By Rob Futter and Shirley Salvoldi
The Eskom Multi Year Price Determination (MYPD6) is finally officially in the public domain. The proposed electricity tariff increases for the next three financial years, starting on the 1 April 2026, have gone out with public submissions open until 4pm on 1 November. The impact of MYPD6 stretches beyond the price changes, critically, it’s about Renewable Energy project viability.
An under estimation of the potential impact to the viability of Renewable Energy projects across all installation sizes, based on changes in the Eskom Megaflex tariff will have a resulting impact on other tariffs – including Municipal tariff structures.
MYPD6 details Eskom Holdings price increases based on the historically used NERSA (National Energy Regulator of South Africa) approved cost plus return on asset base (RAB) methodology to get to a revenue decision for Eskom and an average price increase to be applied to tariffs.
It’s quite a mouthful for those who are not used to regulated industries and the typically used regulator methodology. NERSA tries to use a similar methodology across, electricity, storage and gas, with specific nuances.
Although a common methodology approach to revenue decisions for monopolies makes sense, unfortunately, this often results in a ‘square peg in a round hole’ approach to approval of costs plus return. It’s a bit like when people ask us for one financial model that can consider all options – it sadly doesn’t exist or is so complex that is unusable.
Tariff Breakdown: Fixed vs Variable Costs
The table above shows the change in the fixed versus variable costs based on the tariff reform with fixed costs increasing from 11% to 21% for a typical high load factor megaflex user, with a reduction in savings. This fixed component might be higher for less consistent 24/7 loads on different tariff structures.
It’s also even more than just the RAB and revenue decision methodology – following on this decision it’s also about NERSA approving the proposed Eskom changes to the tariffs in the still to be consulted on Eskom Retail Tariff Plan, which is a different submission from the MYPD submission to NERSA.
For the past 10 years NERSA has approved a blanket increase across all components of the tariffs. This approach has resulted in some charges being higher than what they should be and others being lower in the level of all tariff charges, including that of the Eskom Megaflex tariff. These ‘Overs and Unders’ are proposed to be corrected in the Eskom Retail Tariff plan which was to submitted to NERSA during Q2 of 2024 and due for public comment later in the year.
This tariff restructuring plan is based on the Eskom cost of supply study (cost allocation methodology) and will request a material re-allocation and rebalancing of costs between fixed and variable costs and aligning with wholesale purchase costs reflecting the Eskom’s current financial year divisional costs.
For Eskom, this is a “zero sum” game as total allowable revenue from all the proposed restructured tariffs must equal the NERSA approved revenue decision for this financial year. This will ultimately be the preamble for Transmission (NCTSA), distribution and generation having fully unbundled tariffs.
The MYPD6 decision by NERSA will need to be applied to whatever tariff structural changes NERSA approves and does split out the application into the three components, but it is believed the NERSA will opine on the total Eskom Holdings submission for an average price increase.
The Eskom unbundling journey as envisaged by Cresco
Many clients – both buyers and sellers, have approached Cresco for immediate thoughts, “we already had an idea of the changes and projections requested and so some initial financial analysis has already been considered.”
What will be Eskom price increases over the next three years into the future?
We’re in the process of building a reliable prediction. In previous years, it was really a combined view or ‘average of an average’ of a few client’s views. Market analysis call it a “High-level Consensus view. We’re currently preparing analysis from first principles, recalculating the Allowable Revenue for the three submissions with sensitivities.
Cresco, based on our database of renewable energy projects with “real tariffs” achieved at financial close (not using levelized costs views), has prepared a bottom-up analysis of the cost of energy over the day and over the year. This provides a sense check to the analysis and Eskom price increases.
Should we care about the tariff restructuring plan?
Definitely. This has a significant impact on the net present value of savings from Renewable, which is the typical financial metric we use when evaluating Renewable Energy projects for larger users. This new 2024 Eskom Retail Tariff plan is expected to be similar to the 2022 proposal which was not approved by NERSA but provides more unbundling and granularity on the potential moving parts and potential significant financial impacts.
Additional changes might be included in the 2024 version of the Retail Tariff Plan and once this is published by NERSA for consultation more robust analysis is possible to analyse the impact.
We see that MYPD6 is focused on the next three years, but where to after this?
When you enter into a long-term Power Purchase agreement, buyers and sellers of power must have a long-term view of the financial impact both from increases and tariff structures. In our view, the Eskom tariff plan is just the initial phase in the development of the fully unbundled tariff and creates risks and opportunities for several types of generation.
Crystal ball gazing Eskom price increase is difficult together with the new Eskom tariff plan – but having hard data to support potential savings scenarios is possible, providing material financial impacts for both buyers and sellers of power. This will be critical for businesses wanting to establish project viability.
Rob Futter, director at specialist project finance advisory company, Cresco, and Shirley Salvoldi is the previous corporate specialist retail pricing at Eskom turned Cresco advisory consultant.