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No immediate fix for municipal tariff hikes, says energy minister

No immediate fix for municipal tariff hikes, says energy minister
Minister of Electricity, Dr Kgosientsho Ramokgopa during an interview on 26 February 2024 in Pretoria, South Africa. (Photo: Gallo Images / Rapport / Deon Raath)
Kristin Engel
By Kristin Engel
12 Sep 2024
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With these tariffs, residents across the country have been forced to pay exorbitant amounts for electricity with municipalities imposing harsh subsidies. This has been causing even more financial strain in low-income and middle class households.

On the sidelines of a parliamentary briefing on Wednesday, Minister of Energy and Electricity, Dr Kgosientsho Ramokgopa, told Daily Maverick that no solution would be found to the municipal electricity tariff increases in the next six months, but their intention was to find a more “enduring solution” in a year’s time.

 The National Energy Regulator of South Africa (Nersa) briefed the Portfolio Committee on Electricity and Energy on the reasons for its decision relating to the current municipal electricity tariff increases that it determined under its new methodology using Cost-of-Supply studies and Cost-Based-Structure studies. 

With these tariffs, residents across the country have been forced to pay exorbitant amounts for electricity with municipalities imposing harsh subsidies. This has been causing even more financial strain in low-income and middle-class households.

One case in point is the City of Johannesburg, where indigent households using about 200kWh of electricity per month are facing an increase of about 60%, and other poor households using 300kWh of electricity per month are facing an increase of 45%.

Read more in Daily Maverick: Johannesburg’s indigent households set to be hammered with massive electricity price increases

In the parliamentary briefing, Nersa sought to explain how it determined these exorbitant electricity tariffs, with members of Parliament saying that Nersa did not account for the socioeconomic situation that consumers were now facing – amid an already untenable cost-of-living crisis.

Saying that it had considered the socioeconomic situation of the country in its tariff methodology, Nersa said it also considered the millions receiving free electricity through the Free Basic Electricity initiative. 

However, only 2 million households were receiving this out of the 10 million households that qualified, according to the minister of energy and electricity.

Finding a solution for poor households


Ramokgopa told Daily Maverick that no solution would be found in the next six months, but the intention was to find “a more enduring solution” in a year’s time.

The minister said the best way to rectify the situation was through the Free Basic Electricity initiative.

“The lowest hanging fruit is the Free Basic Electricity (initiative) — it is not extended to everyone, but the money there gets allocated to municipalities. It’s just a reconciliation, making sure that those that are deserving and to whom money is already allocated, they get that,” Ramokgopa said.

He added that they were thinking of unconventional ways to protect vulnerable poor and middle-class consumers from these electricity tariffs, saying that one way could be to assess to what extent a ceiling could be applied for these households.

Minister of Electricity, Dr Kgosientsho Ramokgopa, during an interview on 26 February 2024 in Pretoria, South Africa. (Photo: Gallo Images / Rapport / Deon Raath)



“The bottom line is that the situation is untenable,” Ramakgopa said.

He added that as renewable energy became a bigger player in the country’s energy mix and its cost curve came down, average electricity costs would probably go down. 

Ramakgopa said that the only way they would get the Free Basic Electricity initiative to all qualifying households was through municipalities. 

“The problem is there, how you measure the indigent register, how you measure which households are qualifying, whether municipalities have got the right capacity to do that exercise,” he said.

“It’s something you must resolve internally, but it is a function of a bigger question – that of the capacity of municipalities to discharge their responsibility. We are looking to work with them (municipalities), we will never bash them as we know what they are going through, we will work with the Department of Cooperative Governance and Traditional Affairs to make sure that we address the problem,’ Ramakgopa said. 

Electricity Tariff Methodology 


Welile Mkize, the acting executive manager for electricity, said that in October 2023 a judgment was made to say that the methodology Nersa was using was not in line with the Electricity Regulation Act of 2006. Therefore, he said they had to abide by the court order and find an alternative methodology to determine municipal tariffs. 

Nersa then chose to implement the Cost-of-Supply studies in its methodology, to ensure that their approach was compliant with the act. However, Nersa said that many municipalities were unable to submit and carry out these studies due to a number of challenges.

The first challenge was the skills and capacity within municipalities. Mkize said that Cost-of-Supply  studies were not budgeted for by municipalities, and municipalities did not have proper asset registers, and thus struggled to properly allocate costs.

 “Nersa then provided assistance from Sustainable Energy Africa, a private consultant, which  developed a model for municipalities to use in performing Cost-of-Supply  studies. There were also various workshops held with municipalities, and one-on-one training sessions were provided to some municipalities at request, so there were a number of interventions that the regulator engaged in order to assist,” Mkize said. 

However, Mkize said the rate of submission of Cost-of-Supply  studies was very low, to the extent that there was a risk of most municipalities not having approved tariffs.

