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Growing risk of ‘reform by default’ as South Africa battles to adapt to electricity transition

Growing risk of ‘reform by default’ as South Africa battles to adapt to electricity transition

Photo by Creamer Media

19th October 2018

By: Terence Creamer

Creamer Media Editor

     

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There is a growing risk of “reform by default” in South Africa’s electricity industry, which is already showing symptoms of the “proverbial utility death spiral”, whereby sales volumes fall as tariffs rise, with consumers opting for alternatives.

This argument is outlined in a paper titled ‘The Dawn of the New Municipal Business Model and the Legal Imperatives to Realise Same’, which was presented at a recent Association of Municipal Electricity Utilities conference.

Authored by Utility Coach CEO Dr Willie de Beer, Aurecon energy and transaction adviser At van der Merwe and Cliffe Dekker Hofmeyr senior associate Adriaan van der Merwe, the paper concludes that decisive leadership is urgently required to oversee the reforms needed to transition South Africa to a more sustainable industry structure, while “keeping the lights burning”.

The authors have decades of experience in South Africa’s electricity supply and distribution sectors, with De Beer having served as COO of EDI Holdings, the State-owned entity established to oversee the consolidation of municipal electricity distributors into larger regional distributors. EDI Holdings was closed down after municipalities successfully challenged the constitutionality of the restructuring process.

The paper states that the electricity industry in South Africa is already being disrupted by changes sweeping the global electricity sector, including a steep fall in the cost of renewable energy. Coupled with the surge in South African electricity tariffs since 2006, these changes are making investments in small-scale embedded generation increasingly attractive to commercial and residential consumers.

“The fixed cost structure of the business remains on the increase while the associated energy volumes, as measured in kilowatt-hours (kWhs) and revenue keep on decreasing. It is, therefore, clear that municipalities can no longer use bundled tariffs where consumption is the key recovery mechanism, as the kWh business has become unsustainable,” the authors explain.

There is, thus, and urgent need to implement “tariff unbundling”, which separates out the network service costs from the kWh costs, so as to send the correct tariff signals to consumers. The current model hides the network costs, making the decision to reduce volumes through self-generation less expensive than would be the case if the costs were made visible.

South Africa’s failure to adapt its legislative and regulatory environment to emerging industry trends has already led to financial distress at Eskom and municipal distributors, notwithstanding the step change in tariffs. However, the authors stress that these reforms should be well thought-out and introduced in stages so as to avoid a collapse of services during the transition.

Nevertheless, far-reaching restructuring, including an unbundling of the generation, transmission and distribution aspects of the electricity supply chain, could no longer be avoided or delayed. If it were, the prospect of reform by default would increase further.

“The process of restructuring by default needs to be replaced by instituting a phased approach to solve the underlying disruptive drivers, which can be traced back to the outdated kWh on-selling business structure,” the authors conclude.

Edited by Creamer Media Reporter

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