The journey towards liberalising SA’s electricity sector and breaking Eskom’s monopoly was never going to be a quick or easy task. It is widely acknowledged that the reforms envisaged in the Electricity Regulation Amendment Bill (ERA Bill), which is awaiting President Cyril Ramaphosa’s signature to become law, will take at least five years, but probably longer, to implement.
One of the many complex market reforms that must take place involves establishing a new tariff framework. While this was not the main issue under discussion at last week’s hearings by the National Energy Regulator of SA (Nersa) to consider the granting of generation, trading and import-export licences to private traders, it was one of the complexities raised in Eskom’s objection to the granting of these licences.
Tariffs need to be fair and affordable for users, they must be attractive enough to bring in new investment for generation and transmission grid development, and they have to — as Eskom has long said — reflect the cost of generating and supplying electricity. Finding a balance, and a fair tariff, becomes even more complex in a market that allows for competitive trading.
Eskom argued that Nersa’s rules, as they stand, do not allow for two or more licensees to supply electricity in the same area.
Some of the issues Eskom raised echoed concerns expressed by municipalities in their objections to the ERA Bill.
For one, Eskom said granting these licences would allow private companies to be selective about the customers they choose to supply, which could hurt other electricity consumers in that supply area. This was because current tariff regimes made provision for cross-subsidisation, and removing paying customers from the cross-subsidy base would put pressure on the remaining customers.
Similarly, municipalities fear the ERA Bill will limit their role in providing electricity to households, businesses and government in their service areas.
This ties in with the question of cost recovery for the transmission and distribution networks that Eskom and municipalities own and operate — and must maintain.
A liberalised market will have to provide tariff structures that “safeguard the recovery of all costs in compliance with the electricity pricing policy” as the National Transmission Company SA put it in its presentation to Nersa.
This means that Eskom and the consumers who have funded the infrastructure that may be used to facilitate the transactions of private traders must be fairly compensated for this usage.
We are already seeing an example of this in the capacity charge that applies for users that have solar panels but still rely on the grid. At a coal conference in Johannesburg this week, the CEO of the Energy Council, James Mackay, suggested that consideration should be given to a legacy charge for those businesses or households that choose to go completely independent — severing all connection to the Eskom grid — to pay for how they benefited from the system in the past.
Addressing the erosion of Eskom’s and municipalities’ revenue base from the sale of electricity was always going to be one of the biggest challenges of transitioning to a liberalised market.
But in a liberalised market, rules that create mini-supply monopolies in specific areas would be counterproductive because they would deny electricity users the full benefits of a competitive market, such as the ability to choose from which company they want to purchase power.
Eskom and municipalities will have to learn how to share, but their concerns need to be addressed.
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