South African households consume some 24% of the country’s energy. By the end of 1997, about 60% of households had access to electricity, yet this energy source contributed only 20% of household energy consumption. Most energy was obtained from fuelwood (65%). Other fuels used include coal (9%), illuminating paraffin (8%), and a small amount from liquid petroleum gas (LPGas) makes up the remainder.
To put these figures in context it is important to recognise that the percentage contribution of coal and illuminating paraffin to total household energy consumption is partly a function of access. In fact a majority of poorer households consume these fuels wherever they are available. Also, increasing amounts of coal, paraffin and liquid petroleum gas are used in areas where fuelwood has become scarce. These fuels are also used frequently for cooking and space heating in electrified households, where electricity is used only for lighting and entertainment.
These trends indicate the complexity of multiple-fuel use in households where fuels are required to meet a range of household energy services: cooking, water and space heating, lighting and access to electronic media being the commonest end uses. Energy is also required for productive activities such as informal home-based industries, and small-scale agriculture. Beyond the home, energy is required for the provision of infrastructural services to communities, such as rural water supply, health care, education, public lighting, community facilities and transport.
This range of basic needs requiring energy inputs shows that normal life would be impossible without energy. Without fuel for transport the economy would come to a standstill. Without energy to cook food a household would starve. This is particularly the case for poorer households who rely on cheap staple foods which are inedible without being cooked.
Just as energy is essential for industrial development and economic growth so, at the household level, energy services are essential for improving quality of life through access to services such as entertainment, lighting, home-based industries and small-scale agriculture. Modern development is not possible without energy. Everyday domestic life and activity in the home is inconceivable without energy. But poverty limits energy use, and so long as this situation continues, development will be hindered.
Despite the importance of energy services for low-income households, such services have not been adequately supplied in the past, the priority of government having been the development of a modern industrial urban society to meet the need of the industrial sector and a privileged white minority.
As a consequence there is a general service backlog, with the majority of people still not enjoying the benefits of electricity, and a significant proportion of electrified households at a stage where they are only using electricity for lighting and entertainment. Furthermore, the considerable inequalities in wealth which have resulted from past social and economic policies has meant that many people cannot afford to use electricity optimally, even if they have access to it. Such households have to rely on less convenient and often unhealthy fuels, such as paraffin, candles, coal, liquefied petroleum gas, batteries and fuelwood.
An important factor associated with the continued use of non-electric fuels is unemployment and poverty. Households facing low or unpredictable incomes tend to purchase fuels as and when cash resources are available. Whilst small amounts of paraffin are convenient for such users the benefits of bulk purchasing are foregone. Such unstable energy use patterns, characterised by the use of several fuels for different end-uses, clearly militate against the efficient and rational use of energy. Furthermore, low-income households tend to purchase cheap and unsafe appliances, thus increasing the risk to health.
A further important factor to consider when formulating energy policy is that most household energy users are women. The gendered division of labour traditionally means that women are a ‘disempowered’ class. They are responsible for managing household resources and doing the menial work in the home - using appliances to perform energy tasks and purchasing fuels. However, unless they are breadwinners and command power in the household by virtue of holding an income-earning position, it is often the man who makes the decisions about appliance purchases. Past formulation and implementation of energy policy has given virtually no consideration to women’s needs in this context.
Household energy services are often provided through a mix of appliance/fuel combinations. For example, cooking can be done with a coal stove/coal, hot-plate/electricity, gas-stove/gas, paraffin-stove/paraffin, solar cooker/sun, or low-smoke fuel stove/low-smoke fuel combinations. The costs of these combinations vary widely. For poor households the multi-functionality of appliances and fuels is often important. Paraffin and coal stoves can be used to cook food while heating a room at the same time, whereas two electrical appliances would be required to perform these tasks, at greater expense.
Research has shown that electrified low-income households continue to use a range of fuels because electricity is found to be less cost effective, and is less socially desirable than the alternatives. It is becoming apparent that, contrary to initial expectations, grid electrification may not satisfy all the energy needs of low-income households (or at least not in the short to medium-term electrification process). The high cost of electrical appliances, their lack of multi-functionality and the relatively high costs for thermal end uses like cooking and space heating are some obvious constraints to the greater application of electricity.
It is fair to say that the tendency to multiple fuel use and emphasis on traditional (fuelwood) and low-cost fuels (illuminating paraffin) is likely to prevail for the foreseeable future.
On the other hand, higher-income households are almost entirely dependent upon electricity to meet their energy needs. Despite the high energy consumption of such users, energy policies have placed little emphasis on encouraging energy conservation.
The environmental effects of household energy use are particularly severe on the rural poor, where three million households use fuelwood as their primary energy source. Studies have shown that fuelwood users are exposed to extremely high levels of particulate emissions from wood smoke, which result in adverse health effects, such as Acute Respiratory Illness in children. In addition to air pollution from wood smoke, many areas experience an over-harvesting of natural woodland resources, resulting in environmental degradation, soil erosion, and desertification.
Coal is used by about 950 000 households, mainly on the Highveld, but concentrated particularly in Gauteng. The resulting indoor air pollution has serious health impacts. As with fuelwood, it has been found that exposure to this pollution, especially particulate matter, exceeds World Health Organisation standards by a considerable margin.
It is clear that all South African households require access to a basic level of energy services. Achieving a sustainable level of energy security for low-income households can play a central role in the reduction of poverty, the fostering of households’ livelihoods and an improved quality of life.
Government will determine a minimum standard for basic household energy services, against which progress can be monitored over time and will facilitate the widening of access to such a basic level of energy services, including fuels and related appliances.
Basic needs are understood as those requirements essential for human survival. Defining exactly what constitutes a basic energy need, or rather what may satisfy such a need, is not an easy task however. It is also necessary to recognise that the use of some fuels causes intolerable levels of air pollution. From this it is apparent that people must have both access to fuels and that these fuels should not endanger their health in the conversion process.
As with minimum levels prescribed for other services, such as water and sanitation, the criteria for defining basic energy needs must include consideration of costs, access and health. The establishment of minimum standards could thus be achieved by analysing how a hierarchy of energy supply options could meet these criteria.
For instance access to a plentiful supply of fuelwood without the means to ensure that the appliance used to burn the wood keeps air pollution to an acceptable level would not meet these criteria. Indeed, the application of the health criteria would indicate that several existing fuel use practices, which endanger life, such as three-stone open wood fires in rural areas and the use of bituminous coal, would not meet minimum standard, thus necessitating policy interventions. Other appliances and fuels, which seriously endanger life, will also have to be reviewed. Further detail is provided in the section on Environment, Health and Safety.
Any interventions using technological innovations must be introduced in consultation with households, for the simple reason that without this input households are unlikely to use them. The introduction of healthier and safer technologies has often been shown to be a more difficult process than the introduction of pricing and marketing measures aimed at controlling the supply and retailing of existing fuels.
