The Impact of Eskom's Tariff Hikes

Clerissa Holm • September 2, 2024

Navigating the Rising Costs of Electricity in South Africa

Electricity in South Africa has become a bit like that pricey coffee you know you shouldn’t buy every morning but still do—except with electricity, you don’t really have a choice, and the damage to your budget is quite more significant. 

Thanks to Eskom's latest tariff hikes, keeping the lights on has become a whole lot more expensive. 

Let’s dive into what’s happening, why it matters, and how South Africans are navigating these rising costs. 

Chris Sache, Former Eskom engineer and Current Founder and CEO of Effectual Energy Consultants has added some advice from his personal experience within the industry as well as some mind-blowing calculations that will shock you. 

Remember when electricity was cheap and load shedding was just a term economist tossed around? Those days are long gone. Since 2007, Eskom has steadily increased tariffs, partly due to the hefty costs of maintaining and expanding its ageing infrastructure. Imagine trying to fix an old, rusty car that keeps breaking down—except this car powers the whole country.


These tariff hikes have skyrocketed over the years. By 2022, electricity prices had risen by a whopping 450% since 2007, while inflation only climbed by about 98%. So, while your groceries might cost a bit more these days, your electricity bill has likely doubled or tripled and will continue to over the next 5 years. (BusinessTech).


You might be wondering, “Why is Eskom hiking prices so much?” The answer is a mix of mismanagement, crisis spending, and the need to fund new infrastructure. 


Eskom has had its fair share of challenges—think of it as trying to juggle while riding a unicycle on a tightrope. 


Years of financial and operational troubles have forced the utility to pass on costs to consumers. The National Energy Regulator of South Africa (NERSA) plays a role here, too, regulating these increases to ensure Eskom can keep the power flowing (Eskom).

A Brief History of Eskom Tariff Hikes

Why the Price Hikes In Context of Rising Electricity Costs?

What is Compound Interest?


Compound interest is the interest you earn on both the initial amount of money and the interest that has already been added to it. In simple terms, it means that the amount grows faster over time because you’re earning interest on the interest.

How Does This Relate to Electricity Tariffs?


Now, let's apply this concept to your electricity bills. If Eskom raises electricity tariffs by, say, 15% each year, you're not just paying 15% more each year based on your original bill. Instead, each year, the 15% increase is applied to the new, higher bill amount from the previous year.


Here’s how it works:


  • Year 1: Let’s say your electricity bill is R5,169 per month.


  • Year 2: With a 15% increase, your new monthly bill becomes R5,944.35 (15% of R5,169 is R775.35, added to your original bill).


  • Year 3: The next 15% increase applies to R5,944.35, not the original R5,169. So now, your bill is R6,836.00.


Each year, the increase is calculated on a higher amount, just like compound interest, so your electricity costs grow faster and faster.

How Eskom's Tariff Hikes Impact You

For businesses

For businesses, especially those that need a lot of energy, these price hikes are like a bad plot twist. 


They’re now faced with tough decisions—should they invest in their own energy solutions, scale back operations, or pass the costs onto customers? It’s a bit like trying to decide whether to make your own coffee at home or keep splurging at your favourite café (SA-TIED).


To put this into perspective, let's look at an example:


● Current Costs: Your business currently spends R57,360 each month on electricity. That’s R688,317 every year.

● Future Costs: If electricity prices keep going up, by the year 2030, you could be paying R130,747 each month. That adds up to R1,568,958 per year.

● Annual Increase: This means that, on average, your electricity costs will increase by about 14.72% every year.


Now, ask yourself: 


How much does your business need to grow each year just to keep up with these rising electricity costs? This isn’t just about making profits—it's about staying in business and keeping the lights on.

Table 1 - Eskom Tariff Hikes for Companies

Graph 1 - increase % since 2009 -2023

Graph 2 - Increase per year 

For Residents

And what about regular folks? These rising electricity tariffs are having a noticeable impact on many South Africans, making it harder for people to manage their household budgets. For those living in urban areas with lower incomes, this situation is particularly challenging. As electricity bills continue to rise, some households are being forced to cut back on their electricity use or switch to alternatives like candles or gas. While these options might be cheaper, they’re not ideal or convenient, especially in the modern world.


To put things into perspective, let’s compare your electricity bill to your mortgage payment:


Imagine your home costs R3,000,000, and your monthly mortgage payment is around R28,950.

