Picture: REUTERS
Picture: REUTERS

Despite the current respite, all South Africans have first-hand knowledge of Eskom’s struggles to keep the lights on, and the dire consequences of that, especially for businesses.

Operationally, the utility, which is responsible for meeting 95% of the nation’s energy needs, is a mess. And then there’s the state of its finances and that debt load of more than R420bn that can potentially cripple the government. 

An underappreciated risk of Eskom’s meltdown has been its potential impact on the financial sustainability of municipalities, and overlooking this would be a terrible mistake. This, after all, is the level of government that is supposed to be at the forefront of service delivery.

Municipalities across the country find themselves in the crosshairs of the power crisis.

Local governments are highly dependent on revenues from electricity sales and are the off-takers of more than 40% of the power Eskom generates. It has been a simple and effective way for them to generate income and has been the business model for municipalities across the world.

But times are rapidly changing.

The advent of new power-generation technologies and their increasing affordability means consumers are now able to pursue viable alternatives to source power. Reducing your dependence on the grid not only helps keep the power bills in check in the longer term, but for South Africans in particular it can also serve to mitigate the damaging impact of load-shedding.

While the country’s largest power consumers, such as mining companies and manufacturers, are exploring alternative sources, these are very small-scale and do not present a viable solution for their general dependence on the national grid. They also tend to buy directly from Eskom.

Municipalities are vulnerable to a death spiral, where paying customers increasingly desert the grid. That’s because their traditional customer base — households, small businesses and neighbourhood shopping centres — is most likely to make use of alternative energy sources by installing solar panels on their roofs.

While a move away from the grid lessens the burden on the national power system, it’s not very good for business. Bulk power sales are what historically made the business model of both Eskom and local governments work.

Already municipal electricity departments are seeing profit margins erode, and some have already become loss-making. This is just the tip of the proverbial iceberg.

Undoubtedly, many of SA’s municipalities would be in financial distress regardless of the power question and there are substantial, often self-inflicted, issues in local governments that cause and perpetuate their demise — much like the case with Eskom.

At the last count, according to the Treasury, 64 of SA’s 257 municipalities had negative cash balances in June 2017, while 137 had less than a month’s cash to cover operational expenditure. Their archaic business models are hastening their demise, and it doesn’t have to be this way.

In other parts of the world, municipal business models are dramatically changing. In the US, for example, revenues have been unhinged from power sales and tariffs reflect both the cost of power generation as well as a fixed fee for the power grid services provided by a municipality.

Other local governments have themselves become installers of green power such as solar panels. Others have moved out of energy entirely and outsourced the function.

The Council for Scientific and Industrial Research sees SA’s municipalities as exceptionally well-placed to take advantage of disruptions in the energy sector. For example, gas to electricity from landfills is the perfect sort of project for local governments to grab hold of. At its energy summit in 2018, the SA Local Government Association committed to a number of steps to reform municipalities in order to unlock opportunities and ensure their sustainability.

But a year on, very little progress has been made. 

What is needed is enabling regulation and political will. But the national government appears either incapable or unwilling to get the ball rolling.

Without reform, a widespread municipal crisis is inevitable and it is those communities that are dependent on local government for basic services that will suffer.