No big bang

19th August 2022

By: Terence Creamer

Creamer Media Editor


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Some sense seems to have prevailed at the National Energy Regulator of South Africa (Nersa) regarding the implementation of a new electricity price determination methodology.

In a statement confirming that the deadline for comments on the proposed methodology has been extended, the regulator stated that a phased approach would be adopted to any future implementation.

The statement reads as follows: “It is essential to clarify that the 30 September deadline is not intended to represent a ‘big-bang’ implementation approach. It is envisaged that once the methodology has been approved, an appropriate transition period will be allowed, as has happened in the past, to enable the industry to adapt to the new [methodology] over time.”

Such a phased-in implementation, the statement adds, will “ensure predictability of electricity prices, which is critical to all stakeholders in the electricity industry”.

The statement is significant, as the proposed methodology has raised eyebrows not only within Eskom – which has called for a full impact assessment before implementation and has also questioned whether it is implementable, given the proposed methodology’s significant data requirements, premised on smart meters being ubiquitous – but across municipalities and parts of business. Had Nersa moved to implement the methodology in full in 2024/25 (the courts have disallowed it from implementing it next year), there would most likely have been yet another legal challenge by Eskom and possibly others.

The regulator’s motives for pursuing a new methodology are not the problem. It is obvious that the electricity landscape is changing dramatically and Nersa’s ambition is to keep pace with these changes. However, there are many issues with the proposed redesign, which pose financial threats not only to electricity suppliers but also potentially to taxpayers (as the approach proposes new subsidies for different customer segments) and customers (as any financial unsustainability could result in even more security-of-supply problems).

Instead of assessing what adjustments should be made to the current multiyear price determination methodology to accommodate the changes under way, the new methodology seems to depart materially from internationally accepted regulatory principles by introducing concepts such as allocating generation costs based on load type rather than time of use.

Given the risks associated with such a radical overhaul, an iterative approach seems more sensible. It could even be argued that there would not be as much antagonism towards the prevailing methodology had it been applied properly. Instead, Nersa’s application has been found wanting regularly when taken on legal review.

In the area of electricity regulation, the immediate focus has to be on processing Eskom’s next revenue application and adjudicating the utility’s proposed retail tariff plan. Nersa has started the process of evaluating Eskom’s submission for 2023/24 and 2024/25, albeit after some legal prompting, and Eskom’s retail tariff plan has been published.

Attempting to complete stakeholder consultation on a new methodology while processing two such important matters is either overly ambitious or designed to limit scrutiny. In light of the far-reaching implications, stakeholders should be given the time and space required to digest Nersa’s proposal and to make meaningful input.

Edited by Terence Creamer
Creamer Media Editor



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