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Nersa’s totally foreseeable unforeseeable consequence...

Defend Truth

Opinionista

Nersa’s totally foreseeable unforeseeable consequences of electricity price hikes

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By Tim Cohen
30 Jan 2022 4

Tim Cohen is editor of Business Maverick. He is a business and political journalist and commentator of more years than he likes to admit. His freelance work has included contributions to the Wall Street Journal and the Financial Times, but he spent most of his life working for Business Day. After a mid-life crisis that didn't include the traditional fast car, Cohen now lives in the middle of nowhere in the Karoo.

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. Surprise!

But in fact what is interesting is how little its sales have declined. Increase the electricity price from 30c/kWh to 110c/kWh between 2010 and 2020, and you would expect 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 whole day 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, Nersa argues, 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 on their homes 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” who have the gall to produce their own electricity 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 entirely, making the problem worse, not better.

If you are paying 10-times the price for electricity at night, and producing your own during the day with solar panels, then you might as well build a storage system into your production process and go off the grid entirely, because it would now be worth your while to do so. In their effort to force mines that are operating with solar panels during the day to keep paying high rates for electricity even though they are producing their own power would also negate their incentive to build any sort of power system. It’s just nuts.

Having messed up the 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. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

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  • The fact is that energy costs are too high for consumers and too low for producers.

    Net result is a drop in energy supply and use, aka economic growth, and a bigger drop in per capita wealth, aka poverty, inequality and unemployment.

    The left will try to solve this energy gap with a basic income grant which will never work because money printing is not a substitute for energy.

    Both left and right will burn fossil fuels to the destruction of the climate while the left sings the praises of renewables which can never sustain industrial society.

    Eskom makes matters far worse for everyone by having a bloated, overpaid workforce and corrupt procurement processes that drive costs.

    These problems are global in scale and have no solution.

    • Your second last sentence says it all. That is why the price that the producer gets to too low for it to survive. If any firm in the private sector works inefficiently the cost of that inefficiency is for its own account and it will ultimately fail as competitors take its market. If Eskom was exposed to market forces it would only survive as long as the taxpayer bailed it out.

  • Tim, you say

    “But slamming in an increase of this size would result in foreseeable unforeseen consequences. … it would force commercial systems to go off the grid entirely, making the problem worse, not better.”

    Your experiences storage costs in your domestic adventures offer useful lessons. Domestic users have options for heating etc don’t need much for light and electronics. So get off and stay off grid! But if you want to tap in to municipal or ESKOM supply when your system goes down, pay the availability charge for the privilege.

    NERSA’s proposals make sense for large energy users. NERSA’s job is to ensure that people who want to use the common public supply as a ‘backup’ must pay the costs – which include keeping generating capacity available to cover a cold, still, cloudy week and the cost of maintaining transmission and frequency control ready, just in case the ‘own generators’ decide they need public help.

    Why on earth should the rest of the users be asked to pay for the infrastructure required to meet the convenience of the few? When storage becomes cheap enough, it might make sense for ‘own generators’ to go off-grid but for big users that’s a very long way off. That’s why they don’t and won’t do it.

    Across the world, the consequence of this expectation that public systems will provide free back up to private cost savers is becoming evident. It’s higher prices and lower reliability. Stop pushing a model that is failing!

    • As someone who has lived off-grid on solar for twenty years, I absolutely agree with you Mike.

      Tim needs to do the maths.

      It is viable for a household to buy one or two days worth of battery storage but anyone who lives off grid knows that on rare occasions (e.g. a long stretch of cloudy weather) this will not be enough. The nature of weather is that it affects everyone in an area which means that all solar users will probably simultaneously need to use Eskom on day 3 of cloudy weather. So must Eskom have a dedicated gas power generator sitting idle for months waiting for supposedly “off-grid” users to need help for a few hours? And those users expect to pay the same as people who use Eskom continuously?

      To be honest, I would charge them more than R3.50 per kWh.

      If you want to benefit from being part of a complex grid, you need to pay your fair share. Paying R3.50/kWh on the rare occasions that your solar batteries are insufficient is MUCH cheaper than buying additional battery capacity just for those rare weather events.

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