Growing risk of ‘reform by default’ as South Africa battles to adapt to electricity transition <> *Photo by* Creamer Media
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. ADVERTISEMENT <>
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. ADVERTISEMENT <>
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.