Levelling the playing field: Placing Eskom in a competitive environment
by Sicelo Xulu, SAIEE
The dividing of Eskom into three separate entities: Generation, Transmission and Distribution may be a good thing and might help to make the utility more efficient, focused and transparent. However, the electricity crisis does not start or end with Eskom. The entire electricity supply industry needs a major overhaul.
If South Africa’s electricity crisis is to be successfully addressed, the whole electricity supply industry will need to develop a long-term vision of the future. All that’s happening at present is firefighting. The industry should take a bird’s eye view of the entire electricity industry supply including municipalities.
Right now, the industry is reeling from one disaster to another. Underperforming power stations, cable theft, non-payment, deferred maintenance, ageing infrastructure, illegal connections, ever-increasing tariffs, declining demand, distributed generation, tens of billions of rand in overdue municipal and customer arrear debts, together with many other factors, are creating havoc in the industry.
Disruptive technologies such as rooftop PV, energy storage, low-energy lighting and energy efficient equipment are challenges which power utilities – both national and municipal – are going to have to manage. Furthermore, although the government, through its Renewable Energy Independent Power Producers Procurement Programme, has allowed additional generators to enter the market, its Integrated Resource Plan (IRP) is still heavily biased towards supporting Eskom as the primary generator of electricity.
One of the industry’s challenges is the aspect of dual regulation. Eskom is regulated differently to municipalities. This is particularly visible in the way tariffs and operating costs are regulated. The National Energy Regulator of South Africa (Nersa) determines how much Eskom may receive in revenue from electricity sales in any given year. In 2019/20, that figure has been capped at R206,38-billion. Since the power utility’s generating capacity is known, this equates to actual tariff figures which, in this case, equates to a 9,4% increase in tariffs.
Should Eskom’s cost of generating electricity, and despatching it via its transmission and/or distribution networks end up being higher than the utility originally predicted in its application to Nersa, the utility can claim the difference from the regulator through the Regulatory Clearing Account (RCA). Should the regulator concur with Eskom that the losses resulted from factors outside of Eskom’s control, the regulator may impose a further tariff increase in the next financial year to cover that cost. In the case of 2018/19, that RCA was 4,4% which comes into effect in 2019/20, making the actual increase 13,8%.
Municipalities purchase power from Eskom at wholesale prices and then add what they believe to be the cost of distributing this electricity to consumers plus an allowable profit margin. However, should a municipality get its calculations wrong and lose money by charging tariffs which are lower than what it actually cost, it has no recourse to the regulator and must absorb the loss.
The playing fields should be levelled. Perhaps President Cyril Ramaphosa’s recent announcement that Eskom is to be divided into three parts will help to bring that about. Notwithstanding all the concerns about potential job losses, and the “threat” of privatisation, separating generation and transmission from distribution is actually a good idea.
One option is to establish a few, government-owned regional distribution companies – each responsible to supply electricity to the residents and businesses within its region. These distribution companies would take over Eskom’s direct customers and supply users directly or via the municipalities within the region.
Equally, they would be free to purchase electricity from any bone fide, registered electricity-generating company, including Eskom, IPPs and organisations which have surplus distributed generation to sell. The grid code would be used to regulate the quality, frequency and reliability of supply from these generating companies to ensure that the end-user would always receive high-quality, reliable and affordable electricity. Serious penalties could be levied on defaulting generating companies.
The new distribution companies would, therefore, need to be catered for in the IRP, as would independent electricity generators. To this end, there should be no cap placed on the quantity of electricity to be produced. This will stimulate competition which, in a modern economy, is how all services, products and commodities should be traded.
Although the government has appointed a task team to evaluate Eskom’s power stations, many previous teams have been appointed to consider the way forward for Eskom. Indeed, there is no shortage of reports, documents and proposals dating back to the 1990s. But there has been, until now, a paralysis of action. The president’s announcement may be the first real step in the recovery of the industry.
The way ahead is not the privatisation of the industry, but an allowance to permit privately-owned and state-owned electricity companies to operate side-by-side on the same grid via independent, state-owned distribution companies for the growth of the economy, the confidence of foreign investors and the ultimate good of the country.
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