Electricity industry approaching ‘breaking point’, City Power warns

3rd October 2017 By: Terence Creamer - Creamer Media Editor

Electricity industry approaching ‘breaking point’, City Power warns

Johannesburg’s electricity utility City Power is warning that the current structure of South Africa’s electricity sector is unsustainable and that, in the absence of a coherent national policy, the sector is approaching “breaking point”.

Demand- and supply-side manager Paul Vermeulen says that municipal distributors, along with Eskom, are facing major technological, demand and tariff “disruption” and that the prospect of “forced restructuring” is now chillingly real.

He attributes the crisis to the stagnation in distributor-level consolidation and the lack of progress in advancing the Independent System and Market Operator  (ISMO) legislation. The ISMO is seen as a necessary condition for facilitating competition among generators, as it would be an independent body that buys electricity from Eskom and independent power producers (IPPs).

Eskom’s “uncompetitive tariffs” are likely to result in an increasing number of municipalities challenging the current single-buyer model, a Cabinet decision of 2007 which stipulates that Eskom act as that buyer, and an interpretation of Section 34 of the Electricity Regulation Act that a ministerial determination is required for all new generating plant. Already the City of Cape Town is taking Energy Minister Mmamoloko Kubayi to court over her insistence that the city refrain from buying electricity directly from renewable-energy IPPs.

The City of Cape Town has set a target to source at least 20% of its energy from renewable sources by 2020. In the event they meet the target, the city could, according to a mini-integrated resource plan produced by the Council for Scientific and Industrial Research, realise yearly savings of R500-million on their bulk energy purchases from 2023 onwards.

The warning comes amid Eskom’s request for a further 19.9% hike as from April 2018, which will translate to a 27.5% hike to municipalities from July 1, which is the date that municipalities are allowed, in terms of the Municipal Finance Management Act, to implemented increases.

Vermeulen warns that such steep increases on the back of increases that have already been absorbed by consumers over the past number of years will have consequences for municipalities, some of which already lack the customer mix to make viable the cross subsidisation of poor consumers. In the absence of distributor-level consolidation the prospect of failure is heightened, particularly for smaller municipalities, where there is little or no technical capacity to operate the network.

However, the hike will also accelerate moves by better resourced municipalities to pursue city-level or regional integrated resource planning, whereby other sources of supply will be procured for both cost containment and environmental reasons.

Vermeulen forecasts that, as renewable energy becomes cheaper than Eskom supply, South Africa’s electricity sector will be disrupted by the ‘four D’s’ of decentralisation, democratisation, digitalisation and decarbonisation, a global industry trend identified by the ‘Wise Minds’ report from the UK. In response, cities will seek to include distributed supply options as part of a drive to secure “least-cost” supply.

He also predicts that some municipal or regional distributors are likely to become experts in the use of utility-scale storage to balance their networks and avoid “punitive” peak utility tariffs.

“Energy storage is of key value to future metropolitan energy security,” Vermeulen averts, adding that emphasis will also be given to the development of “flexible loads” through the use of smart-grid technology.

However, cities will also need to combat the current perception of grid defection being the answer to “going green”, when in fact the most efficient future green-energy solution includes the grid. Retaining affluent customers will depend on the grid being available for seamless supply to load balancing services and as a marketplace for them to realise value for their surplus generation. “The grid has to provide the green-energy investor a place to trade their surplus energy and optimise their investment.”

That said, there is also an opportunity to use cost-effective micro-grid and off-grid options to electrify communities where the cost of new connections to the grid, as well as the maintenance of that connection, becomes prohibitive.

The initial cost to install a grid connection is around R24 000. City Power’s preliminary cost of supply study indicates that around R10 000 a year is required to maintain the grid to each household thereafter, and then subsidised energy needs to be sourced from the national grid to make the system work.

“If a five-year term is considered, the R75 000 cost may be better spent on a solar photovoltaic electricity system for light utilities and a bottled gas system for cooking and heating, provided communities accept such an alternative,” Vermeulen muses.