Futuregrowth investment analyst Bonga Maliwa said the ambiguity surrounding the government’s wheeling regulations creates uncertainty among investors, hindering progress in solving load-shedding.
Maliwa said it has become increasingly clear that South Africa’s energy security lies mainly in the hands of Independent Power Producers (IPPs) who generate renewable energy and distribute it to customers over Eskom’s electricity grid.
In light of the country’s electricity crisis, the government increased electricity generation by removing licensing requirements for power generation.
This has led to a significant boost in private-sector investment in South Africa’s power sector.
However, there is still a lot of ambiguity surrounding the government’s wheeling regulations that have left these IPPs uncertain and have hindered further investment.
Wheeling is a bilateral agreement between renewable energy generators and the off-takers that use that energy. As part of the agreement, the power generated by the first party is wheeled over Eskom’s or a municipality’s transmission networks.
Maliwa explained that Eskom charges a wheeling tariff, but that rate hasn’t been standardised.
“In the few contracts concluded between Eskom and the wheeling parties, the wheeling and use-of-system charges have been negotiated on a case-by-case basis, which is both time-consuming and unpredictable,” he said.
“Simplifying the costs and how the wheeling agreements will work will provide power producers with more certainty and enable them to fast-track wheeling arrangements with Eskom and the municipalities.”
“To date, the wheeling arrangements that have been concluded are few and far between because of the prolonged nature of negotiations with Eskom about how much they will charge the IPP to distribute the electricity to its end client.”
He said this process becomes even more complex when the power must also be distributed across municipal grids to get to the end customer, as separate agreements must be established between Eskom and the municipalities.
Eskom recently announced its intention to establish a virtual wheeling platform.
This differs from direct wheeling contracts between an IPP and a corporate client, as Eskom controls the platform by connecting multiple buyers with generators, Maliwa explained.
In other words, clients can source private-sector electricity over the grid, while Eskom will control the electricity tariff.
However, there will be no room to negotiate with the IPP on the cost of the electricity provided to them in a one-to-one agreement.
Maliwa said the virtual wheeling contract will also be complex as the client will be charged a set amount for electricity each month.
Then, Eskom will calculate the electricity used and determine the buyer’s wheeled energy refund.
Therefore, unlike with one-to-one wheeling arrangements, buyers will be exposed to Eskom’s financial risk because they will have to rely on Eskom being able to repay clients for the electricity they have not used.
“Part of Eskom’s process is dealing with the significant third-party debt it has built up over the years and determining which of the three entities will become responsible for that debt after its restructuring,” Maliwa said.
“Billions of rands are needed, but the utility is technically insolvent and doesn’t have the money to meet its debt obligations.”
“By freeing up private generators’ ability to trade power over the grid, Eskom is effectively bringing the private sector on board to assist in servicing that debt. Revenues from the wheeling charges paid by the IPPs are expected to impact Eskom’s revenues positively.”