How business subsidises other electricity users

Businesses and large electricity users can no longer afford to pay up to 18% more for electricity to subsidise Eskom’s poor residential customers, according to the Energy Intensive User Group (EIUG).

The obligation to provide a social package is on government, not business, and it should be done from the fiscus, says the lobby group. The EIUG represents mines, large factories and foundries. Its members collectively use 40% of the country’s electricity supply.

Energy regulator Nersa recently granted Eskom annual tariff increases of 9.41%, 8.1% and 5.22% for the next three years. The first increase will kick in on April 1 for Eskom’s direct clients, who will pay on average almost 14% more for electricity from that date, due to an additional 4.4% increase granted to Eskom earlier in terms of the Regulatory Clearing Account (RCA) mechanism. 

The RCA is a risk mitigation measure that allows Eskom and its clients to recover amounts that were overpaid or underpaid when the assumptions underpinning the revenue allocation did not play out as expected.

During the public hearings preceding Nersa’s recent tariff decision, Eskom disclosed that intensive energy users paid up to 18% more for electricity in 2017/18 than the amount it costs Eskom to supply them with it. Large users like mines, factories and big municipalities paid up to 10% more.

Eskom showed that, together, these two groups ‘overpaid’ to the tune of around R12 billion to subsidise other users.

According to a study conducted by the EIUG, the largest portion of this was paid by intensive users due to the large volumes of electricity they consume.

In practical terms it means that an intensive user consuming 600 gigawatt hours (GWh) per month would get an electricity bill of about R500 million. About R42 million of that would not be for its own use, but to subsidise Eskom’s residential and rural clients. 

Residential customers paid up to 36% less

In 2017/18 the utility’s residential customers paid up to 36% less than they would have if their tariffs correctly reflected the cost of supply to them, while its rural clients paid up to 16% less thanks to cross-subsidisation.

To some extent there will always be some cross-subsidisation or pooling. Without it, electricity would be inaccessible to users in outlying areas of the network, such as farmers at the end of the distribution line. 

Tariffs also vary within user groups and are structured to favour, for example, households that use less due to an assumption that they are also poorer than larger residential users.

However, in 2013 Nersa introduced an additional affordability subsidy to protect poor consumers and this has led to an increasingly skewed tariff regime.

According to EIUG spokesperson Shaun Nel the scale of cross-subsidisation is increasing.

He says without that burden industry would be better placed to absorb big Eskom tariff increases.

This comes against the background of calculations done by Minerals Council of South Africa economist Henk Langenhoven, which indicate that the tariff hikes over the next three years could cost the mining industry 90 000 jobs as operational costs spiral.

Nel said scrapping the cross-subsidisation would help industry to remain competitive and avoid job losses due to increasing costs.

Eskom appealed to government to establish a proper framework for cross-subsidisation between user groups, emphasising that it does not have any discretion in the matter.

Speaking on behalf of the Nelson Mandela Bay Business Chamber, David Mertens said the framework is quite clear in the Electricity Pricing Policy. 

Transparency required

He says it stipulates that every user category should be charged the cost of supply to the group. While the policy provides for cross-subsidisation favouring, for example, the poor and farmers, it requires transparency in doing so and for it to be specifically approved. The policy further specifically stipulates that the impact of cross-subsidisation on the “productive part of the economy” – in other words, businesses – should be kept to a minimum.

Mertens says it is difficult to determine the level of cross-subsidisation, because the true cost of supply per user group is unclear. 

He says the disproportionate burden on intensive users and businesses is exacerbated at municipal level with residential users being favoured “massively” with no transparency. He questions whether the municipal cross-subsidies have been approved and therefore whether they are even being imposed lawfully.

He says at municipal level households are subsidised to such an extent that it would be impossible to phase it out in one go. In fact, it could take a decade, he says.

Read: More pain ahead as Nersa grants Eskom 9.4% increase for 2019/20