Flawed electricity pricing policy and tariff regulation are deepening SA’s municipal electricity crisis

South Africa’s municipal electricity tariff methodology is fundamentally broken.

Worse still, recent regulatory practice risks accelerating financial stress on paying consumers while simultaneously undermining the sustainability of municipal electricity services.

South Africa’s municipal electricity crisis is often reduced to a familiar list of symptoms: failing infrastructure, high losses, weak billing systems, political interference and a culture of non-payment. While all of these are real, they obscure a deeper and more structural problem at the heart of the system — the way municipal electricity price increases are calculated, approved and regulated.

At the centre of this lies the annual electricity tariff determination process overseen by the National Energy Regulator of South Africa (Nersa). What should be a transparent, economically rational and legally sound mechanism has instead evolved into a deeply contested process, increasingly challenged in court, poorly understood by stakeholders and widely mistrusted by consumers and municipalities.

A technically sound and industry-credible alternative exists — but it requires Nersa to rethink its approach from first principles.

A system under strain

Municipalities that distribute electricity are required to apply annually to Nersa for approval of tariff increases. In theory, this process is governed by an Electricity Pricing Policy, which requires municipalities to periodically undertake cost-of-supply studies and to justify tariffs based on prudent costs, efficient operations and transparent cross-subsidies.

In practice, however, the system has drifted far from these principles. Over the past decade, repeated court cases against Nersa over municipal electricity tariffs have highlighted deep flaws in process and substance. These legal challenges are not an inconvenience — they are a signal that the regulatory framework no longer enjoys legitimacy across the sector.

The core problem is not that tariffs are increasing — Eskom’s bulk supply costs and broader inflationary pressures make municipal increases unavoidable. The problem is that the methodology used to determine those increases is opaque, inconsistent and technically unsound, exposing consumers and municipalities to significant risk.

From benchmarks to confusion

Historically, Nersa relied on relatively simple benchmark-based models to assess municipal tariff applications. These models used assumed cost ratios, benchmark increases for major cost categories and limited prudency checks. While far from perfect, the approach at least provided a degree of predictability.

That approach collapsed after successful court challenges, which found that benchmark methodologies could not replace a properly conducted cost-of-supply study for each distributor. In response, Nersa attempted to shift towards a revenue-requirement-based framework. Unfortunately, this transition has been poorly executed.

Between 2024 and 2025, Nersa introduced a series of revenue-requirement templates, some of which were later ruled unlawful, others introduced without proper consultation, some full of technical errors, and some used in practice despite verbal assurances to the contrary.

The result has been regulatory confusion, inconsistent decisions and widespread uncertainty within the municipal electricity sector.

A model that overcharges consumers

The most troubling aspect of Nersa’s current approach is not administrative confusion, but substantive error.

One example is the treatment of electricity losses. Nersa’s current model assumes technical losses of 12%, a figure that bears little resemblance to engineering reality in most municipal networks. In practice, true technical losses are closer to 5%, with the balance being non-technical losses such as theft and non-payment. This 12% is effectively a new benchmark that has not been established through any consultative processes required by the Electricity Regulation Act.

By misclassifying non-technical losses as technical losses, the model effectively allows municipalities to recover the cost of electricity theft and non-payment from paying consumers. Worse still, the model then adds the cost of these assumed technical losses back into bulk energy costs, resulting in double-charging. This is not a marginal technical issue — it directly inflates approved tariffs and places an unjust burden on compliant customers.

Similar flaws appear elsewhere in the model. Capital expenditure is incorrectly included in revenue-requirement calculations, even though depreciation already provides for capital recovery. Other revenues are incorrectly deducted, internal electricity sales are mishandled, and equitable-share funding for Free Basic Electricity is frequently misallocated.

Taken together, these errors point to a fundamental misunderstanding of how a revenue-requirement framework should function. The result is a system that simultaneously overcharges consumers and under-recovers legitimate municipal electricity costs.

Why cost-of-supply studies matter — but not annually

Nersa recently insisted that municipalities submit cost-of-supply (COS) studies annually. This is neither practical nor legally required. Proper COS studies are complex, expensive and time-consuming. Expecting municipalities — many already financially distressed — to complete them every year is unrealistic.

The Electricity Pricing Policy is clear: COS studies are required every five years, or when major structural changes occur. Their purpose is threefold: to determine the overall revenue requirement, to allocate costs fairly across tariff categories, and to design tariffs that reflect economic and policy objectives.

Annual tariff applications should not attempt to redo this work. Instead, they should build on the most recent COS study, adjusting the revenue requirement for inflation, Eskom price changes, and justified operational shifts, thus the need for a new revenue requirement method and template.

A workable alternative

A more credible and defensible approach exists, and it is outlined in detail in the proposed methodology developed by Hendrik Barnard of Elexpert.

At its core, the proposed framework separates cost allocation from revenue adjustment. Cost allocation is based on historic actuals from audited trial balances, not forward-looking budgets that are frequently cut mid-year. Revenue requirements, by contrast, are adjusted for known future changes, including Eskom tariff increases and inflation.

Crucially, the methodology corrects the treatment of losses by recognising that excessive non-technical losses should not be recovered from paying consumers. Instead of reducing bulk energy costs, the model adjusts revenue to reflect realistic loss thresholds, improving transparency and fairness.

The framework also replaces historic-cost depreciation with current replacement-cost depreciation. This ensures that tariffs provide adequately for the refurbishment and replacement of ageing electricity infrastructure — one of the most critical challenges facing municipalities today.

The surplus debate

One of the most contentious issues in municipal electricity tariffs is the question of surplus. The Electricity Pricing Policy allows for a municipal surplus of electricity, but in practice, few municipalities generate a true surplus once capital requirements are considered.

Most municipal electricity “surpluses” are illusory, failing even to cover annual refurbishment needs. Expecting electricity consumers to fund general municipal rates relief through inflated tariffs is both economically inefficient and socially regressive.

Why this matters beyond electricity

The implications of flawed municipal electricity tariff regulation extend far beyond the electricity sector itself.

Electricity prices shape business competitiveness, investment decisions, inflation and employment. Unpredictable and unjustified tariff increases undermine industrial planning, weaken municipal credibility, and fuel resistance to payment, further worsening non-technical losses.

At the same time, underfunded networks accelerate infrastructure decay, increasing outages and reliability risks. The result is a vicious cycle in which higher tariffs, poorer service and declining trust reinforce one another.

A call for regulatory reset

South Africa does not need another stopgap template or incremental tweak. It needs a regulatory reset.

Nersa should suspend the use of its current municipal revenue-requirement model and initiate a transparent, consultative process involving municipalities, organised business, consumer bodies and technical experts. The objective should be a single, coherent, legally defensible methodology that is consistently applied across the sector.

The alternative is more litigation, deeper mistrust, and a continued erosion of municipal electricity sustainability. At a time when electricity is central to economic recovery, energy transition and social stability, that is a risk South Africa can ill afford. DM

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