South African consumers face more tariff pain

From the newsletter

South African consumers are set to suffer even more from rising electricity costs, after the national energy regulator admitted to errors in its revenue determination for Eskom. As a result, Eskom will be allowed to raise tariffs above earlier projections, with increases of 8.76% and 8.83% in the next two years, instead of the 5-6% previously announced.

• For households and businesses already stretched by rising living costs, this spells more pressure on disposable incomes and operating margins. The settlement could accelerate the general grid exodus.

• Large industrial players, including mines, smelters and manufacturers, have already begun investing in self-generation through solar, wind, and battery storage. With tariffs continuing to rise, the incentive to leave Eskom grows even stronger.

More details

• Eskom has suffered losses mainly from its inefficiency and poor infrastructure and has resorted to annual electricity tariff increases to plug the revenue gap, but this is becoming unsustainable for consumers. In the 2024/25 financial year, it increased electricity tariffs by 12.74% but had initially requested a higher margin.

• In an application to the National Energy Regulator of South Africa (Nersa) for its Sixth Multi-Year Price Determination (MYPD6) revenue decision, Eskom stated that it had made an error underestimating certain components. The regulator confirmed a R54 billion settlement with the utility, which will be recovered from users through additional tariff hikes over the next three years. For the 2026/27 financial year, the additional increase will be 3.4%, resulting in a price increase of 8.76%. For the 2027/28 financial year, the additional increase will be 2.64%, resulting in a price increase of 8.83%.

• Across Africa, many power utilities are underperforming in revenue collection and are turning to tariff hikes to balance their books. Kenya, Nigeria, Ghana, and Botswana are some of the latest to have tariff increases. But this has not worked well for all. Some, like Kenya, have increased revenue generation with the utility turning to profit-making, but some, like those in Ghana and Nigeria, still wallow in debt. Nigeria, in particular, is hard hit, with most of its customers lacking metered connections, making revenue collection more difficult.

• The increase in prices for South Africa and Nigeria has come with a share of its challenges. With the market now liberalised, residential as well as commercial and industrial (C&I) customers are now looking into their own generation. Large consumers, once Eskom's most reliable and profitable customers, are leading the exodus. Some are setting up their own power plants, and some are securing power through power purchase agreements (PPAs) and wheeling it through the Eskom grid. The more these customers leave, the more the cost burden shifts to the remaining consumers, perpetuating the death spiral of Eskom.

• In 2024, more than 700 MW were installed for the C&I sector alone, and residential solar home systems continue to grow, with Eskom extending a waiver on registration fees for installations of residential solar systems until March 2026. In addition to Eskom's price increases, manufacturers are adopting renewables to avoid the looming EU carbon policy that is set to make carbon-intensive products expensive.

• With Eskom generating 80% of its electricity from coal, manufacturers have little choice but to seek solutions from renewable-focused Independent Power Producers (IPPs). Eskom is now integrating renewable energy into its generation mix and allowing direct PPAs with large consumers, which could help retain some of its valuable customers. However, its recent proposal to charge residential solar users a “use-of-network” fee risks slowing down off-grid solar adoption, one of the few measures that has worked well to reduce pressure on the national grid.

Our take

• Eskom’s reliance on annual tariff increases is unsustainable. While it plugs short-term revenue gaps, it accelerates customers' move to self-generation. Without structural reforms in operations, cost efficiency, and infrastructure upgrades, higher tariffs will only deepen its death spiral.

• Eskom should realise that the time for a monopoly is over and leverage its transmission and distribution assets to become a primary wholesaler and trader of electricity. This includes buying renewable power from private IPPs and selling it on to municipalities and directly to large consumers. This shift could help it retain key customers and generate revenue from new business models.

• But more investment is needed to modernise and expand transmission lines so that power from new privately funded renewable energy projects can be evacuated. This would enable Eskom to generate additional revenue through wheeling charges and strengthen its financial position.