26 March 2008 – South African consumers have been warned that the proposed 53% tariff increase requested by Eskom are just the tip of the iceberg and that electricity prices will have to double within the next two to three years in order for Eskom to retain its financial stability.

Alec Erwin

Public Enterprises minister,
Alec Erwin

This warning came from Public Enterprises minister, Alec Erwin. Despite opposition from the ANC, Congress of South African Trade Unions and opposition parties and warnings from economists that these increases could have a harmful effect on inflation, Erwin said it was better to begin the increases at once, rather than hit the consumer with "one heavy blow later".

Government last week supported Eskom’s request for a tariff increase, necessary to cover increased costs for coal and diesel, which have risen in price by more than 25%.

Last week Eskom lodged a request with the National Energy Regulator of South Africa (NERSA) for an increase of 53%, or a nominal 60%, despite being granted a 14.2% increase for 2008/09.

"In a very short period, in two or three years, we are probably going to have to double the price of electricity on average. How do we do that? Should we not do it in bigger chunks and quickly? It makes sense to do it that way," Erwin told the National Council of Provinces.

"We are proposing that it will be better for everybody to take those costs now rather than wait until 2009 and probably have a 100% increase."

According to the Business Day newspaper, over the last two years Eskom absorbed R7bn (US$1 billion) of under-recoveries on fuel. Failure to get the requested tariff increase means the shortfall will amount to an extra R5,3bn (US$757 million), excluding the more than R2bn (US$285 million) required for demand-side management initiatives. The total shortfall would be more than R7bn (US$1 billion).

"If we delay until the next cycle of price increases we are going to have a very big increase," Erwin said. "We are going to have the cost of the coal and the diesel which would have been incurred right through two financial years" and would also "have to factor in the financing".

"It makes sense to begin the price increases now. The original planning was that the regulator would start next year. In view of the experience we have had, we believe we should start this year with the price increases."

Erwin continued that a failure by Eskom to recoup costs would lead to a deterioration in the utility’s financial situation, which would affect its ability to raise capital for its expansion programme.

The proposal put to the regulator included a "very low" increase to be imposed on the poor. "So it will be the more affluent households that have greater scope for electricity saving — if they don’t save they will pay more," said Erwin.

One of the ANC’s main concerns was the effect on the poor, although the party also said it was "unfair" for Eskom to propose tariff increases, when it had "not demonstrated any ability to deal adequately with the power crisis".

Erwin further said it was "most unlikely" that Eskom executives would receive bonuses this year as "stated objective had not been met". The payment of bonuses has been a source of grievance among consumers who have to deal with unreliable electricity supply.