Electricity doom-loops: South Africa's municipalities aren't paying for their unreliable power

Eskom’s Kendal power plant

In some sense, electricity is like an Amazon Prime subscription. You pay a fixed fee each month just for the privilege of using its great service, and you pay for your goods or electricity usage on top. When you pay, they deliver your product reliably. That is, unless you live in South Africa.

There, you might pay a nominal standing charge to be connected to the electricity grid, but for 20% of 2023, there was no electricity service for the average South African. This was because of “load shedding,” deliberately switching off parts of the grid because there was not enough energy supply to meet demand. This is not just because of an ageing coal-dependent network, but from mismanagement, corruption and sabotage.

If this were the quality of service offered by Amazon Prime, I would be unsubscribing and moving to another platform. No such luck in the electricity sector. Like many countries, South Africa’s grid is a monopoly, operated by the national electricity utility, Eskom. There is nowhere else to take your money, unless you invest in installing back-up power at your home. Most people cannot afford this.

Another retaliation is to stop paying for electricity until the service improves. This usually leads to the utility cutting off your electricity entirely, which is why people usually do not take such a drastic step.

Yet several municipalities, including Johannesburg, have withheld payments from Eskom. Their CEO is not happy about it. After delivering a reliable grid for all of three months, the FT reports that they are now demanding the money they are owed.

Eskom has warned a failure by South African municipalities to pay billions of rand owed to the state-owned power utility is thwarting its recovery efforts just as it is close to ending a decade of blackouts that have hit growth and scared away foreign investors.

“It’s a major risk to our business. In many cases, they can afford it, but haven’t prioritised paying Eskom,” Eskom chief executive Dan Marokane told the Financial Times. …

Eskom’s unpaid municipal debt was growing at R15bn ($833mn) annually, Marokane said, threatening to derail its plan to make a profit after a disastrous five years in which it struggled to keep the lights on and made combined losses of R111bn. The years of blackouts stifled investment, but Eskom says it is turning the tide and recently celebrated 100 days without power outages.

The CEO later threatens to cut off these municipalities if they fail to pay:

Marokane, who took up his role in March, said that while Eskom may have previously chosen not to cut power to non-payers for fear of a backlash against the then-ruling African National Congress, “we are not there now — we’re very clear on the steps we need to take”.

What is interesting here is that individuals are not necessarily paying Eskom directly. Some people receive a lower rate and are billed by their municipality, which then remits the funds to Eskom. Local governments, and not necessarily individuals, are holding up the payments. In a case last year, one municipality raised c. 90% of the money owed to Eskom from its residents, but failed to hand it over due to ‘mismanagement’.

This places Eskom in a bind, much like the municipalities themselves. No one wants to turn off the electricity of someone struggling to pay their bills, but the utility cannot function without payments. Turning off an entire municipality’s electricity seems unimaginable, which is probably why they can boldly renege on their payment obligations.

Yet without recovering costs, Eskom’s performance will struggle to improve, as they will not be able to afford to invest in improvements. This, in turn, reduces customers’ confidence further and lowers the propensity to pay.

This ‘doom loop’ phenomenon is not unique to Eskom. Nigeria’s unreliable power is driven in part by non-payment to energy generators. Electricity was historically charged to the end user below the cost to generate it. This meant distribution companies could not recover enough of their costs to pay suppliers. This year, Nigeria announced plans to increase tariffs to cost recovery levels for 15% of ratepayers in a bid to improve their utilities’ finances and attract investors.

In other jurisdictions, the doom loop begins with customers switching to off-grid electricity supply. As customers install solar panels to reduce electricity bills, or diesel generators to improve reliability, they purchase fewer kilowatt hours from the utilities. This reduces the utilities’ revenue even though there is a relatively fixed cost for operating the grid. In response, they can raise per-unit prices to recover costs, which then increases the incentive to go off-grid.

One solution to break the investment doom loop is to raise the fixed portion of the energy bill, so that even if a customer has alternative generation sources, they are paying for their use of the electricity grid. In the UK, for example, standing charges represent 27% of the average electricity bill (£219 per household), guaranteeing some revenue collection for distribution and transmission companies. Per-unit charges for utilities with fixed costs are also adjusted in later years to account for any shortfall in their required revenue.

South Africa’s equivalent of standing charges represented just 10% of tariffs in 2021/2022, yet Eskom estimated that 76% of their costs were fixed. This perhaps contributed to lower cost recovery, as customers were not paying a significant fixed charge during extensive blackout periods. In their 2023-24 retail tariff plan, Eskom proposed to increase the fixed payments to 24% of the bill to better align with their cost structure.

Another solution is to simply raise prices for the customers that are paying. Earlier this year, reports of a draft Eskom document suggested a plan to increase tariffs by up to 44% in 2025. This could make it even more compelling to switch to distributed electricity resources, or to stop paying.

A third option is to take out the middle-man municipalities, and have all households pay Eskom directly. Eskom would then be directly accountable to their customers, and responsible for disconnecting power for non-payment. As it stands, disconnecting municipalities seems untenable if some of the customers are, in fact, paying. Municipalities’ outsized negotiating power may also mean that Eskom never recovers their debts, if they cannot credibly threaten any punitive action for non-payment.

Eskom’s demands to be paid are amusing after delivering such a woefully poor service for the past year. Yet pushing for municipalities to pay their bills matters for improving the quality of the grid, especially if they have collected them from customers. The consequences of continued non-payment seem like they will only hurt the South African economy and its people in the long run.