South Africans set to be hit with new electricity tariffs

Eskom and municipalities are likely to implement new tariffs for Independent Power Producers (IPPs) and small-scale generators.

These ‘use-of-network’ tariffs are needed to maintain the utility’s financial viability as more households and businesses reduce their reliance on it for electricity. 

Furthermore, the additional revenue will be necessary to fund grid maintenance and the expansion of infrastructure to accommodate more points of connection and increased load in key areas. 

This is feedback from the Organisation for Economic Cooperation and Development (OECD), which outlined some of the challenges a decentralised electricity system presents. 

The OECD urged the government to accelerate the implementation of reforms to open up South Africa’s electricity sector to increased competition, ensuring long-term energy security. 

This would result in significantly more generators of electricity being connected to the grid, reducing the country’s reliance on Eskom and potentially lowering the cost of energy. 

However, it also creates a significant challenge for utilities and distributors regarding how they collect revenue and how much is needed to increase investment in maintenance and expand the grid. 

The organisation stated that, under the current system, the National Energy Regulator of South Africa (NERSA) regulates tariffs at each stage. 

This includes Eskom’s tariffs, wholesale tariffs for direct power purchasers from the utility, and distribution tariffs for municipalities, which aim to cover both electricity costs and distribution expenses. 

With the increasing use of IPPs and small-scale generators, particularly solar installations, in distribution networks, there is a need to update these tariffs, the OECD said. 

It explained that new ‘use-of-network’ or ‘wheeling’ tariffs are needed. Currently, these tariffs are unregulated by Nersa and are left to municipal discretion. 

The absence of national legislation and clear regulation will hinder the growth of electricity supply from IPPs and small-scale generators. 

Progress in this area is underway, with the National Wheeling Framework published for public consultation in August 2024. 

Once approved, it will be adopted and implemented by municipalities. Advancing this process would be highly beneficial. 

To process the large volume of billing data, end users’ meters and municipalities’ digital capabilities need to be significantly upgraded. 

Higher cost-reflective tariffs combined with short-term targeted financial transfers could help cover the costs of these investments, the OECD said. 

Distribution disaster

Another major threat to the creation of an open, competitive electricity market is the steady deterioration of South Africa’s distribution infrastructure. 

Most of the government’s reform progress has been placed on generation and transmission, with little given to distribution. 

Due to constitutional provisions in South Africa, municipal governments play a key role in the electricity sector, distributing around 40% of all electricity. This makes reforming the sector much more difficult. 

Municipal governments primarily serve households and small businesses, with the remaining 40% of users being served by Eskom, which caters to large users and municipalities without a network. 

The role of municipal governments includes maintaining infrastructure, providing new connections, and setting minimum service levels.

Much of this infrastructure is poorly maintained and suffers from high technical losses, leading to frequent power outages for parts of the country. 

This has been exaggerated by the impact of theft and vandalism on distribution infrastructure, leading to further localised outages. 

Most municipalities struggle to perform maintenance and safeguard their infrastructure assets because they allocate only 1% of their infrastructure value to repairs and maintenance, according to the OECD. 

This is compounded by the declining financial health of municipalities and Eskom, increasing their need for additional tariff revenue and limiting investment in maintenance. 

Nearly half of municipalities, including some major metropolitan areas, face significant financial challenges, raising concerns about their ability to perform their functions effectively. 

Almost 80% of municipal debt resides with the 20 municipalities that are particularly struggling to provide reliable electricity to their constituents. 

Worryingly, most of this municipal debt is in the form of arrears owed to Eskom, significantly impacting the utility’s financial health.