Government supports the concept of "energisation", i.e. the widening of access to a safe and effective energy package within grasp of low-income households and will promote it’s implementation where appropriate.
In implementing this policy government will have to consider:
- appropriate appliance/fuel combinations to meet energy service needs of households in different areas of the country,
- households’ abilities to acquire these fuels and appliances,
- the availability of efficient and safe appliances and fuels,
- the impact of pricing structures and financing mechanisms on the affordability of fuels and appliances.
Considerable research and development has been undertaken nationally and internationally around household energy use, technical interventions, and pricing and financing mechanisms aimed at bringing safe and effective energy ‘package’ within the grasp of low income households. Much of this information can be utilised for the present exercise, but the monitoring and evaluation of the progress towards the basic energy service level will require a research and extension programme.
More specific policy measures pertaining to household energy access can be found in the relevant energy supply sections of this paper.
A significant opportunity exists to promote energy efficiency and energy conservation measures in building low cost housing at a time when the national housing campaign is still in its formative stages. There is also great potential to stimulate the adoption of energy demand management in middle and high income households, through strategies such as time of use electricity tariffs, energy efficient lighting, insulation, and solar water heating. Savings realised through these measures would free resources, and delay the need for further investment in plant. Detailed policies on this issue are provided in the sections on Energy Efficiency and Electricity.
Government commits itself to the promotion of energy efficiency awareness in households.
Detailed policies on the implementation of energy efficiency are provided in the section on Energy Efficiency.
There is a great need to supply all householders with responsible information about the efficient, safe and cost-effective use of appliances and fuels. Without such an initiative government and the energy supply industry alone would find it impossible to convey the information which people need to make knowledgeable decisions about energy use and appliances. Almost all energy users lack sufficient knowledge about energy as well as community leaders, development advisors in the NGO and professional sectors and government officials at all levels.
Specific policies on this issue are presented in the section on Capacity Building, Education and Information Dissemination.
Industry, mining and commerce account for about 60% of commercial energy consumption in South Africa, at a cost of approximately R18 billion in 1995. The low price of coal and electricity in South Africa has contributed to the development of an economy with a large energy-intensive primary industrial sector. Mining and minerals beneficiation were responsible for 11% of South Africa's GDP and over 50% of South Africa's foreign exchange earnings in 1995.
Whilst large industry has been well supplied with all forms of energy, many urban and rural areas of South Africa have inadequate access to energy, particularly electricity, which has been a major obstacle to the development of small and micro-sized industrial, mining and commercial enterprises in these areas. A major priority is therefore to provide these areas with access to energy services.
In the past, government has devoted little attention to the promotion of energy efficiency in industry, mining and commerce, despite widely acknowledged potential for improvement. More efficient use of energy would have both financial and environmental benefits for the country, and could assist in making South African industry more internationally competitive. Government faces a challenge in mobilising resources to tap this potential.
Whilst cheap energy is a comparative advantage for South Africa's major foreign exchange earners, there are concerns that the production and use of energy has harmful environmental and health effects, the costs of which are not included in the price of energy. There is also concern that rapidly changing international environmental standards may have an adverse effect on South Africa's exports in the future. The challenge for government is therefore to balance energy prices with sustainable environmental standards.
Many energy supply/demand issues encountered by this sector are resolved between consumers and suppliers in the normal commercial manner, without requiring the intervention of government or regulators. In the electricity and gas sectors, however, where opportunities for competition are currently limited, regulation is required to ensure equitable access for consumers and avoid the abuse of monopoly power. The regulatory framework must, at the same time, stimulate the growth and competitiveness of large industry.
The development of commercial activities in underdeveloped areas will be a crucial factor in the economic empowerment of the poor. Commercial activity usually begins with small businesses and micro-enterprises, such as shops, entertainment facilities and agro-industrial activity. The development of commercial activity provides services and employment for people living in underdeveloped areas.
Modern energy services are an essential input for the development of commercial activity. Electricity in particular is a key requirement for commercial activity, which the electrification programme is addressing. Where the supply of grid electricity is impractical, costly or delayed, alternative electricity supplies are required.
Policies relating to these challenges are contained within the sections on Electricity, and Renewable Energy Sources.
Researchers have identified significant opportunities for energy efficiency improvements in South Africa. Typical conservative estimates of savings vary between ten and twenty per cent of current consumption. These findings clearly suggest a degree of market failure and the need for government to play a role in facilitating increased efficiency in the use of energy. Barriers to the adoption of efficiency measures include:
- inappropriate economic signals;
- lack of awareness, information and skills;
- lack of access to efficient technologies;
- high return on investment criteria; and
- the high cost of capital.
Government commits itself to the promotion of energy efficiency and the development of holistic programmes for industry, mining, and commerce.
Detailed policies around the implementation of energy efficiency programmes are provided in the section on Energy Efficiency.
The environmental impacts of energy use by industry, mining and commerce can by reduced by the use of cleaner energy end-use technologies, the enforcement of environmental performance auditing, and the internalisation of environmental costs. Effective implementation of these strategies does, however, require better co-ordination between organisations concerned with environmental issues.
The Department of Minerals and Energy will therefore proactively collaborate with other government departments and public authorities in order to improve the management of the environmental impacts of energy use by industry, mining and commerce.
Government will continue to track developments in international environmental standards, in order to formulate policies that prevent the loss of South African exports through unwitting transgressions of any environmentally sensitive policies supported by our trading partners. The economic implications of ratifying environmental agreements should, however, be properly assessed before South Africa consents to these.
Further detailed policies are provided in the section on the Environment, Health and Safety.
Poor quality and reliability of electricity supply can endanger workers, damage equipment, and cause production and revenue loss. Some industrial processes are particularly susceptible to supply quality and reliability, whereas others can tolerate a degree of disruption without significant impact. The issue of supply quality is particularly relevant in the light of the restructuring envisaged for the electricity distribution industry.
The government will ensure supply quality and reliability standards in the electricity supply industry.
The National Electricity Regulator will determine minimum standards for electricity supply to households, industrial, mining, and commercial consumers.
Electricity distributors will have to comply with these minimum standards. Where higher standards are required these can be negotiated between the distributor and the consumer at a cost premium.
There is as yet insufficient accurate information on energy demand for policy planning and implementation purposes. Whilst the Department of Minerals and Energy has begun developing an energy statistics database, the database is not yet accurate or comprehensive, and does not include sub-sectoral production and economic data. A means of collecting accurate and consistent statistics from energy users and energy suppliers is necessary and co-operation with the Central Statistical Service is essential. Aggregated information should be made available to all interested parties for planning and research purposes.
The Department of Minerals and Energy will develop a comprehensive energy demand database, which will be available to all interested parties at a reasonable price, if necessary.
