2,000% electricity price pain in South Africa

From next month, South Africa’s electricity tariffs will have increased by nearly 2,000% since the country became a democracy.

While the cost of certain goods and services would have increased gradually over time due to inflation, Eskom’s hikes over this period far exceed that figure.

In 1994, the average price of one kilowatt-hour of electricity from the power utility was 10.32 cents,

Had the price increased by inflation over the past 31 years, it should have been roughly 58.35 cents in 2025.

After Eskom’s upcoming 12.74% tariff hike takes effect on 1 April 2025, the average tariff will be R2.12. That is roughly 1,955% — or 20 times — higher than in 1994.

While the tariff hike is much lower than the 36.55% Eskom had requested, it is still the fourth-highest increase in the past decade.

It is also almost three times the average consumer price inflation of 4.4% in 2024.

Eskom’s tariff hikes were generally aligned with or under inflation between 1994 and 2007.

In those 13 years, the average tariff changed from 10.32 cents to 19.80 cents, with the highest annual increase being 10.15% in 2002. The tariff was then even decreased by 0.03% in 2004.

The inflation-linked trend changed in the first year after Eskom implemented load-shedding.

For its 2008 financial year, Eskom was granted a whopping 27.5% increase, followed by 31.3% in 2009, and 24.8% in 2010.

These increases were largely driven by the power utility’s urgent need for new capacity in the form of the Medupi and Kusile power plants.

Despite going over budget by hundreds of billions of rand, neither power station has been fully commissioned — nearly two decades after construction began.

Energy expert Chris Yelland recently said that, considering all the accumulated costs, Kusile was possibly the most expensive coal power station ever built.

Yelland said Kusile exceeded its initial budget by a factor of 2.5, and the 10-year delay in finishing the power station cost the country dearly — in interest on debt and in impact on the economy due to load-shedding.

In the 18 years between 2007 and 2025, the average Eskom tariff has increased from 19.80 cents to 212.03 cents — a 971% jump.

The graph below shows Eskom’s actual average tariffs between 1994 and 2025 and how much these should have been if they had been linked to inflation.

Eskom’s senseless costs argument

Eskom has frequently argued its tariff hikes are necessary for the entity to provide its services at “cost-reflective” prices.

However, this approach is misguided when it comes to monopolies, which are not subject to the pricing dynamics of competitive industries.

Eskom is effectively free to set prices as it wants, as most South African consumers have no choice but to buy its electricity.

No market forces are compelling it to seek efficiency or punish it for allowing egregious corruption, like someone approving the purchase of a wooden-handled mop for over R200,000.

The only entity able to stop the power utility from imposing excessive tariff hikes is the National Energy Regulator of South Africa (Nersa).

Nersa must help protect the consumer by ensuring that Eskom only collects enough revenue to cover its costs, with a reasonable profit margin.

One of the best arguments for why using costs as the basis for setting prices does not make sense in Eskom’s case comes from Basic Economics writer Thomas Sowell.

The renowned economist used the example of government-run enterprises in the former Soviet Union to illustrate his point.

These entities regularly asked for more money than they required, at the expense of the union’s taxpayers.

As they did not have to contend with other companies, there was no pressure to keep down costs and run efficiently.

“They take everything they can get, regardless of how much they need, and they don’t worry about economising on materials,” Sowell explained.

While it is not operating in a communist country, Eskom shows many of the same symptoms as these entities.

The utility’s operating costs have skyrocketed due to an oversized workforce, corruption, mismanagement, and a waste of resources.

To date, South Africans have been left largely powerless against the flurry of price hikes.

For the most part, only those with the financial means to invest in their power have been able to cut down their bills, albeit typically only after the upfront investment is paid off.

However, the opening up of the electricity generation and distribution industries made possible by amendments to the Electricity Regulation Act will add competition to the larger electricity supply chain.

The establishment of an independent transmission network operator over the coming years will also eliminate Eskom’s control over which independent power producers (IPPs) can connect to the grid.

There are already many IPPs propositioning businesses and homeowners with lower tariffs from alternative energy sources.

These companies still supply some power from Eskom or municipalities to their customers but because of their leaner business models with little room for waste, they can reduce the overall tariff.

The price of generating a kWh of electricity with solar or wind has plummeted in recent years, dropping well below Eskom’s cost to generate electricity with coal.

With battery prices also in freefall, the per-kWh price of dispatchable stored renewable energy could soon be cheaper than coal, posing a significant threat to Eskom’s business.