1. What is the current state of municipal debt to Eskom?

Municipal debt to Eskom is a growing concern, threatening the utility’s financial sustainability. As of July 2023, the total municipal debt is around R85 billion and is projected to reach R100 billion by the end of the 2023/24 financial year. By 2027/28, the debt is projected to exceed R200 billion if current trends continue.

2. What is the debt relief incentive scheme, and why has it failed?

The debt relief incentive scheme was introduced by the National Treasury in May 2023 to encourage municipalities to pay their Eskom debt. The scheme offers debt write-offs over three years if municipalities maintain their current payments. However, the scheme has been largely unsuccessful, with only 14 out of 72 participating municipalities honoring their commitments.

3. How does Eskom plan to recover unpaid municipal debt?

Eskom aims to recoup a portion of the unpaid bills from its paying customers. The utility has included a 2.5% charge for arrear debt in its 36% tariff increase application for 2025/26. However, Eskom acknowledges the unfairness of burdening paying customers with the debt of non-paying municipalities and urges the government to address the issue.

4. What are Negotiated Pricing Agreements (NPAs), and how do they impact Eskom’s finances?

NPAs are special discount agreements that Eskom grants to large customers, particularly in energy-intensive industries like smelting. The rationale behind NPAs is to ensure the viability of these industries, but the increasing number of these agreements has resulted in Eskom forgoing an additional 5% of its total revenue. This shortfall is also factored into the proposed 36% tariff increase.

5. What role does NERSA play in the Eskom tariff setting process?

The National Energy Regulator of South Africa (NERSA) is responsible for determining Eskom’s tariff based on a formula that allows the utility to recover its costs, provided they are deemed prudent and efficient. NERSA also allows Eskom to earn a return on its assets. However, NERSA has consistently allowed a lower return on assets than Eskom’s estimated cost of capital, contributing to the utility’s financial challenges.

6. What is Eskom’s justification for the proposed 36% tariff hike?

Eskom cites several factors driving the proposed 36% tariff hike, including:

• Rising primary energy costs: Particularly the increasing cost of coal.
• Recovery of arrear debt: The 2.5% charge to recover unpaid municipal debt.
• Special discounts for large customers (NPAs): The revenue shortfall from discounted rates for large customers.
• Carbon tax: The implementation of environmental levies and carbon taxes.
• Increased return on assets: Eskom has proposed an increase from 1.5% to 4%.

7. What are the potential consequences if Eskom’s financial situation is not addressed?

If the municipal debt issue and other financial challenges are not addressed, Eskom’s financial sustainability will be seriously jeopardized. The utility may be forced to seek another bailout from the National Treasury by 2028, further burdening the fiscus.

8. What steps are being taken to address Eskom’s financial challenges?

Eskom is implementing internal efficiency measures to achieve savings of R15 billion to R20 billion. However, the gap between the cost base and the current tariff is significant, requiring government intervention. Possible solutions include addressing the municipal debt crisis, reviewing the NPA framework, and potentially providing targeted subsidies to ensure Eskom’s long-term sustainability.