Publication of energy data will have to take into account sensitive commercial interests. Aggregation of data should, however, overcome this problem. Further policies on energy information are available in the section on Statistics and Information.
Transport of people and goods is an essential social and economic service, and accounts for about 24% of total energy consumption. More than 90% of transport energy is derived from liquid fuels. Since the supply of these fuels is largely dependent on crude oil imports, transport energy is unusual in that its pricing is heavily influenced by international supply and demand trends.
With the lifting of oil sanctions, and South Africa’s re-admittance into the international community, the importance of liquid fuel supply security has declined dramatically. Instead, South Africa now faces the challenges of facilitating equitable access to affordable public transport, ensuring the efficient utilisation of transport fuels as a means of promoting international competitiveness and minimising harmful environmental effects stemming from the use of transport fuels. Opportunities also exist to increase fuel diversity within the transport sector. Innovative international transport technologies, enabling the use of natural gas, hydrogen and electricity as fuels, are reaching stages of maturity, which may make their usage economic for local applications.
Provision of public transport has been severely constrained by past land use development and allocation policies, resulting in low housing densities and the poor being located furthest from work opportunities and social facilities. This inequitable spatial development has a direct impact on transport patterns and, in addition to being a further burden on the poor, results in the inefficient use of transport energy.
Many transport energy problems are best addressed by transport and town planning-specific policies. Nonetheless, there are a number of energy-related challenges, which deserve attention.
Liquid fuel prices are presently composed of a cost-related component and a variety of duties, levies and taxes emanating from different government departments. These taxes are utilised to raise revenue for the general fiscus and for specific policy purposes. In many countries the price of diesel is much lower than petrol, in some cases by up to 33% percent. This price differential thus promotes the use of diesel, which is a more efficient fuel, and also lowers input costs for productive activities. Insufficient consideration has, however, been given to the impact of these taxes on fuel usage. In fact, liquid fuel pricing policies provide an opportunity to influence the fuel mix (particularly the ratio of petrol to diesel consumption), in order to support economic activities, constrain leisure activities and promote public transport. This can be achieved by adjusting taxation levels to provide appropriate price signals.
Tax differentials between petrol and diesel may be used to support government’s policy of promoting more efficient and environmentally sound transport modes, such as diesel-driven motor vehicles where they form part of a holistic approach and are simultaneously underpinned by other supporting measures.
The key challenge for transport energy policy is to promote the optimum and efficient utilisation of transport energy, in a way that is sensitive to the needs and attitudes of transport energy users, and particularly for those most in need of affordable transport. The promotion of energy efficiency directly complements government’s policy of promoting public passenger transport.
The Department of Minerals and Energy will advise other government departments, particularly the Departments of Transport and Finance, on the energy efficiency implications of alternative transport modes and public transport subsidy policies, and will provide assistance in the formulation of fiscal and transport policies to promote energy conservation and efficiency.
Issues, which need to be prioritised, include the energy efficiency implications of income tax deductions on company vehicles and travel allowances, as well as vehicle benefit schemes and the effect of transport subsidies.
Vehicle purchasers do not generally consider the vehicle’s fuel consumption as a major criterion. This is due in part to a lack of accurate information on vehicle fuel efficiency.
The Department of Minerals and Energy will provide information on the fuel use characteristics of new vehicles.
Energy consumption information should be included in all advertising, vehicle test reports and vehicle specifications. The system will have to be developed in close liaison with the vehicle-manufacturing industry and should be implemented through appropriate marketing and information dissemination campaigns.
The implementation of this policy will assist government, as a major owner of vehicles, to include energy efficiency as a criteria for vehicle purchases. Further information on this is available in the Energy Efficiency and Fiscal and Pricing sections.
Whilst demand for transport energy needs to be satisfied in order for economic activity to take place, insufficient consideration has been given to the indirect costs of utilising transport energy. Further policies on this issue are covered in the Environment, Health and Safety section.
Operating vehicles on alternative fuels such as electricity, gas or diesel could derive major benefits. Research is required on government's role in the promotion of such vehicles, the technical and economic feasibility of such technologies, and the key requirements for their successful promotion. Research is also required to develop and stimulate energy-efficient and environmentally friendly transport energy technologies. Further policies on this issue are covered in the Research and Development section.
Clearly transport energy policy must be mutually supportive of related national policies. A further challenge facing government is therefore effectively to co-ordinate and integrate transport, energy, land use, economic development, environmental and other policies. The new constitutional dispensation may well exacerbate existing problems with policy co-ordination as transport functions are now devolved to provincial and local government levels.
A lack of adequate co-ordination is demonstrated by the failure of past policies to consider their implications for transport energy efficiency. Policy instruments at government’s disposal, including fiscal measures such as fuel taxes, vehicle licence fees and income tax deductions on transport benefits, have been used as a means of generating revenue, without sufficient consideration being given to their impacts on energy efficiency.
An inter-departmental Transport Energy Co-ordinating Committee will be established to co-ordinate and integrate policy formulation between the Department of Minerals and Energy and other relevant departments.
The functions of the Transport Energy Co-ordinating Committee will include:
- the identification of transport energy policy needs;
- the co-ordination of transport energy policy research;
- the formulation of appropriate policies;
- the co-ordination of policy administration;
- improving communication between government departments; and
- improving communications with other transport energy stakeholders.
The Transport Energy Co-ordinating Committee will also ensure the co-ordination and communication of transport energy policies between national, provincial and local government bodies.
Land use, transport and traffic management plans all impact on transport energy usage. Insufficient attention is currently paid to the energy impacts of these plans. The Transport Energy Co-ordinating Committee will give attention to the formulation of guidelines to assist metropolitan and other planning and implementing authorities to consider the transport energy use impacts of land use, transport and traffic management plans.
In general the Department of Minerals and Energy will assume the lead responsibility for policy formulation where the primary motivation for such policy is energy supply, energy efficiency or energy conservation.
About three per cent of the total energy used in South Africa is consumed by agriculture, mainly by commercial farmers. Traction and transport tasks dominate this energy use, as evidenced by the fact that liquid fuels meet three-quarters of commercial agriculture's energy requirements. Stationary operations, such as lighting and refrigeration, are generally performed with electricity, although diesel is also used to power pumping and dehulling activities.
By contrast, traditional agriculture depends almost exclusively on the muscular energy of people and draught animals for the performance of traction and stationary tasks. The productivity of traditional agriculture power is severely constrained by the inherently low energy and power capacity limits of these energy inputs and the lack of access to cost effective energy supplies and energy-dependent agricultural technology. Women, in particular, bear a disproportionate burden in providing muscular energy for agricultural activities, in addition to their many household tasks.
Despite these problems, it is necessary to recognise that traditional agriculture provides employment and livelihoods for many of the black rural population, albeit at subsistence levels below the poverty line.
