Banele Ginidza

The National Energy Regulator of South Africa (Nersa) on Wednesday issued a clarion call for tighter regulation of the coal sector, a move that comes in the wake of significant tariff hikes approved for Eskom.

Responding to questions in the portfolio committee on electricity and energy on the justification for the recent Sixth Multi-Year Price Determination (MYPD6) approval, which effectively gave Eskom 36.1% tariff increase, Nersa Commissioner Tembinkosi Bukula highlighted that the coal sector currently operates as a “blind spot” in Eskom's production costs.

Bukula remarked that the regulator had no authority to scrutinise the coal contracts that Eskom negotiates independently, which is increasingly concerning as a majority of the contracts near the end of their 20 or 30-year terms.

"The energy regulator does not, nobody regulates that part of the business, the coal sector, is free. Eskom contracts with them. We may have a view of how big the contract or how high the contract price is but we do not regulate that, nobody does," Bukula said.

He said the renegotiation of the contracts was also Eskom's prerogative and Nersa was aware that many contracts have come to the end of their 20 or 30 year terms and those renegotiations were being done.

"Because third-grade coal has become a commodity in the international market, we do base our assessment of the cost of coal delivered to the mine on what the Richards Bay Coal price is and what the transportation price is, not all stations are close to the mines that supply them," he said.

He emphasised that elements such as Broad-Based Black Economic Empowerment (BEE) procurement and the involvement of small miners also complicated the regulatory landscape.

Amid this evolving scenario, Nersa's CEO Nomalanga Sithole remarked on Eskom's collaborative efforts to clarify its coal contract arrangements, thereby addressing some of the regulator's concerns over coal costs.

However, she reiterated that Nersa did not regulate the specific cost per ton that Eskom pays for coal, which ultimately flows into the tariffs charged to consumers.

"Because they pay a particular cost per ton, that cost will need to be reimbursed through the tariffs that is the amount that Eskom is paying and we do not regulate that," Sithole said.

The implications of Nersa's recent approval of an average electricity tariff increase of 12.74% cannot be understated.

This increase, which falls short of Eskom’s requested hike of 36.15%, aims to mitigate potential detrimental effects on South Africa's economy.

In its economic analysis, Nersa projected that Eskom's proposed increase would have resulted in a productivity decline across various sectors—3.34% in the primary sector and a staggering 3.98% in the secondary sector.

By approving a lower tariff increment, Nersa's intervention trims the potential productivity loss: from 3.34% to 1.24% in the primary sector, and from 3.98% to 0.58% in the secondary sector.

Even in the tertiary sector, where Eskom's request could have led to a 0.65% decline in productivity, Nersa's phased approach—12.74% in FY2025/26, 5.36% in FY2026/27, and 6.19% in FY2027/28—limits that drop to just 0.24 percentage points.

This regulatory adjustment illustrates Nersa's hard stance on Eskom's operational decisions, especially in light of municipal debts and the contentious use of Open Cycle Gas Turbines (OCGTs) to bolster power generation when coal-fired stations could be utilised instead.

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Nersa highlights need for coal sector regulation in Eskom tariff increase discussions