’re in trouble.”
SA’s energy problems should be blamed on policymakers advised by people with vested interests, “the suppliers of technology and all that, including coal, nuclear and renewables”.
“We’ve been driven by suppliers and not by what kind of economy we have and what it needs to thrive, including what type of energy infrastructure does it require.”
When sectors get to a point where electricity is too expensive, they shut down, he says, citing mining as an example.
“I’m not sure in terms of our economy we want to head in that direction, because then we are no better than any other African economy.”
This is why Nersa needs a new regulatory framework and methodology so it can play a more active role in protecting consumers, including big business, from destructive electricity price increases.
“The idea is to get big business on board. But they’re leaving SA and taking our endowment and processing it in China.
“But we need to develop this country here. We can’t allow SA to deindustrialise.”