Commercial farmers have, on the whole, adequate access to energy supplies and energy technologies. The key challenge for energy policy in respect of commercial farming and energy use is thus the issue of energy efficiency.
Although technological advances have enabled production per unit of land and per person to increase significantly, it is interesting to note that energy inputs have increased for the same agricultural output. Mechanisation, fertilisers and pesticides are energy-intensive technologies and, whilst they clearly have a role to play in increasing productivity, need to be balanced with environmental protection and improved nutrient cycling. New technologies make it possible to design farming systems, which are energy efficient, productive, profitable and environmentally responsible.
Policies related to this issue are covered in the sections on Energy Efficiency and Renewable Energy Sources.
It is tempting to prescribe increased access to fuel energy and fuel-driven technologies as the remedy for low productivity in smallholder agriculture. This solution must, however, take two important factors into account. Firstly, fuel energy and fuel-driven technologies are costly and often unaffordable for smallholder farmers. Secondly, indiscriminate mechanisation of smallholder farming could lead to massive labour displacement and the loss of rural livelihoods. This would aggravate rural unemployment and migration to urban areas.
Such unwanted side-effects can be pre-empted by careful strategies which focus on providing access to energy services which relieve critical muscular-energy bottlenecks and help to raise the productivity of labour intensive agriculture. Examples of such selective applications of modest mechanisation are found in the high productivity smallholder farming systems prevalent in the far east, such as in Japan, Korea, Taiwan and China. This strategy is in accordance with Agenda 21, the international environmental convention, which advocates the use of low external input and sustainable agricultural systems in support of rural development. Programmes to encourage these systems could focus on:
- supporting the use of perennial crops, to reduce ploughing bottlenecks in spring;
- research into efficient forms of animal traction; and
- supporting efficient nutrient cycling, through the development of ecologically sound, energy-efficient farming systems to reduce energy wastage and pollution.
Smallholder agriculture also requires many other enabling inputs in addition to improved energy services, such as rural schools, clinics, roads, communication infrastructure and well-trained people. In essence, the energy needs of smallholder agriculture cannot be divorced from broader issues around rural development and the supply of energy services to rural households. Rural energy programmes should not be established in isolation of these broad initiatives.
Nonetheless, specific policies, which can be addressed within the scope of the energy white paper, include the following.
- Access to diesel supplies
Many smallholder farmers experience difficulties in accessing diesel supplies. This is caused by limitations on the number of supply points, due to distribution cost constraints, resulting in farmers having to travel long distances to buy fuel.
Government will facilitate the removal of market barriers so as to provide access to bulk diesel supplies for small-scale farmers.
Strategies will be established to increase access to diesel supplies, such as the creation or expansion of rural co-operatives, or the establishment of communal bulk storage facilities owned and managed by local communities.
While the majority of commercial farms are electrified, many thousands of farm workers do not have access to electricity within their homes. Policies addressing this problem can be found under electrification in the Electricity section.
Although the agricultural sector is a relatively small consumer of energy its contribution to the supply of fuelwood, the main source of energy for many millions of rural people, is crucial. This demonstrates the strong linkages between agriculture and the livelihood of rural people.
Many agricultural, forestry and agro-forestry products, by-products and residues can serve as raw materials for processing into modern bio-fuels, suitable for the operation of fuel-driven technologies at high efficiencies and for combined heat and electric power generation. Such biofuels include briquettes, charcoal, biogas, producer gas, ethanol and bio-diesel fuel. The residues from processing some of these bio-fuels include fertilisers and soil conditioners.
Policies relating to renewable energy supplies and social forestry programmes can be found in the section on Renewable Energy Sources.
The electricity supply industry inherited from the apartheid government is in many ways typical of present-day South African economic infrastructure. It has highly sophisticated production and distribution capabilities, developed under circumstances of economic isolation to meet the needs of the industrial sector and a privileged white minority. The energy needs of the majority, the possibilities of regional integration, and the challenges of global competition, have only recently begun to be addressed.
South Africa produced 179 450 GWh of electrical energy in 1997. Ninety-six per cent of this amount is generated by Eskom and transported over its national transmission network to distributors country wide. More than 400 distributors, mainly municipal electricity departments, supply electricity to end customers. Eskom is also the largest single distributor in the country in terms of energy sales for final consumption and number of customers. Eskom is governed by a stakeholder-based Electricity Council, while municipal distributors are under the direct control of their elected local councils. All electricity utilities are subject to regulation by the National Electricity Regulator.
The full extent of the policy problems and challenges facing the electricity sub-sector has only begun to emerge recently. Government has identified the following list of primary challenges that will have to be addressed:
- approximately 40% of all homes in South Africa, and tens of thousands of schools and clinics, are without ready access to an electricity supply;
- the distribution sector of the industry is highly fragmented, with more than 400 distributors, resulting in low efficiencies, high costs, wide disparities in tariffs, and financial viability problems in many distributors;
- the electricity distribution industry continues to experience high levels of non-payment and electricity theft, resulting in increasing arrears and payment defaults;
- apart from a few notable exceptions the electrification programmes of most municipal distributors are limited by difficulties in accessing affordable finance;
- municipal electricity departments are expected to make a contribution towards the funding of other municipal services, particularly in the major urban areas, but are also faced with the burdens of non-payment and the need for significant expenditure on electrification;
- coal-based electricity generation results in significant polluting emissions, with potential long-term effects on the environment;
- in some cases electricity is used inefficiently, perhaps because of a consumer perception that electricity is cheap, thus wasting scarce energy and capital resources;
- although growth in electricity demand is only projected to exceed generation capacity by approximately the year 2007, long capacity-expansion lead times require strategies to be in place in the mid-term, in order to meet the needs of the growing economy; and
- whilst a number of the challenges presented above could place inflationary pressure on prices, South Africa has to maintain the competitive advantage of low, stable and cost-reflective electricity prices.
Electricity supply throughout the world is undergoing a revolution. This is being caused mainly, but not solely, by electricity utilities having to meet new pressures resulting from global markets and governments opening up their countries to foreign investors to help fund power sector expansion and development. As a result, utilities are having to see themselves as businesses, and act accordingly. South Africa is not immune from these forces, and will have to move broadly in line with developments taking place in the rest of the world, while also ensuring that the industry evolution meets South Africa’s special requirements. However in South Africa the main drivers for change are potential economic efficiency gains, and technological change (e.g. different economies of scale in power plant construction and new information and control technologies).
Therefore government believes that the operation of the industry will have to be constantly optimised to maximise the potential for adequate, reliable, and low cost electricity to serve the people and industries of South Africa. To ensure this result, as an initial goal the distribution sector of the electricity supply industry will have to be rationalised, by reducing the number of distributors to a much smaller number. As investigations have demonstrated, it is the distribution sector that is most urgently in need of reform. But changes will also be needed in the generation and transmission sectors in due course.
