Overstrand: Why your electricity bill keeps climbing

After our recent posts on electricity increases in the Overstrand, many readers forwarded documents to us that they had found on the municipal website. We thank everyone who made the effort. Unfortunately, most of these documents turned out to be only limited and selective extracts from the Electricity Cost of Supply (COS) study.

We eventually managed to obtain the complete COS study, as well as additional supporting documents, through a networking process — which is exactly what OVAC is about. We can also confirm that we did not find the complete report on the municipal website.

We have now uploaded the full COS study and you can access it at OM Cost of Supply and Tariff Study 1st Doc (1).pdf.

The report is long and quite technical, but once one works through it carefully, several interesting as well as some concerning points emerge. At its core, the report deals with a simple issue: how the cost of maintaining the electricity network should be shared between residents at a time when electricity consumption is starting to decline.

A big thank you to everyone who helped obtain and interpret this document. Below is our attempt to explain the key points in simple language.

A major restructuring of electricity tariffs

The Overstrand Municipality started a major restructuring of electricity tariffs in 2024.

The official reason for this restructuring is to make electricity tariffs more “cost reflective” and to reduce the extent to which some customers subsidise others. In principle, this is a reasonable and fair objective.

The COS study itself states that this restructuring means that some residents will pay less for electricity, while others will pay significantly more.

Another factor mentioned in the report is the growing number of residents installing solar systems, which reduces the amount of electricity bought from the municipality. This reduces municipal electricity revenue and was apparently a motivation for increasing fixed tariffs.

To soften the impact of these changes, the restructuring was designed to be implemented gradually over four years.

We are therefore currently about halfway through the process. This suggests that the increases experienced over the past two years may continue for another two years before the process is complete.

Public participation – some red lights

The COS study states that any submission to theNational Energy Regulator of South Africa (NERSA) should only take place after an extensive public participation process.

We were also able to obtain minutes of a Council meeting on 24 April 2023 which recorded a council resolution that, amongst other things, a series of public meetings would be held to explain the purpose of the COS study to residents. See Apr 24 2023 Council Minutes .pdf page 3 number 5.1.

We were unable to find evidence that these public meetings actually took place, and most residents appear to be unaware of the contents of the COS study.

These minutes also indicate that the COS study would be submitted to NERSA as a provisional report. We could find no records of the COS study ever being formally adopted by Council.

If this is indeed the case, the lack of meaningful public participation, as well as the provisional status of the document, may raise questions about the legality of the implementation of some of these tariff changes.

A surprising finding in the COS study

One of the more surprising findings in the COS study is that the electricity service appears to have already been covering its costs, and generating a surplus, before the restructuring began.

In simple terms, electricity revenue was already more than enough to cover the cost of supplying electricity.

This suggests that the restructuring may not have been introduced to rescue a loss-making service, but rather to change how electricity costs are distributed between different consumers and to protect municipal revenue as electricity consumption declines.

It should also be considered that another possible motivation may have been to increase municipal revenue.

More concerning, the COS study also mentions that, at the time the report was compiled (2022), both the “infrastructure charge” and the “Exceeding Notified Maximum Demand charge” were not approved by the National Energy Regulator of South Africa and may therefore have been unlawful. It is unclear for how many years these charges may have been collected.

How municipalities make money from electricity

Municipalities are allowed to buy electricity from Eskom and sell it to residents at a higher price.

The difference between the purchase price and the selling price must cover:

• the cost of running the local electricity network
• maintenance of cables and transformers
• staff and vehicles
• substations and other infrastructure.

In many municipalities, a large portion of electricity revenue goes toward buying electricity from Eskom, while the remaining portion covers the cost of running the local electricity system and may generate a modest surplus for the municipality.

The way this surplus is entered into the municipality’s financial records is important. It took some time to fully understand how this works.

The 40% administrative cost question

Electricity departments make use of services provided by other municipal departments such as:

• finance
• human resources
• information technology
• legal services
• municipal management.

It is normal practice for a portion of these costs to be allocated to the electricity department, while the remaining portions are allocated to other departments such as water, sanitation and refuse removal.

However, the COS study indicates that administrative and support costs equal to about 40% of the electricity department’s direct operating costs are currently allocated to electricity.

