Electricity subsidies: Who pays more and who pays less?
Large power users have supported low-income households for years. However, the upcoming tariff increase has the industry asking for a review of the cross-subsidisation policy.
To explain the 36.1% tariff increase Eskom wants next year, CFO Calib Cassim called for more transparency. He wants clarity on the subsidies included in the utility’s electricity tariffs.
Cassim spoke to journalists at a briefing earlier this week. He discussed Eskom’s tariff application to the energy regulator Nersa.
Eskom is asking for R455.5 billion in revenue for FY 2025/26. They want R495.3 billion for FY 2026/27. Finally, they seek R585.6 billion for the last year of the three-year period.
Eskom wants an increase of 11.8% for the first outer year and 9.1% for the second.
Nersa must think about Eskom’s needs and balance them with what consumers want. They should also consider affordability. By law, Eskom can recover its efficient costs and a fair margin from consumers through electricity tariffs.
The regulator has asked for written submissions about the application. They will hold public meetings in each province to hear from stakeholders.
Some customers pay more
At the briefing, Eskom explained that other customers pay more to support the pricing deals approved by Nersa. These deals are for several large energy users, like smelters. Due to confidentiality, Eskom cannot share the total subsidy amount. However, it mentioned that the subsidy will rise by R21 billion in the next financial year.
Large power users, mainly industrial customers, pay R7 billion more this year. They do this to help subsidize the tariffs for low-income households.
This is one of several ways to help low-income customers with high electricity costs. Right now, they pay a third less than other homes served by Eskom, the utility said.
Arrear debt
Eskom is also asking the regulator to approve nearly R9 billion. This money will help cover its unpaid debt for the next financial year. Municipalities owe Eskom R85 billion for bulk purchases. Out of this, four major cities owe R11 billion.
If approved, it may act as a subsidy. This means paying customers will support those who do not pay. Many see this as unfair.
Negotiated pricing agreements
Nersa has approved pricing agreements based on a framework from the Department of Trade, Industry, and Competition. This framework aims to help struggling companies with their electricity costs. Electricity is a major expense for these companies. High costs can hurt their ability to compete globally and keep jobs
They pay at least Eskom’s fixed costs but get relief on the variable component. If they start making a profit, their tariffs will change. This will help share the profit with consumers through Eskom.
Nellis Bester, chair of the Ferro Alloys Producers Association (FAPA), says some members gain from these pricing agreements.
He says despite this assistance, the workforce of FAPA members shrunk by 897 jobs in the last two years.
"Workers shut down several furnaces." Those hoping to restart now have no chance. Eskom wants to raise tariffs by 58% over the next five years."
Bester says that large power users have helped support low-income households for many years. The cross-subsidy makes up 14% of their tariffs. Last year Nersa, without any consultation, increased this to 16% by an additional 2% through the affordability subsidy charge.
Most FAPA members cannot survive without help from the government or NPAs. This support helps local smelters stay competitive in the global market.
FAPA wants to meet with Electricity and Energy Minister Kgosientsho Ramokgopa and Trade Minister Parks Tau. They need to discuss how to protect base load customers from high electricity tariffs. Keeping key industries like silicon, manganese, chrome, and steel is important.
"These NPAs are very important for attracting international investment to South Africa. "They keep jobs and balance the grid during off-peak times," he says.
Bester says the country should consider if charging other electricity users is the best way to support these industries.
“On the one hand, you assist the one guy who is in distress, but on the other hand, you put the other guy in distress.”
The government should fund these policy decisions in other ways. He says that these industries are important for Southern Africa, and local communities need the benefits.
Cross-subsidisation talk needed
Hugo Pienaar is the chief economist at the Minerals Council. He says we need to have a national discussion about cross-subsidisation in electricity tariffs. This will help us decide our national priorities.
"There will be trade-offs," he says. Beneficiation is what smelters do. The government often talks about it.
However, the South African ferrochrome industry was the world leader 10 to 15 years ago. Now, it has lost its market share to China. "It is unlikely that it will regain its position as market leader."
Bester says the same is true for manganese alloys.
Pienaar says that smelters are under pressure. With sharp tariff increases coming, there is a big risk of more closures soon.
South Africa has lost its edge in this industry. However, it still has valuable mineral reserves that the world needs. “Wouldn’t it be better to make primary mining as competitive as possible?” he asks.
Using data from 2021, Eskom showed that its electricity prices are still lower than in many other countries.
Bester notes that other countries do not show this in their tariffs compared to South Africa. He says, “From a smelter perspective, we lost the tariff advantage in 2022 at the start of the last tariff period” (MYPD5).
Do you need a Quote for our Tax and Accounting Services?
Contact our team via any of the following channels to get a proposal for your accounting and tax services:
Subscribe to our newsletters.
Purchase Contract TEMPLATES and BUSINESS STATIONERY at www.ZEELIEONLINE.com
Disclaimer:
The views or opinions expressed on this site are solely those of the original authors and other contributors.
The material and information contained on this website is for general information purposes only.
This information is for general purposes only. Don't use this information for making business, legal and tax decisions without consulting a professional.
We do not make any express or implied representation, as to the completeness or accuracy of the information published.
Tax law regularly changes, so any tax information on this site could become outdated.
We are not responsible for any other websites that you may access through links on our website.
ZPA accepts no liability for any loss or damage arising from the use of any material on this site.