As part of South Africa’s energy policy objectives, the electricity supply industry objectives must:
- improve social equity by specifically addressing the energy requirements of the poor;
- enhance the efficiency and competitiveness of the South African economy by providing low-cost and high quality energy inputs to industrial, mining and other sectors; and
- achieve environmental sustainability in both the short and long-term usage of our natural resources.
To ensure the success of the electricity supply industry as a whole, various developments will have to be considered by government over time, namely:
- giving customers the right to choose their electricity supplier;
- introducing competition into the industry, especially the generation sector;
- permitting open, non-discriminatory access to the transmission system; and
- encouraging private sector participation in the industry.
Addressing the mid- to long-term issues will require substantial analysis and additional stakeholder consultation and input. Eventually, however, these measures must translate into an electricity supply industry that is financially viable, technically healthy and well managed. In other words, one that is capable of being the engine for growth, development and prosperity for South Africa.
Owing to the interdependence of the various electricity policies they are not presented in any order of priority, but rather in a sequence designed to assist the reader in understanding the logic of the policy.
The challenges underlying government policy for the electricity sector have been debated in various forums over the past five years. Early initiatives culminated in the establishment of the National Electrification Forum in May 1993. After concluding its discussions the National Electrification Forum presented a set of recommendations to cabinet in the second half of 1994, leading to the establishment of the National Electricity Regulator in early 1995. The National Electrification Forum also developed financial models of various scenarios for the national electrification programme. This information was used by RDP drafters to establish a national electrification target of 2,5 million household connections by the end of 1999. The RDP further suggested that all schools and clinics should be electrified as soon as possible. As a contribution to the RDP Eskom has set itself the target of delivering 1,75 million household connections (300 000 per annum), assuming that municipal distributors would be responsible for the remainder. The National Electrification Forum subsequently dissolved, leaving the task of drafting a new electricity regulatory bill to an advisory committee on electricity legislation reporting to the Department of Minerals and Energy.
The National Electricity Regulator subsequently attempted to rationalise the electricity distribution industry through its first licensing round. This initiative failed to result in any effective rationalisation and, in the absence of a clear policy framework, the National Electricity Regulator turned to government for direction. An Electricity Working Group was subsequently appointed, reporting jointly to the Minister of Provincial Affairs and Constitutional Development and the Minister of Minerals and Energy, to investigate the possible restructuring of the financial relationship between local government and the electricity sector, and to develop proposals for the rationalisation of the electricity distribution industry. The Electricity Working Group developed proposals, after consulting with a wide range of stakeholders, and presented these to the cabinet for approval. Cabinet in turn referred the proposals to an inter-Ministerial committee which, in turn, created an internal government committee known as the Electricity Restructuring Interdepartmental Committee. Cabinet has subsequently adopted this committee’s recommendations as government’s position on the restructuring of the distribution industry for negotiation with stakeholders.
There are a number of issues facing South Africa’s electricity distribution industry which limit its ability to achieve its primary objectives of meeting the aggressive electrification targets, of ensuring world class supply quality, and of continuing to provide low cost and equitably priced electricity to all consumers. The challenges include the following:
- The industry is highly fragmented. Currently more than 120 municipalities have less than 1000 customers and more than 90 municipalities have revenue of less than R1 million per annum;
- There are substantial differences in the financial health of municipal distributors. Four municipalities earn 50 per cent of the total surpluses being earned by all municipal distributors and an additional 18 municipalities earn another 25 per cent of the total surpluses. At the other extreme 289 municipalities earn less than 1 per cent of the total surpluses, and the bottom 25 per cent of municipal distributors lose money on their electricity sales.
- There is a wide disparity in the prices paid by the various customer segments that cannot be fully explained by the costs associated with serving these segments. For example, mining customers pay anywhere from 9 to 17 cents per kWh in Gauteng, and anywhere from 23 to 32 cents per kWh in Mpumalanga. Price disparities for other customer segments are as wide.
- Economies of scale, skill and specialisation are not being captured by many of the small distributors. Average distribution costs (including purchased energy) range from 23.9 cents per kWh for distributors of less than 1 GWh in annual sales to only 13.4 cents per kWh for distributors of more than 1000 GWh in annual sales, a 46 per cent difference in costs.
- Electrification needs are not evenly distributed across regions with some of the poorer regions having the greatest need. Without explicit or transparent funding mechanisms there is a great risk that in times of tight resources many distributors will not be able to fund their targets. Moreover, as electrification is a national objective, cross-regional subsidisation should be considered as an equitable way to fund the electrification program.
- While there are many distributors that are not financially viable today, collectively the industry is able to fund both the supply of electricity and electrification over the long-term. However, if the industry is expected to both contribute to funding other municipal services (as it does currently) and to pay for the electrification programme over the long-term, the electricity distribution industry will experience financial bankruptcy without alternative funding and pricing mechanisms, a reduction in the generation and transmission prices (i.e. the wholesale price of electricity), or substantial increases in tariffs. Even if the price municipalities pay for energy is reduced to the price paid for energy by Eskom distribution, the collective position of the industry will not change. The current Eskom distribution surplus will just be transferred to municipalities, without changing the overall cashflow problems for the industry as a whole.
These challenges will have to be addressed in any restructuring of the electricity distribution industry. The current structure and funding mechanisms in the distribution industry put it at significant risk. It is already not meeting the objective of providing low-cost and equitably priced electricity to all customers, the financial health is deteriorating rapidly, and the aggressive goals of the electrification programme may not be met in the areas that need it most. This is evidenced by an increasing number of municipalities who are unable to pay their bulk accounts to Eskom, high prices, poor quality of supply in many areas and problems with the delivery of electrification.
- Critical assumptions about restructuring
Government has found it necessary to make a number of assumptions about the restructuring process and the implications of restructuring. These assumptions may be regarded as constraints to restructuring, rather than formal policies, and include the following:
- Retrenchments that might occur in the distribution industry as a result of restructuring, will have to be negotiated.
- The electricity distribution industry will remain under public ownership for the short to medium-term, and any changes to ownership status will take place within the framework of government’s policy on the restructuring of state assets.
- Municipalities will continue to play an important role in setting policy, including end-user tariffs and in supervising the distribution of electricity in their areas. This does not mean, however, that they must undertake the distribution of electricity directly.
- Municipalities will continue to fund other municipality services from funds generated from electricity, but these funds will be generated through new, transparent mechanisms.
- Distributors will have to meet their agreed-to electrification targets, although funding will be done nationally and in a transparent manner.
- Regardless of whatever distribution structure is put in place, national tariff systems and national service and technical standards will be enforced by the NER.
- Regardless of the distribution structure, there are certain issues which have to be addressed at a national level. For instance planning, standards and collective bargaining are best addressed at the national level, whilst local planning and customer service complaints are better addressed at a local level.
