A discussion paper released by energy regulator Nersa on September 24, Heritage Day, calls for a full review of the ways Eskom’s rates are set.
It proposes a move away from the current revenue-based approach to determining electricity rates in South Africa to a cost-of-service approach that could benefit large energy users who have been subsidizing residential customers for years.
Read: Eskom fights tooth and nail for massive price hikes
Stakeholders have until October 29 to submit written comments, after which Nersa will hold public hearings through Microsoft Teams. The regulator expects to finalize the new methodology in mid-November.
It is expected to decide next week whether to reject Eskom’s request for rates for the next three financial years, which was submitted in early June. This request has been drafted in terms of the rules for the current rate period, called Pluriannual Rate Determination 4 (MYPD4).
If Nersa approves this proposal by its own electricity subcommittee (ELS) to return Eskom to the drawing board in terms of the new rules, it will have to come up with an interim measure to determine at least 2022/23 rates, as Eskom takes about a year to write a rate request.
The matter was discussed by ELS behind closed doors last week.
Eskom’s rates for 2022/23 must end before March 15, when the utility is due to present the rates in parliament. The rates go into effect on April 1 for Eskom’s direct customers and municipalities increase their rates for end users on July 1.
Ideally, Eskom’s new rates should be known in December for municipalities to incorporate into their budgets, which are implemented on July 1.
If Nersa does not approve Eskom’s rates on time, it will not be able to legally recover any income.
In its discussion paper, Nersa says that the current revenue-based methodology “has failed to offer stable prices.”
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Over the past decade, electricity prices have risen 175%, outpacing the consumer price index (CPI).
Read: Electricity: Who Pays More?
The availability of Eskom’s generation plant plummeted and the utility managed the stability of the grid by implementing continuous blackouts.
Escalating prices and unreliable supply have restricted economic growth as customers reduced their demand, sought alternative energy sources, closed, or requested special pricing agreements.
Eskom’s sales fell 14.7%.
Therefore, Nersa argues that a new appropriate methodology must be developed to ensure price stability.
The current methodology places the regulator in an impossible situation where it determines Eskom’s revenues and fees based on its costs and sales, while Nersa has no control over sales.
When expected sales fail, Eskom recovers less than promised revenue. This must then be recovered at a later stage through the Regulatory Compensation Account (RCA), resulting in a different price trajectory than anticipated.
The current system also relies on pooling costs to determine Eskom’s total revenue and average price.
“Because the individual retail rate[s] which are then derived from the averaged costs do not resemble the actual costs incurred by the utility company to provide a service to individual customer groups, this has in fact hurt customers, especially industrial and manufacturing customers, by making them pay costs they don’t contribute to. ”
Average price does not send the correct price signals to different users regarding the cost that their consumption imposes on Eskom, Nersa argues.
“The enemy in the current approach to electricity pricing is the ‘average’, which results in inefficiencies, cross-subsidies and cost socialization, which is critical in determining revenue.”
In the consultation document, Nersa proposes three critical principles:
- Activity-based costing: disaggregation of generation, transmission, distribution, system operations, market operations, marketing and other auxiliary services;
- Costs by type of service – different load profiles: base load or constant demand, medium or semi-constant demand, peak or variable demand and ad hoc or emergency demand are satisfied by different generating units and the associated costs differ; Nersa says that these must be recognized; and
- Marginal prices for setting rates: The costs associated with the different plants used to satisfy a specific demand also differ, and the question is how these different plants are implemented. “The answer lies in how the market would have approached the problem, which is that the cheapest plants in each service category would be deployed first in the order of their cost merit and the costs associated with the last plant ‘balancing’ the market. will determine the price of that service. “
According to Nersa, the idea is that the provider of each service, for example, each power plant, requests, based on its cost, its own rate, which will include some profit.
These individual rates will be delimited, and under an independent market and a system operator, this marginal price will ensure efficiency and proper order or the deployment of different generation units.
The discussion paper also points to other key determinants of the new methodology, namely the separation between trade and distribution, which allows for bilateral contracting and the requirement that different services be fixed and contracted separately.
The regulator poses 11 sets of questions for interested parties to comment on.
The discussion document can be downloaded here.