LAEL BETHLEHEM AND GROVÉ STEYN: Eskom tariff restructuring could undermine plans to resolve load-shedding

It must be unimaginably difficult to run Eskom. A shortage of generation capacity, a heavy load of debt, internal and external mafia intent on lining their pockets at all costs ...

We wish the new Eskom board well. But we know  things will not get much easier until we have more generation capacity on the grid. Eskom cannot supply this alone; it must work with private power producers. In these circumstances, incentivising new supply is a huge priority.

One of the most difficult issues SA faces in doing so is the need to balance Eskom’s revenue requirements with the need for new generation capacity. Right now we appear to be getting that wrong in a way that directly threatens the most promising renewable energy projects in the country.

On October 27, the National Energy Regulator of SA (Nersa) will hold public hearings on Eskom’s tariff restructuring proposals (this is separate from its tariff increase application). These proposals have not attracted much interest yet, but if approved will all but destroy the burgeoning market for “wheeling projects” so recently created by the president’s new energy plan.

Privately financed off-site renewable energy projects “wheel” power from a remote location to a mine or factory, using Eskom’s transmission lines, and pay a fee for doing so. Wheeling projects are a win-win as they provide renewable power to industry and reduce the demand on Eskom. They increase the supply of energy to the country at no cost to Eskom or government.

Without wheeling projects load-shedding will take far longer to resolve because everyone will have to rely on Eskom entirely, unless they are lucky enough to be able to build a renewable project on their own site. Wheeling projects are crucial because they create new (renewable) generation capacity and link it to the grid. To make this happen an independent power producer (IPP) must find a large customer that is willing to enter into a 15-20 year contract. Once the project is up and running, the customer pays the IPP for the energy it supplies, but continues to pay Eskom for fixed charges, subsidies and the use of its transmission infrastructure.

The customer receives a credit from Eskom for energy injected by the IPP it has contracted with, but at the wholesale electricity pricing system (Weps) rate, which is lower than the rate Eskom charges customers for power. The financial incentive for customers to sign these long-term commitments arises from the saving they make on the variable energy charges. However, if the Eskom tariffs are rebalanced to hugely increase the fixed charges and reduce the energy charges, wheeling projects can become uneconomical.

That is exactly what Eskom is now proposing to do, directly contradicting the president’s stated objective of getting IPPs to provide renewable energy directly to the private sector and municipalities.  This appears to be an unintended consequence of Eskom’s tariff restructuring proposals rather than a direct attack on the wheeling market. However, if it is not corrected it will have severe consequences. It is clear that Eskom did not investigate the effects of these proposed changes on new investment and load-shedding before publishing its proposals.

How does Eskom’s proposed new pricing work? The cost of electricity for industrial users take the form of fixed and variable kWh-based charges. For distributed generators that are not located on-site, additional wheeling charges are also added. Eskom now proposes to reduce kWh-based energy charges on aggregate and greatly increase the fixed charges. It proposes to do this in one fell swoop, imposing a sudden shock on the energy market. This overnight change in tariff structure therefore risks uprooting the IPPs, at a time when SA urgently requires capacity from the private sector to help end load-shedding.

We agree that over time Eskom’s price structure should be adjusted to reflect the different parts of the value chain, especially if generation is to be separated from transmission in the Eskom structure. But this needs to be done gradually, predictably and with careful consideration of the effect on load-shedding. It must be managed in a way that does not kill the wheeling market, because that simply reduces supply of new energy at a time when we all desperately need it. 

What should be done instead? There are five urgent priorities to incentivise risk taking investments in new private power:

• First, Eskom should agree that any (large scale) consumer that has brought new capacity to the grid through wheeling should not be subjected to the same level of load curtailment during load-shedding periods. The curtailment should be calculated after netting off the additional supply it is bringing to the grid. This is a simple, sensible change that Eskom could make immediately.
• Second, Eskom should incentivise customers and IPPs to build larger projects by agreeing to buy the surplus energy they generate at times of abundant wind or sunshine. This can be done through the existing “standard offer” mechanism — but the offer should be made clear, should be long-term, and should be set at a cost-reflective level such as the Weps rate. The current offer is unclear and set well below even the lowest cost of generation.
• Third, any change to the balance between fixed and energy charges should be introduced gradually with a clear  seven to 10 year process so industrial consumers can take this into account in their wheeling projects. If fixed charges are to be greatly increased, this should be offset by reducing wheeling charges so that additional capacity can still be viable.
• Fourth, where wheeling customers help to bring significant new generation to the market, Eskom should credit the wheeled units at the same rate as it charges for energy. At present it credits the wheeled energy at a lower rate, while also charging a wheeling fee.
• Fifth, there are many renewable projects that are ready to construct but cannot get access to the grid because the existing transmission capacity is too limited to carry the supply. Climate financing should be used to fix this problem urgently. It is the single biggest barrier to new power capacity, and Eskom does not have the money to fix it. In the short term it is an outstandingly good use of climate finance. 
• Finally, Eskom’s pricing department must not operate in a silo. Pricing changes have major consequences. Every decision in Eskom must pass the load-shedding test. We must all work together to get the lights back on, and to power up the SA economy.

Bethlehem is chief ESG officer at Sedibelo Platinum where she is involved in procuring renewable energy. Steyn is MD of Meridian Economics and has worked extensively in energy policy.