Government believes that distribution industry restructuring should be undertaken in order to:
- ensure agreed-to electrification targets are met;
- provide low-cost electricity;
- facilitate better price equality;
- improve the financial health of the industry;
- improve quality of service and supply;
- foster proper co-ordination of operations and investment capital; and
- attract and retain competent employees.
To achieve these objectives government proposes the following policies.
Government will consolidate the electricity distribution industry into the maximum number of financially viable independent regional electricity distributors (REDs).
Based on initial financial modelling and operational considerations the maximum number of financially viable independent regional distributors is five. It is not possible to create nine regional distributors aligned by provincial boundaries because a number of these regional distributors would not be financially viable.
The REDs will be owned by Government. Control of all distribution network assets must pass to the companies and Government will determine appropriate mechanisms for achieving this.
Any further restructuring of REDs, if necessary, will be done in terms of the Government policy on rationalisation of State-owned assets. Government believes that transfer of assets by legislation is the preferred option but other options could be used depending on individual circumstances.
While these distributors will be independent, they should co-ordinate on issues such as electrification planning, tariff issues and centralised bargaining.
Government has decided that only two business forms are appropriate for the regional electricity distributors, namely companies established in terms of the Companies Act, 1973, or special statutory corporations established in terms of Special Acts of Parliament. Irrespective which governance form is decided upon, the governance structure of the REDs will have to comply with the protocol on corporate governance of State-owned entities.
The regional electricity distributors should be controlled by boards of directors appointed by Government. The memorandum and articles of association of the companies and the appropriate management structure still needs to be developed.
The relationship between the regional electricity distributors and municipalities will be formalised through legislation, contractual arrangements or other appropriate mechanisms.
Government has recognised that in order to implement the end-state model of independent regional electricity distributors from the present fragmented EDI, a transitional process is required. The transitional process must include the implementation of a legal transitional structure to manage the ongoing operations of the industry and implement the restructuring plan.
Government will implement legal transitional structure as an interim phase before the end-state model of independent REDS is implemented. The transitional structure will consist of Eskom distribution as well as that of municipal distributors, and will be a separate company from Eskom generation and transmission, including other municipal services.
As in the case with REDs, the Transitional Structure should be controlled by a board of directors appointed by Government. The Transitional Structure will consist of different regional electricity subsidiaries, along the same boundaries as the REDs, which will be determined before implementing the Transitional Structure. The Transitional Structure will fall away at a specific date, upon which the respective subsidiaries will have to be independent REDs. This date will be determined before the Transitional Structure is established.
During the Transitional structure a number of critical issues need to be addressed. These include the following: ownership and governance, constitutional issues, number of REDs, municipal levy, business form, tariff structure, key industrial customers, human resources, transfer of assets, legislation, as well as criteria and period for phasing out of transitional structure.
A limited number of large industries who generate their own electricity are licensed as privately-owned distributors by the NER. Currently these privately-owned distributors operating alongside other licensed local authorities and/or Eskom distribution area. In the future no change with regards to this situation is foreseen.
Licensed privately owned distributors will be allowed to co-exist alongside other public and private distributors to distribute their own generated electricity, subject to approval by the NER.
Government expects the entire electricity supply industry to change the manner in which it funds its obligations. Restructuring alone will have limited impact on improving the overall financial health of the industry, particularly given the constraints placed on the restructuring process. In effect, unless alternative funding and pricing mechanisms are developed, the industry will be unable to both fund electrification and contribute to other municipal services without substantial increases in tariffs, major reductions in distribution costs, or the curtailing of the electrification programme.
The entire industry (generation, transmission and distribution) must move to cost-reflective tariffs with separate, transparent funding for electrification and other municipal services.
While additional work in this area needs to be completed the objective would be to design a tariff and tax system that minimises the impact on end-user tariffs while addressing the funding needs in the industry.
The Constitution of the Republic of South Africa, 1996, empowers municipalities with executive authority in respect of, and the right to administer, gas and electricity reticulation. The purpose of this provision is to enable municipalities to fulfil these functions if they are required to do so.
Section 17 of the Electricity Act of 1987 provides that the supply of electricity in its area is subject to the consent of a local authority, but that where such consent is unreasonably withheld the National Electricity Regulator is allowed to rule on the matter.
Government will investigate the rights of local authorities with respect to electricity distribution and will propose parameters for the local government–utility relationship (service authority/service provider relationship). If necessary these parameters will be enacted through new legislation and policy implementation such as the proposed Local Government Municipal Systems Bill.
Since this is essentially a fiscal matter, rather than electricity policy, this issue is dealt with in detail in the section on Fiscal and Pricing Issues.
Some industrial sectors’ international competitiveness is highly sensitive to the price and quality of electricity supply. Government wishes to see the competitiveness of South African industry and exports increased and wishes to maintain a predictable, secure and efficient electricity supply to these sectors.
However, not all of industry is equally sensitive to electricity prices and there are sectors where electricity costs constitute a relatively small proportion of input costs. In some cases, existing low electricity prices may even be a disincentive to invest in energy efficient technologies which could also enhance international competitiveness.
There is thus a need to disaggregate industrial sectors, to understand different sensitivities to electricity prices and to develop a differentiated set of policies which are relevant and appropriate to different sectors.
Within the context of electricity distribution restructuring, there is a fear by some large industrial users that the cost and tax structures of different suppliers might differ considerably, resulting in potential price uncertainties and penalties. On the other hand electricity distributors do not wish to lose potential income from large customers and the burden for sharing the costs of electrification should be equitable. The best way of balancing these different concerns is, in the first instance, to allow choice of supply only to those industries whose international competitiveness is particularly sensitive to the prices and quality of electricity supply. This arrangement has the added benefit of sending correct price signals to customers. Therefore:
Government will initiate a study which will determine the sensitivity of the competitiveness of different industrial sectors to the price and quality of supply of electricity and will develop a set of differentiated policies and criteria which could allow choice of supply to those industrial customers where this is a critical issue.
The study should include an assessment of the impact of this policy option on electrification financing and local government revenue.
General choice of supply for all customers is not seen as an option in the short term. Government first wishes to ensure that the electrification programme is substantially complete and the orderly restructuring of the ESI is achieved.
Electrification is a central component of the RDP’s infrastructure delivery programme. In line with the target proposed in the RDP document it has been government’s intention to ensure the electrification of 2,5 million houses by the end of the decade. The programme will require capital investments of up to R2 billion per annum and it is expected that the programme will incur operating losses of up to R300 million per annum during the early years. Grid and off-grid connections will continue to be made at more modest levels after 1999.
From the government’s perspective the most critical policy challenges surrounding the national electrification programme are obtaining financial resources, allocating these resources to appropriate projects, and ensuring that capable utilities are in place to implement the programme. This last point has already been dealt with above under the heading of ‘Restructuring the distribution sector’. Financing the programme and allocating these resources to selected projects are directly related and are discussed below.
