Electricity distribution on the verge of crisis
Urgent action needs to be taken to rehabilitate the dilapidated infrastructure that supplies electricity — or the economy faces yet more hammer blows, writes Tom Nevin
The electricity supply network in SA is heading for failure unless the Department of Energy, electricity utility Eskom, and city and town councils can find ways to fast-track infrastructure rehabilitation and new installation.
"No doubt about it," says sector specialist Melusi Maposa. "Our failing electricity distribution infrastructure is seriously putting SA’s economic growth at risk. If the lights went out in the past 12 months, then it was a distribution failure, not load shedding," says Maposa, MD of resources at Accenture Management Consulting.
In a 2015 National Energy Regulator of SA (Nersa) report, "one municipality managed only 2% compliance with the Nersa scorecard. Compliance is often a measure of quality of electricity distribution. No industrialist would start a business in a 2%-compliant town."
For years Nersa has reported the failure by municipal electricity distributors to comply with licensing conditions, largely because of insufficient refurbishment and maintenance.
The maintenance backlog is significant. The Financial and Fiscal Commission (FFC) notes that for at least seven years, municipalities have spent only 60% of the benchmarks for maintenance across municipal infrastructure countrywide, of which a benchmark of R10bn a year for electricity infrastructure is the largest component.
"This could mean seven years of underspend, amounting to R40bn in current money terms. Again, funding is not the only issue," says Maposa. "The FFC states that lack of institutional capacity is a major cause of the maintenance backlog. Even if funding is available, municipal distributors are unable to spend it."
In its report to Parliament, the FFC highlights the lack of maintenance and the inadequate rate of asset replacement.
This concern echoes that of Nersa, and both entities zero in on a dearth of maintenance due in large part to a diminishing pool of the skills required to allocate, prioritise and prudently invest in electricity.
But whereas the Nersa report cites funding and skills as the key issues, the FFC states that adequate or nearly adequate capital funds for new access and refurbishment are available across all provinces (except Gauteng) if the municipal infrastructure grant and Integrated National Electrification Programme funds are combined.
The distribution problems resurface at a time when South Africans have only recently emerged from the gloom of load shedding
"In fact," notes Maposa, "the FFC states that in three provinces, electricity plant renewal and growth are actually overfunded, although the FFC does not include funding for the maintenance backlog."
The Nersa and FFC reports do not offer solutions. Although skills may be available elsewhere in the public sector, additional funding for the maintenance backlog will be an issue.
Maposa believes that Nersa, with political support from the Department of Energy, should withdraw the distribution licences from a pilot group of the worst-performing municipalities. "Then the delicensed municipalities would have to find an operator," he says.
"There is a process to be followed in the municipal acts when ‘a basic service’ is outsourced — this process could be made less onerous by [an] act of Parliament," he says.
Skills can be made available from the public sector. Eskom successfully runs the largest distribution network in SA, and Centlec in Mangaung is already managing a few Free State municipal distributors on behalf of those municipalities, so a public sector option is possible.
Maposa says the government should encourage Eskom to take on the delicensed municipal distributors provided Eskom can fund the capital requirements.
But Maposa also suggests it is time to involve the private sector in municipal electricity.
"If Eskom declines due to funding or operational capacity, then options must be found.
"South African municipalities lack the skills to effect improvements as much as they lack the funds to address the backlog. So where will the skills and funds come from?" Then Maposa answers his own question: "From the private sector."
He proposes giving the delicensed municipalities a chance for electricity-driven prosperity based on private sector funding and skills.
Unless urgent attention is paid to the rehabilitation of SA’s decrepit electricity supply, a total blackout is the next inevitable event.
Two years ago, Thava Govender, Eskom’s group executive, spelled out the dire consequences of a supply system grid failure. "A blackout is where you lose all power in one province and the whole grid collapses. So you basically black out Gauteng or Mpumalanga. A national blackout is when you don’t supply anything in the country. There’s no power at all," he said.
Another expert explained that load shedding was a result of power shortages but was a planned event. Grid collapse was unplanned.
The problem that confronts the South African energy industry is nothing new; it has steadily been worsening in past decades. Nearly 10 years ago two eminent business academics spelled out the problem. Little heed seems to have been taken and now a full-blown crisis is looming.
In their South African Network Infrastructure Review, David Newbery, professor of applied economics at Cambridge, and Anton Eberhard, professor at the Graduate School of Business at the University of Cape Town, found that distribution performance by municipalities was generally poor and could deteriorate — at great economic cost.
"About half SA’s electricity distribution is delegated to municipalities that lack appropriate, politically insulated commercial structures for the management of distribution and supply and that, in many cases, have failed to maintain infrastructure and retain suitably qualified staff," their review stated, accurately forecasting the current deteriorating situation.
The review proposed that "the highest priority should be given to ironing out policy uncertainties concerning the rationalisation of the electricity distribution industry and providing a clear road map".
Accenture executive Ken Robinson believes that the reworked Integrated Resource Plan, the road map that spells out energy needs and resources for the next 20 years, should state the policy. "Then the departments of energy and public enterprises should force Eskom to support it, by nominating a new board if necessary," he says. "I think the Companies Act could be changed to ensure directors of state-owned companies must follow policy."
The distribution problems resurface at a time when South Africans have only recently emerged from the gloom of load shedding. It could have been worse. Had GDP grown at the expected 5%, the 35,000MW national grid capacity would have been woefully inadequate and load shedding would have been a fact of everyday life.
However, the economy slumped to a growth rate of just 0.5% for 2016 and much of the same is expected for the year ahead. This means that current capacity might be enough to keep the lights on. Whether the means to distribute electricity will be available for much longer is another story.