The low oil price may mean lower power price increases

The price decrease in oil is due to the world’s economy coming to a virtual standstill as a result of the Covid-19 coronavirus pandemic.
The price decrease in oil is due to the world’s economy coming to a virtual standstill as a result of the Covid-19 coronavirus pandemic.

The sharp decrease in the international price of Brent crude oil could contribute to tempering electricity prices in the future and make it more affordable for Eskom to avoid load shedding when the economy is up and running again.

Eskom has confirmed to City Press’ sister paper Rapport that the price it pays for diesel is directly linked to the domestic diesel price, as determined by the mineral resources and energy department.

The international oil price and rand/dollar exchange rate are major factors in establishing this.

On Friday, the international oil price was at just over $26 (R490) a barrel, as opposed to $66.23 on January 2 and $62.06 a year ago.

This dramatic price decrease is due to the world’s economy coming to a virtual standstill as a result of the Covid-19 coronavirus pandemic.

Economist Mike Schüssler said he expected the oil price to only return to levels above $30 or $40 closer to the end of the year.

The department announced on Friday that the wholesale price of different grades of diesel would drop by between R1.56 and R1.61 per litre, thanks to a sharp decrease in the oil price. This comes after a decrease of about R1.34 a litre last month.

Eskom’s expenses are affected by the oil price as oil is used for three major purposes:
  • Start-up oil to get the units at power stations back on line after they have been turned off;

  • Diesel for its own gas turbines; and

  • Energy needs associated with similar gas turbines belonging to the private sector.


Eskom obtains its income through electricity tariffs, which are determined on the basis of certain assumptions, including the price of diesel.

According to Eskom, its current tariffs are calculated on the assumption that it will pay on average R14.07 a litre for diesel during this financial year.

To date, however, it has only cost Eskom R11.63 a litre on average this financial year, a difference of about 17%.

Eskom gets a discount from large-scale suppliers and therefore pays less than the person on the street.

If the oil price remains at current levels, it could mean substantial savings for Eskom.

In the current financial year, the National Energy Regulator of SA (Nersa) approved Eskom’s recovery of almost R1 billion for the cost of its own gas turbines and R1.6 million for start-up oil.

A further R2.4 billion may be recouped for energy from gas turbines in private ownership. The greatest portion of this, however, is for fixed costs, so the benefits of the diesel price in this regard are limited.

Eskom’s expenses are taxed at the end of every financial year and can therefore be retrospectively adjusted if the assumptions that they were based on are not realised.

As a result of the high costs associated with running the gas turbines, Nersa has limited Eskom to 211 gigawatt hours in the current financial year

To date, the so-called regulatory clearing account (RCA) mechanism has mostly led to additional increases for consumers, but if diesel costs remain consistently lower than expected, this should also mean lower tariff increases for consumers.

Eskom is expected to also rely on the RCA to compensate for sales that are lower than expected during the lockdown, and the diesel savings could limit the impact of this to a degree.

Another positive aspect is that the cost of using the gas turbines – if the demand for electricity returns to normal levels and Eskom battles to supply power – will also be considerably lower.

As a result of the high costs associated with running the gas turbines, Nersa has limited Eskom to 211 gigawatt hours in the current financial year.

The turbines are actually only intended to be used to protect the power supply against unforeseen circumstances.

Nersa has, however, previously indicated that it would be willing to compensate Eskom for “reasonable use” in excess of the limits.

Eskom has access to about 3 000 megawatt hours of generating capacity from the gas turbines and could elect to make use of this more often to prevent load shedding, if it is cheaper.

Eskom confirmed that this could help, but said it was well aware that Nersa would still scrutinise its practices to determine whether the costs had been incurred in a prudent manner.


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