In simple terms, this means that for every R100 spent on actually supplying electricity, about R40 is added for municipal administrative and support services.

The consultants who compiled the COS study specifically note that the National Energy Regulator of South Africa is unlikely to accept a value higher than 20% without further explanation.

This matters because the higher the costs attributed to electricity, the higher the tariffs required to recover those costs — and the more ratepayers have to pay for their electricity.

Fixed charges and solar installations

Another important part of the restructuring is the introduction of larger fixed monthly charges.

The reasoning behind this is that many of the costs of maintaining the electricity network remain the same, even if people use less electricity.

The report also argues that households with solar installations still rely on the electricity network for backup supply and therefore should contribute to maintaining that infrastructure.

OVAC, on the other hand, is of the opinion that it is unfair to expect households that use only small amounts of electricity — and therefore receive limited benefit from the network — to finance it to the same extent as households that use large amounts of electricity and benefit more from the network.

Fixed charges also create another potential problem.

They do not distinguish between households that use little electricity because they have solar systems, and households that use little electricity because they cannot afford to use more.

As a result, some low-consumption households may be disproportionately affected by fixed charges.

Holiday houses may also carry a significant burden even when they are empty.

An unintended consequence may well be that some residents with solar installations decide to go completely off-grid in order to avoid these fixed charges altogether, meaning the municipality could lose this source of income entirely. This would of course be the opposite outcome to what the municipality intended.

Capacity charges

Another issue that deserves attention is the introduction of capacity charges based on the maximum amperage supplied to a property.

In theory, these charges reflect the fact that the electricity network must be designed to supply a certain maximum load to each property. Lower amperage connections require thinner cables and smaller transformers and are therefore cheaper to install.

However, in practice most residential electricity networks were built many years ago and are already capable of supplying typical household capacities such as 40 or 60 amps.

In many cases, reducing the rated supply capacity of a household therefore does not result in any real reduction in infrastructure costs, because the cables, transformers and substations remain the same.

This raises the question of whether capacity charges fairly reflect the actual cost of supplying electricity to typical households, or whether they simply represent another way of recovering fixed infrastructure costs from residents.

In some new developments, infrastructure may be designed for lower-capacity connections in order to reduce construction costs. While this may lower initial costs, it may also limit the maximum electricity supply available to households in those areas and could require major infrastructure upgrades if higher capacity is needed in the future.

Complexity of the tariff system

Working through the COS study and related documents also reveals a high level of unnecessary complexity in the tariff structure.

For most residents it is extremely difficult to understand exactly how electricity tariffs are calculated and why different charges apply.

OVAC believes that a simpler and more transparent system would benefit both the municipality and residents.

A possible simpler approach

While NERSA generally encourages the use of some fixed charges, OVAC questions whether they are necessary beyond ensuring a guaranteed income for the municipality and allowing municipalities to recover revenue in ways that are less visible to consumers.

It should also be noted that NERSA provides guidelines rather than strict rules regarding tariff structures, which means alternative approaches may still be possible.

OVAC believes a much simpler tariff structure could include the following principles:

• verifying what share of total municipal operating costs truly relates to electricity supply
• keeping administrative allocations within reasonable limits (below 20%)
• incorporating the true costs into a transparent electricity price per kWh
• removing fixed charges wherever possible

For example, an electricity bill could simply consist of the number of units used multiplied by the calculated price per kWh.

In such a system, households that use more electricity naturally contribute more to the cost of the network, while those who use less electricity pay proportionally less.

OVAC is also of the opinion that residents should not carry the burden of cross-subsidising other residents. Government is already responsible for providing social support through taxes and grants that all ratepayers contribute to. Any subsidies for vulnerable households should ideally come from government support programmes.

Final thoughts

The COS study shows that the Overstrand Municipality is in the process of implementing a major restructuring of electricity tariffs.

Such restructuring is not necessarily wrong, but it has significant consequences for residents and therefore requires transparency, public participation and clear communication.

The COS study raises a number of questions that deserve further discussion between the municipality and residents.

The full COS study is now available at OM Cost of Supply and Tariff Study 1st Doc (1).pdf for anyone who wishes to read it and draw their own conclusion.