State-owned power utility Eskom is stuck in a “classic utility death spiral” that many power companies worldwide face as the pressure to adopt new business models and proactively reform increases.
Eskom’s need for higher tariffs to offset declining electricity sales amid ever-rising costs is having the unintended effect of incentivising consumers to use less electricity.
“Eskom’s application to the regulator for a 20% tariff hike, plus the prospect of even higher costs as the utility seeks compensation for lower sales in previous years, demonstrates again that its current business model is unsustainable,” says energy expert and professor at University of Cape Town Graduate School of Business (GSB) Anton Eberhard.
Technology innovation and shifting energy investments are “changing the game” and upending the sector, leaving many utilities globally scrambling to keep up, leaving little room for anything else but to embark on a proactive reform in the electricity sector to adapt to cleaner and smarter energy generation.
“Changing patterns of electricity use have forced power utilities all over the world to rethink their antiquated business models,” says Massachusetts Institute of Technology (MIT) Center for Energy and Environmental Policy Research and Sloan School Professor Ignacio Perez-Arriaga.
“We are in this disruptive moment in the power sector where prices for renewable energy are falling fast and their share of electricity production is growing,” Eberhard explains, adding that utilities face declining sales as distributed and off-grid electricity investments increase.
A new MIT Energy Initiative report shows that smarter consumption of electricity and, where cost-effective, the deployment of distributed energy resources, could deliver billions of dollars in savings by improving the use of electricity infrastructure.
“New opportunities include the ability to invest in distributed generation, smart appliances and energy efficiency improvements. At present, the vast majority of power systems lack a comprehensive system of efficient prices and regulated charges for electricity services,” the report outlines.
Eberhard believes utility business models should incorporate the use of distributed energy resources, such as rooftop solar, fuel cells and batteries to improve the operational efficiency and reliability of the grid.
Further, the MIT report notes that the structure of the electricity industry should be carefully re-evaluated to minimise potential conflicts of interest.
“It is critical to establish a level playing field for the competitive provision of electricity services by traditional generators, network providers and distributed energy resources,” adds Perez-Arriaga.
As buyer, generator and distributor, Eskom has often been criticised for stifling competition in the sector and the development of independent power producers, with the City of Cape Town having launched a court bid to challenge Eskom’s monopoly as a buyer.
“If successful, [this] could force the utility to rethink its business model, in common with utilities around the world,” Eberhard notes, highlighting the response of US and European utilities.
“There is potential for utilities in developing countries to build on international power reform experience and to design future power markets and operating systems to respond to these new opportunities,” he says.