The current electricity model incorporates a paradox in which continual increases in price contribute to falling demand, which in turn leads to higher unit costs and prices. In this context, high levels of capital expenditure by Eskom have become a critical cost driver.
The contradictory response of raising prices in the midst of declining sales results in part from weaknesses in the regulatory framework for electricity prices, and in part from Eskom’s business model
This working paper reviews the factors behind stagnant Eskom sales. It then analyses why Eskom’s response to these changing conditions has become so paradoxical. It finds that Eskom’s path dependency is generated by the current regulatory framework for electricity prices combined with Eskom’s attachment to an outdated business model.
It then provides a systematic assessment of the costs, benefits and risks of three options for responding to the new conditions.