Eskom is considering a new pricing structure which will have a material impact on the value proposition of solar installations.

Eskom generates revenue from two sources: fixed connection charges and electricity tariffs which vary based on usage.

As a customer, the fixed connection charge is currently a relatively small part of your monthly electricity bill, with usage charges making up the bulk of what you pay.

Eskom is now proposing a change to this pricing structure – it wants to significantly increase the fixed connection charge and reduce electricity usage charges.

This change, Eskom explains, will reduce the financial risk to the company and help it recover its fixed costs.

Eskom explains

Eskom explained that connection charges contribute towards the initial capital cost to connect a customer to the existing Eskom network.

This cost is based on the national average cost to build the line and connect the customer to the power grid.

Electricity tariffs, in comparison, are split into various types of charges like c/kWh and R/kVA to recover the cost of operating and maintaining the network.

Energy costs, which include Eskom generation plus Independent Power Producers (IPPs) are recovered through c/kWh charges.

Network costs, which include transmission lines, distribution lines and transformer costs, are largely fixed in nature.

However, these network costs are currently also recovered through variable (c/kWh) and fixed (R/kVA and R/Customer) charges.

Fixed charges for fixed costs

Eskom explained that having variable tariff charges for a fixed cost can cause problems when there is a reduction in usage (sales).

This is because the reduction in revenue from less usage does not have an equal reduction in its own fixed network costs.

To resolve this problem, Eskom wants to reduce variable usage charges like c/kWh and increase fixed charges.

This change, Eskom says, will help the company to recovery actual fixed costs that are incurred even if volumes are lower.

“If this is not done, a customer that decides to put a solar installation on their rooftop can reduce their bill not only with the energy value but also the network value,” Eskom said.

Eskom then makes a loss on this customer, because its fixed network costs for this customer did not decrease, but the customer is paying only a fraction of their usual monthly bill.

“This then means that the network charge of customers without solar must increase, effectively resulting in customers with solar being subsidised by customers without solar,” Eskom said.

“If we don’t start to fix the tariffs to respond to changes in technology and environment – to be more cost-reflective by recovering fixed costs through fixed charges – all customers will be impacted negatively.”

The impact on solar installations

Most companies and households which have solar installations also use Eskom power as a backup.

The business case for these solar installations works, as there is a big saving on electricity usage charges.

Eskom’s new pricing structure will change this, however, as a large part of an electricity bill will be a fixed charge which will not be reduced by using solar power.

Should the proposed changes be implemented, the savings which can be achieved through using a solar installation will be much lower than they are now.

This can break the business model for a solar installation unless the household or company goes completely off the grid without any backup power from Eskom.