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Capital Markets

South Africa: Local governments to shoulder energy-price spikes

Electricity price rise adds to budgetary burdens; Might hit those least able to afford increases

As excitement gathers before this summer’s football World Cup in South Africa, financial pressure on the host nation is also growing, especially at municipal-government level.

South Africa’s National Energy Regulator (Nersa) has allowed state-owned electricity generator Eskom to charge municipalities higher energy rates. Eskom electricity prices for municipalities will be permitted to rise on average by about 25% a year from April 1 2010 until March 31 2013.

The extra money will help Eskom build more power stations and plug South Africa’s energy shortage. But the issue is socially sensitive, even though electricity prices in South Africa are still relatively low, despite previous Eskom price increases in recent years.

Municipal governments distribute electricity to most South African households and small businesses. This year, the regulator has issued guidelines to municipalities on how much they can pass on Eskom’s price increases.

In the past, municipalities have used income gained from energy sales to cover the cost of less profitable public services. According to a recent report on the municipalities by Moody’s Investors Service, electricity sales bring 30% of municipalities’ revenue but electricity purchases only account for 20% of their spending.

Nersa says municipalities that implemented price increases to end users in line with Eskom’s 30% price increases in the 2009/10 financial year should only implement new price increases of about 15% on average a year for the next three years.

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