Currently, your electricity bill is 18% of your mortgage payment, which equals R5,169 per month.


If electricity tariffs continue to increase with compound interest:


●     By the year 2037, your electricity bill could be 108% of your mortgage payment.

●     This means you’ll be paying R31,333.46 per month for electricity, which is more than your mortgage payment.

 

Now, consider this: while your mortgage payment is likely to stay the same, electricity tariffs are expected to keep increasing. In about 10 years, you could end up paying more for your electricity each month than you do for your home

Graph 3 -Electricity Cost And Mortgage Payment As A % Of Home Loan Cost (2024-2043)

The Risk of an Endless Price Hike Cycle

Here’s where things get a bit more dramatic. Economists warn of something called a ‘utility death spiral.’ It sounds ominous, and it kind of is. As Eskom raises prices, more people and businesses might start looking for other ways to get their energy—like solar panels on rooftops. 


This means less revenue for Eskom, which could lead to even higher prices to cover the costs, pushing even more people away from the grid. It’s like a never-ending game of chasing your tail, and it’s not a game anyone wants to play (SA-TIED).

Finding a Sustainable Path Forward

So, what’s the solution? Eskom is in the process of some big reforms, like splitting into different entities for generation, transmission, and distribution.

 

The idea is to create more competition and, hopefully, drive prices down. In the meantime, many South Africans are looking into energy-efficient solutions and alternative power sources to keep their costs manageable. Think of it as swapping out that expensive daily coffee for a homemade brew—it might not be as convenient, but it saves money in the long run​ (Alternative Info & Dev Centre).

 

If Eskom continues to implement a 15% tariff increase per year, the cumulative impact on electricity costs over time will be significant. 

Here's an outline of the potential cost benefits of switching to solar power under such circumstances:

1. Compound Effect of Annual Increases

A 15% annual increase might seem manageable at first glance, but the compounding effect can lead to a drastic rise in costs over a few years. For instance, if your electricity bill is R1,000 per month today, a 15% increase would push it to R1,150 next year. After five years, that bill could exceed R2,000 per month due to compounded increases.


2. Long-Term Savings with Solar Power

By installing a solar power system, you can lock in your energy costs and protect yourself from these annual increases. Even though the upfront cost of a solar installation might seem high, the break-even point could be reached much sooner if Eskom continues with these aggressive tariff hikes. Over the typical 25-year lifespan of solar panels, the savings could be substantial—potentially offsetting the entire cost of the system several times over.


3. Insulation Against Future Price Hikes

Each year that Eskom raises tariffs by 15%, the cost of grid electricity becomes more prohibitive, making the savings from solar power even more pronounced. As grid electricity becomes more expensive, the relative cost of maintaining and operating a solar system (which has minimal ongoing costs) becomes more attractive.


4. Avoiding the ‘Utility Death Spiral’

As more consumers and businesses turn to solar power to escape these escalating costs, Eskom may face reduced demand, which could lead to further price increases in an attempt to cover its fixed costs. By investing in solar, you insulate yourself from this potentially vicious cycle, ensuring that your energy costs remain predictable and manageable.


5. Potential Return on Investment

The return on investment (ROI) for solar power improves as electricity prices rise. If Eskom continues to increase tariffs by 15% annually, the payback period for a solar installation could be shortened dramatically as well as increasing the return on investment (ROI), making it a financially prudent decision sooner than later.

As South Africans grapple with the rising costs of electricity driven by Eskom's annual tariff hikes, it’s clear that traditional reliance on grid power is becoming increasingly unsustainable. 


The situation demands innovative solutions, such as investing in solar power, which offers a viable way to escape the cycle of ever-increasing electricity bills. By generating your own power, you not only save money in the long run but also gain energy independence, reducing your vulnerability to future price hikes.


The ongoing reforms in South Africa's energy sector, while promising, will take time to yield tangible benefits. In the meantime, adopting alternative energy sources like solar power can provide immediate relief and long-term financial security. 


As more consumers and businesses take control of their energy needs, we could see a significant shift in the country’s energy landscape—one that fosters sustainability, affordability, and resilience.


In the face of these challenges, the path forward is clear: embrace change, invest in smart solutions, and take proactive steps to safeguard your financial future. 


By doing so, you’ll not only weather the storm of rising electricity costs but also contribute to a more sustainable and efficient energy system for all South Africans.

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