The challenges which have resulted from the current funding and allocation mechanisms include the following.
- The annual allocation of more than R1 billion of public funds by Eskom to individual electrification projects takes place through internal utility processes, in a non-transparent manner, without any direct accountability to parliament or any sphere of government.
- As a combined result of the internal financing arrangements and the present structure of supply rights, costly investment in rural electrification occurs, while many urban areas remain unelectrified.
- The majority of municipalities are unable to finance or subsidise electrification projects.
- Because the subsidy funds Eskom raises are only available for its own grid-based programme, other electrification initiatives using off-grid technologies such as photovoltaic supplies are disadvantaged. This results in inefficient and expensive investment in grid electrification where other technologies would have provided cost-effective solutions.
- Government intends to address these problems by developing a detailed national electrification strategy. Government will ensure the allocation of funds for addressing backlog electrification projects, while it will assist in subsidising infrastructure developmental electrification projects. Government expects that utilities will fund infrastructure developmental electrification projects from a combination of commercial finance, concessionary loans and grant funding. Utilities will be encouraged to make the true costs of the electrification programme transparent and open to public debate.
For the purpose of funding, government will differentiate between electrification addressing backlog and electrification as part of new infrastructure development.
Government will co-ordinate the electrification programme, including the following activities: setting of realistic electrification targets, determination of allocation criteria and priority areas for electrification, ensuring allocation and management of funds, financing and subsidisation of electrification projects and determination of appropriate mix between grid and off-grid technologies.
Government also wishes to see electrification subsidies allocated in a more transparent and accountable manner than in the past, with elected political representatives playing a larger role in establishing the policy framework.
- Universal access
Government recognises that household access to adequate energy services for cooking, heating, lighting and communication is a basic need. Whilst these needs can be met by various fuel-appliance combinations, government recognises that without access to electricity, a clean, convenient and desirable fuel, human development potential is ultimately constrained.
Government commits itself to implementing reasonable legislative and other measures, within its available resources, to progressively realise universal household access to electricity.
Access to electricity is taken to include grid supplies, Solar Home Systems, generators, hybrid systems, battery systems or any other supply solution which provides an appropriate and affordable electricity. supply. The decision of which technology to utilise, will be based on life cycle cost analysis and the number of connections made in terms of the budget allocation.
The Minister of Minerals and Energy, together with the Minister of Finance and the Minister of Provincial Affairs and Constitutional Development, will establish rolling five-year national electrification targets on an annual basis.
Annual connection targets will be allocated to electricity distributors who, as part of their licence conditions, will be expected to comply with these targets. Initial targets will be in accordance with those proposed by the medium scenario of the National Electrification Economic Study, as adopted in the Reconstruction and Development Plan.
In many cases grid electrification is simply uneconomical. In such cases an off-grid supply can often provide an adequate electricity service. Government therefore recognises the need to level the playing field between grid and off-grid electrification.
Annual connection targets, and related subsidies, will be allocated for off-grid electrification in accordance with the national electrification strategy.
Government recognises the problems that off-grid industries might have to invest in the manufacturing of off-grid equipment on an annual basis, but will as far as it will be possible, commits itself to maintaining stable targets and subsidy levels.
Government will establish a National Electrification Fund to provide electrification subsidies.
The National Electrification Fund will derive income from a combination of allocation from electricity industry; fiscal allocations; grants; and any other appropriate sources. Government will determine an appropriate balance between these sources from time to time. Initially this fund will be financed by subsidisation of the electricity industry, until the budgeting process and the issues regarding Eskom dividend and tax flow to fiscus have been finalised. It is important to note that with the establishment of this fund the current subsidisation from the electricity industry will be made transparent and is not a additional mechanism for obtaining finances for electrification.
It is foreseen that with time this Fund will decrease, as electrification projects are completed.
Further policy on the electrification funding can be found in the section on Fiscal and Pricing Issues.
The National Electrification Fund will subsidise a portion of the capital costs of connections made towards meeting electrification targets.
The subsidy will make a substantial contribution to the capital costs of connection, but should not remove supplier incentives to innovate for lower costs.
Backlog as well as new household electrification connections made under the national electrification programme will receive a standard subsidy and there will be differentiation in subsidy level on the basis of geographic region, supply technology or any other factor.
The Minister of Minerals and Energy will, together with the Minister of Finance, determine the appropriate subsidy level on an annual basis.
In so doing they will take into account:
- the rate of progress towards the goal of universal access;
- the resources available for electrification subsidies;
- industry cost trends; and
- any other relevant factors.
Allocation of electrification funds will be undertaken in terms of government’s criteria for the allocation of electrification subsidies.
These criteria will be developed through ongoing research and consultation. The allocation criteria will aim to:
- maximise the economic benefits of electrification subsidies;
- achieve an equitable regional distribution of subsidies;
- provide appropriate division between grid and off-grid supplies; and
- stimulate innovation within suppliers.
The Minister of Minerals and Energy may delegate responsibility to an appropriate organisation or organisations to allocate electrification subsidies and manage the National Electrification Fund in accordance with government’s allocation criteria and policies.
Such allocating and fund management organisations will meet the following criteria. They will have:
- adequate accounting and managerial capacity to ensure responsible treatment of public funds;
- established capacity for project evaluation, project financing and project administration;
- a good understanding of the role of energy supply and electrification in social and economic development;
- the capacity to integrate electrification with other social and economic development processes; and
- a suitable level of independence from commercial activities relating to electrification so as to ensure that conflicts of interest do not arise.
The progress of the national electrification programme may be monitored by a number of agencies, including at least:
- The National Electricity Regulator (NER);
- Department of Minerals and Energy;
- Department of Constitutional Development;
- Allocating and fund management organisations; or
- Other agencies concerned with development within South Africa generally.
The Department of Minerals and Energy (DME) will ensure that a national electrification database is established and maintained to assist with the monitoring of progress and the establishment of targets. The DME may request a suitable agency or agencies to undertake this task.
Government will evaluate the impact of the national electrification programme and will amend the electrification policy and strategy from time to time as necessary.
In its approach to electricity pricing policy government has to achieve an appropriate balance between meeting equity, economic growth and environmental goals. Pricing policy has to steer a course between affordable electricity prices for households, low-cost electricity for industrial consumers, prices which provide efficient market signals by accurately reflecting the cost of supply, and a general price level that ensures the financial sustainability of electricity utilities.
In addition to these general criteria for pricing policies, electricity distribution industry pricing presents the following additional challenges.
- As a result of the fragmentation of the electricity distribution industry there are currently more than 1100 domestic tariffs in place. Residential areas directly adjacent to each other often experience wide variations in tariff structures and levels. This situation creates unnecessary confusion for domestic consumers, is impossible to justify or regulate and may well contribute to an ongoing culture of non-payment.