Seeing this, Mkize said they then adopted the Cost-Based Structure for municipalities that could not submit their Cost-of-Supply studies, as a transitional measure, to determine tariffs.  

Only 76 municipalities were able to submit completed Cost-of-Supply studies. The rest of the tariff applications, 102, were assessed based on the licensed municipalities’ Cost-Based Structure submitted.

Different outcomes in tariffs


This led to different outcomes in the 2024/25 municipal tariffs, with some municipalities having much higher costs than others. 

Mkize said the introduction of these Cost-of-Supply studies suddenly showed where the larger costs were located, and those tariffs needed to be adjusted accordingly.

In some instances the Cost-of-Supply/Cost-Based Structure resulted in tariffs increasing at very high percentages. In such cases, Mkize said that Nersa had encouraged the municipalities to phase in the increases over time.

In other cases, he said the average increase would be reasonable but increases to some customer classes would be high, with other classes reducing due to elimination of cross-subsidies. 

“In such cases, Nersa encouraged the municipalities to phase the elimination of cross-subsidies over time,” Mkize said.
The energy regulator was very aware of the economic issues in the country, the socio-economic situation specifically and so the target was to try and keep the increases to a maximum of 12-15% to cushion the consumers of electricity, knowing in some cases that municipalities were under-recovering, which meant they will have to have a recovery plan to recover those revenues over the years rather than just an instant increase all at once

“The energy regulator was very aware of the economic issues in the country, the socio-economic situation specifically and so the target was to try and keep the increases to a maximum of 12-15% to cushion the consumers of electricity, knowing in some cases that municipalities were under-recovering, which meant they will have to have a recovery plan to recover those revenues over the years rather than just an instant increase all at once,” Mkize said. 

Afriforum case to stop the municipal tariff hikes


This briefing comes almost a month after the Gauteng Division of the High Court dismissed Nersa’s leave to appeal against a high court application launched by Afriforum, seeking to stop Nersa from pushing through these “unlawful and invalid” municipal tariff hikes.

In a statement, AfriForum says that municipal electricity rate increases were implemented nationwide at 178 licensed electricity distributors on 1 July 2024, despite only 66 distributors having conducted Cost-of-Supply  studies. They said that at least 112 municipalities had therefore already been charging illegal electricity rates to millions of consumers for more than a month.

On Wednesday, Nersa CEO Nomalanga Sithole confirmed that they would petition the Supreme Court of Appeal against this and “highlight the incorrect assumptions factored into the judgment”.

In June 2024, the high court ruled in AfriForum’s favour that Nersa’s decision to consider municipalities’ applications for tariff hikes without the required Cost-of-Supply studies was unlawful and invalid.

AfriForum’s Manager of Local Government Affairs, Morné Mostert, said that the submission of Cost-of-Supply studies was a required component of municipalities’ applications for tariff hikes as prescribed by the Electricity Regulation Act 4 of 2006. 

Mostert explained that Cost-of-Supply studies were critical because they provided a clear outline of what municipalities should charge for electricity to deliver the service and maintain networks properly.

In the briefing Mkize explained that Nersa sent two letters to municipalities in the process of determining the 2024/25 tariffs, first asking municipalities to submit the Cost-of-Supply studies required in the new methodologies to determine the tariffs, and then asking them to submit a Cost Breakdown Structure.

These letters were contradictory, according to the Nersa CEO, who said this was the basis of Afriforum’s case.

Mkize said the first letter was sent on 17 November 2023, asking municipalities to provide Cost-of-Supply studies by 01 March 2024 to afford Nersa sufficient time to process the municipal tariff applications.

Letter sent


However, Mkize said they noticed that many were not able to supply these already by January 2024, they then sent another letter requesting municipalities to provide the regulator with their Cost Breakdown Structures of their actual costs, which would be used to review their tariffs. 

“Nersa received and assessed a total of 76 tariff applications that were compliant with Nersa’s Cost-of-Supply studies. The rest of the tariff applications (102) were assessed based on the individual municipality’s Cost Breakdown Structure submitted,” Mkize said.

As Nersa,  Sithole said they believed that what was used by Afriforum as a basis to take them to court was not clearly understood in terms of the two letters, “because the two letters were basically complementary to each other”.

“We believe that the decision the court has taken has got huge implications in the sense that it would have a negative impact on the industry as a whole. Hence, as a regulator we resolved to petition the Supreme Court of Appeals after our leave to appeal to the high court was turned down,” Sithole said. 

 Nersa added that the implication of the dismissal of their leave to appeal was that municipalities who did not provide the Cost-of-Supply studies with their applications would not be able to continue implementing Nersa-approved tariffs, but would have to revert to implementing the 2023/24 tariff.

“This will impact the sustainability of municipalities as Eskom increases on municipalities have taken effect,” said the regulator.  DM 

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