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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 <www.engineeringnews.co.za/article/growing-risk-of-reform-by-default-as-south-africa-battles-to-adapt-to-electricity-transition-2018-10-19> *Photo by* Creamer Media
19TH OCTOBER 2018
BY: TERENCE CREAMER <www.engineeringnews.co.za/author.php?u_id=13> CREAMER MEDIA EDITOR
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There is a growing risk of “reform by default” in South Africa <www.engineeringnews.co.za/topic/south-africa>’s electricity industry <www.engineeringnews.co.za/topic/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 <www.engineeringnews.co.za/topic/paper> titled ‘The Dawn of the New Municipal Business <www.engineeringnews.co.za/topic/business> Model and the Legal Imperatives to Realise Same’, which was presented at a recent Association of Municipal Electricity Utilities conference. ADVERTISEMENT <www.engineeringnews.co.za/adcentre/rv/en/www/delivery/ck.php?oaparams=2__bannerid=3066__zoneid=420__cb=ea75a83c4c__oadest=http%3A%2F%2Fwww.airliquide.co.za>
Authored by Utility Coach CEO Dr *Willie <www.engineeringnews.co.za/topic/willie> de Beer*, Aurecon <www.engineeringnews.co.za/topic/aurecon>energy <www.engineeringnews.co.za/topic/energy> and transaction adviser At van der Merwe and Cliffe Dekker Hofmeyr <www.engineeringnews.co.za/topic/cliffe-dekker-hofmeyr> senior associate Adriaan van der Merwe, the paper <www.engineeringnews.co.za/topic/paper> concludes that decisive leadership is urgently required to oversee the reforms needed to transition South Africa <www.engineeringnews.co.za/topic/south-africa> to a more sustainable <www.engineeringnews.co.za/topic/sustainable> industry structure, while “keeping the lights burning”.
The authors have decades of experience in South Africa <www.engineeringnews.co.za/topic/south-africa>’s electricity supply <www.engineeringnews.co.za/topic/electricity-supply> and distribution sectors, with De Beer having served as COO of EDI Holdings <www.engineeringnews.co.za/topic/edi-holdings>, the State-owned entity established to oversee the consolidation of municipal electricity distributors <www.engineeringnews.co.za/topic/municipal-electricity-distributors> into larger regional distributors. EDI Holdings <www.engineeringnews.co.za/topic/edi-holdings> was closed down after municipalities successfully challenged the constitutionality of the restructuring process. ADVERTISEMENT <www.engineeringnews.co.za/adcentre/rv/en/www/delivery/ck.php?oaparams=2__bannerid=2350__zoneid=647__OXLCA=1__cb=8b526d05c0__oadest=https%3A%2F%2Fpips.seifsa.co.za>
The paper <www.engineeringnews.co.za/topic/paper> states that the electricity industry <www.engineeringnews.co.za/topic/electricity-industry> in South Africa <www.engineeringnews.co.za/topic/south-africa> is already being disrupted by changes sweeping the global electricity sector <www.engineeringnews.co.za/topic/electricity-sector>, including a steep fall in the cost of renewable energy <www.engineeringnews.co.za/topic/renewable-energy>. Coupled with the surge in South African electricity tariffs <www.engineeringnews.co.za/topic/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 <www.engineeringnews.co.za/topic/business> remains on the increase while the associated energy <www.engineeringnews.co.za/topic/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 <www.engineeringnews.co.za/topic/business> has become unsustainable,” the authors explain.
There is, thus, and urgent need to implement “tariff unbundling”, which separates out the network service <www.engineeringnews.co.za/topic/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 <www.engineeringnews.co.za/topic/south-africa>’s failure to adapt its legislative and regulatory environment <www.engineeringnews.co.za/topic/environment> to emerging industry trends has already led to financial <www.engineeringnews.co.za/topic/financial> distress at Eskom <www.engineeringnews.co.za/topic/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 <www.engineeringnews.co.za/topic/services>during the transition.
Nevertheless, far-reaching restructuring, including an unbundling of the generation, transmission and distribution aspects of the electricity supply <www.engineeringnews.co.za/topic/electricity-supply> chain, could no longer be avoided or delayed. If it were, the prospect of reform by default would increase further.

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