- Non-payment and electricity theft continue to be widespread in South Africa and contribute to the financial losses of the electrification programme.
- The widespread practice of monopoly pricing within the commercial and industrial tariffs of many municipal distributors creates serious pricing distortions and imposes an uneven burden on these consumers, which, in turn, could inhibit industrial development.
- The structure and level of many electricity tariffs does not provide adequate incentives to consumers to use electricity more efficiently.
To address these challenges, electricity pricing policy, to be implemented by the National Electricity Regulator, will be informed by the following approach.
- Price signals should result in economically optimal investments in electricity infrastructure and consumption of electrical energy. Government is of the view that this will generally be achieved through the use of cost-based electricity tariffs which include capital replacement costs (long-run marginal costs).
- The level of electricity prices should essentially be determined by the utility’s revenue requirements, while the tariff structure should be determined by the structure of costs.
- Recognising that many households are presently unable to afford cost based tariffs, government acknowledges that moderately subsidised tariffs for poor domestic consumers are necessary for equity reasons.
- To limit possible negative impacts and ensure effective political accountability subsidies should, as far as possible, be transparent to the public.
- Cross-subsidies should have a minimal impact on the price of electricity to consumers in the productive sector of the economy.
Government policy on electricity pricing is as follows:
Cost-reflective tariffs will be applied at electricity distributor supply points in due course.
The cost of electricity inputs to regional distributors depends on the supply voltage level and the distance of the supplying sub-station from the Gauteng/Mpumalanga highveld where most generators are located. Basing transmission tariffs on the true cost of supply will have significant impacts on the financial viability of some distributors, as well as the prices paid by electricity consumers within their areas. Eskom presently normalises its prices nationally and levies a ‘transmission surcharge’ of a maximum of 3%, depending on the distance from Johannesburg, while in fact the geographic variation in transmission costs can be much higher.
Regional distributors will establish cost-reflective tariffs for each major customer segment.
The new tariff system will be designed and implemented over an appropriate period of time. Tariffs must take into account adjustments to the electricity sales price to the distributors and cost savings achieved through industry consolidation. The level of end-user tariffs may be reduced if the generation and transmission tariffs are reduced and/or if significant cost savings occur as a result of restructuring. If it is determined that some subsidisation (such as transmission subsidies to certain regions) should continue, they should be made explicit and transparent.
The National Electricity Regulator will regulate domestic electricity tariffs in order to rationalise the large variety of tariffs available in South Africa and ensure that a suite of supply options with progressive capacity-differentiated tariffs and connection fees are available to domestic customers.
Domestic customers differ in terms of their levels of consumption, supply capacity requirements, ability to pay the capital costs of connection, and the ease with which they can alter their consumption patterns. Generally poor households demonstrate low levels of electricity consumption, therefore only requiring low capacity supplies, and can only afford low connection fees and subsidised tariffs. On the other hand wealthy households tend to be high consumption customers, require expensive high capacity connections, and can afford to pay full connection costs in addition to contributing towards the subsidisation of low consumption (poor) households.
A suite of capacity-differentiated tariffs with a range of connection fees and tariff structures will therefore be offered to domestic customers. Lower-end tariffs will be structured to subsidise low levels of consumption but, as consumption increases, will automatically cover full supply costs and even contribute towards cross-subsidies. As consumption increases, households will have an incentive to shift to more sophisticated cost-reflective higher-end tariffs.
These choices will provide a strong signal to domestic customers to choose affordable and appropriately rated supply options. The average level of domestic tariffs should, as far as possible, be set to recover operating losses incurred in supplying poorer domestic consumers from within the domestic sector. In remote rural areas, where the lowest capacity grid system cannot be supplied within the capital expenditure limit, this system will provide a natural opportunity for Remote Area Power Supply (RAPS) systems to be supplied. The implementation of this policy may require amendments to the Electricity Act to enable the National Electricity Regulator to regulate connection fees.
Government will support electricity distributors in the establishment and implementation of sensitive but firm strategies to deal with non-payment and energy theft.
For the sake of the financial viability of the electricity supply industry, and the sustainability of the national electrification programme, it is essential that a culture of payment for services be revived within South Africa. Government, at all spheres, will take responsibility for this process and assist the electricity supply industry in dealing with this problem.
Eskom is the world’s fourth largest electricity utility, with an installed generating capacity of about 39 000 MW in 1997. The maximum demand in 1997 was about 28 330 MW. Eskom’s latest Integrated Electricity Plan forecasts for an assumed demand growth of 4,2% that Eskom’s present generation capacity surplus will be fully utilised by about 2007. Timely steps will have to be taken to ensure that demand does not exceed available supply capacity and that appropriate strategies, including those with long lead times, are implemented in time. The next decision on supply-side investments will probably have to be taken by the end of 1999 to ensure that the electricity needs of the next decade are met.
For many decades Eskom has carried the responsibility of supplier of last resort, effectively enjoying a de facto monopoly on the construction of new generation capacity. Power station construction was based on projections of historic demand growth and by 1980 it became apparent that Eskom had committed itself to expensive over-capacity, a situation that has prevailed for the last fifteen years. Since customers ultimately have to bear the costs of poor investment decisions it is government’s intention to ensure greater public participation in future decisions on public expenditures of this magnitude. Government also intends to steadily increase competitive pressures in the generation sector in order to improve efficiencies and reduce electricity prices.
In the light of the decisions that have to be taken with respect to future electricity demand, the debate about moth-balled power stations, existing power stations, Koeberg, non-utility generation and import of electricity will have to be formulised and completed.
Government will require the use of integrated resource planning methodologies in evaluating further electricity supply investments and the decommissioning of older power stations.
IRP is a decision-making process concerned with the acquisition of least-cost energy resources, which takes into account the need to maintain adequate, reliable, safe, and environmentally sound energy services for all customers. The IRP approach includes:
- the evaluation of all candidate energy supply and demand resources in an unbiased manner;
- the systematic consideration of a full range of economic, environmental, social, and technological factors;
- the consideration of risks and uncertainties posed by different resource portfolios and external factors, such as fluctuations in fuel prices and economic conditions; and
- the facilitation of public consultation in the utility planning process.
The compulsory use of IRP methodologies will ensure that utilities avoid or delay electricity supply investments, or delay decommissioning decisions, when it is economical to do so, by optimising the utilisation of existing capacity and increasing the efficiency of energy supply and consumption. The use of IRP will also contribute to meeting the electricity supply industry’s environmental performance.
Government will establish the guidelines for the IRP approach through new energy legislation and regulations and will require the National Electricity Regulator to oversee its implementation. If a competitive electricity supply market is established in future IRP policies will be adjusted to be consistent with the new market system.