National Energy Regulator of South Africa (Nersa) fulltime member for electricity Nhlanhla Gumede has called for the regulatory methodology used to set electricity tariffs in South Africa to be overhauled, arguing that the multiyear price determination (MYPD) approach is not aligned with the changes taking place in the sector.
Speaking during a virtual briefing only days after Nersa lost another court battle with Eskom over its application of the MYPD, Gumede argued that the ongoing disputes between the regulator and utility were largely about the “outputs of models, rather than the construct of those models”.
“Perhaps we are fighting about methodologies that should have been changed quite some time back,” he added.
Gumede reported that Mineral Resources and Energy Minister Gwede Mantashe had also expressed concern about the prevailing tariff-setting model, revealing that, during a recent interaction with Nersa, the Minister questioned why the regulatory methodology had remained static in a dynamic sector such as electricity.
“The market is changing dramatically, yet we are using static structures, we’re using outdated methodologies in terms of how we set prices, how we regulate the sector and how we’ve structured the industry. We are not moving with the times,” Gumede said, indicating that the MYPD created scope for too much discretion.
“Therefore, rather than us fighting about the output of models, isn’t it time that we focused our energies on changing the models, on changing the regulatory approach.”
Gumede provided no detail as to the alternatives being assessed by Nersa and government, but indicated a preference for a formula similar to the one used to set petrol prices, whereby the price at the pump was adjusted monthly in line with highly visible indicators, such as changes to the oil price and the rand/dollar exchange rate.
Nersa’s acknowledgment that the MYPD might not be fit for purpose, follows years of steep tariff increases and comes amid growing uncertainty about the future price path in light of recent adverse court rulings against the regulator, which is likely to result in further upward adjustments to future tariffs.
It also follows an appeal made by the Energy Intensive Users Group (EIUG) in June for the Department of Mineral Resources and Energy to undertake an urgent review of the regulatory methodology.
The EIUG, whose mining and industrial members account for over 40% of the electrical energy consumed in South Africa, also described the MYPD methodology as outdated and warned that persisting with the framework would result in continuously rising electricity tariffs, which would undermine the country’s industrial and mining competitiveness and further accelerate the utility ‘death spiral’ under way at Eskom.
The EIUG said the model was in need of “fundamental” reform so that Eskom could be increasingly exposed to market forces rather than a guaranteed regulatory return.
“It is crucial to have a predictable electricity forward price path to support business planning and attract much-needed investment,” the EIUG argued.