Could the call to reduce power consumption lead to higher tariffs?
In an article I wrote on this site a few days ago, I asked a very interesting question and that was,” If we all save electricity as ESKOM is asking , would that ultimately lead to much higher prices?”
At first glance , this would see a bit strange, if not ridiculous, but let’s investigate this further.
Where does ESKOM generate it’s revenue?
That’s easy – by supplying electricity of course. While we know that different consumers are charged at different rates – massive industry pays a fraction of the cost per Kwh that consumers do – everyone still pays and that revenue model is based on consumption.
The more we use, the more revenue ESKOM receives.
If that usage drops, so does the revenue – simple economics.
So if ESKOM has an annual turnover of R138 billion , with a profit declared of R7 billion as per the last financial year, a call from ESKOM to all consumers to drop the consumption by 10% would lead to the following equation.
R138 billion – 10% = R 138 billion – R 13,8 billion = R 124,2 billion. This would also equate then to a loss of R800 million in profit ; since R7billion profit = 5% of turnover ; that would now become R6,2 billion.
If you thought that the price increases now were severe, wait til that margin drops by R800 million.
The ONLY Way that ESKOM can POSSIBLY recover that is to raise the price of electricity once again.
Between a rock and hard place
A lower profit margin due to less consumption would place even more financial pressure on ESKOM even though the demand would be less and thus enable them to maintain supply without load shedding, the price for that is reduced revenue.
As consumers, we are always looking to cut expenses where we can so we can have more money available to spend on the experiences of life , rather than the expenses of life.
As more and more ‘off grid’ and ‘reduced grid dependent’ technologies and products become available and many even seek to get ‘off grid’ completely, this has another massive implication for ESKOM – fewer customers.
Add that to reduced usage and you have an oversupply but you also have decreasing usage and demand – and that would probably keep the ESKOM CEO and his board up at nights in a cold sweat.
Again, the only way to stay financially afloat would be to charge the current customers even more and as the client base reduces as more people and companies find ways to cut their dependence on the grid, the remaining clients will end up paying significantly higher prices for electricity and that will lead to them being even more aggressive in looking for alternative sources of power.
It’s essentially a self destructive cycle and as such, ESKOM is going to have to come up with some creative ways to slow this grid exodus down or die trying.