South Africa has less than five years to increase its capacity for electricity generation, Xolani Mkhwanazi, National Electricity Regulator (NER) CEO, warned this week.
Mkhwanazi’s comments coincided with the release of the NER’s annual report. His call for greater urgency was echoed by a range of industry players, who called for the restructuring of the sector to be accelerated or called off.
The restructuring, described as “the most technically complex and politically volatile” to be undertaken post-1994, has been 10 years in the making. It is estimated that South Africa will need additional generating capacity in 2007.
One effect of the proposed changes — which include a uniform tariff structure and the creation of six regional distributors — would be improved efficiencies and lower prices.
Mkhwanazi divided South Africa’s power consumption into three broad categories: 17 energy-intensive users, such as Iscor, which consume 57% of power; light industry, commerce and agriculture, which consume 25,5%; and domestic users, who consume 17,4%.
Power is generated almost exclusively by Eskom and distributed directly to large customers or by municipalities.
The restructuring process en- visages the formation of six regional electricity distributors (Reds) instead of a patchwork of municipal suppliers with highly fragmented pricing. Municipalities, which will lose their distribution function and the accompanying revenue, will be shareholders in the Reds.
The only reform to date is the formation of a holding company, Electricity Distribution Industry Holdings, which will oversee this.
A separate government-owned company will manage transmission lines to ensure fair and unhindered access for possible additional power generators from the private sector. The government’s controversial plan is to introduce competition in the generation field, with an option to privatise part of Eskom and introduce black economic empowerment participation.
Jean Venter, general secretary of the Association for Municipal Electricity Undertakings (Ameu), this week ascribed the delay in restructuring to “a lack of commitment by government, and lack of coordination between [the Department of Minerals and Energy and Department of Local and Provincial Government].”
Venter noted that the uncertainty had led to a loss of skills, as disgruntled professionals left the field, and to the withholding of infrastructure investment by municipalities.
The fact that municipal participation in the proposed new system was still voluntary raised the additional risk of legal complications.
Venter said members of his association were required to canvass public opinion as part of an investigation into whether municipal councils should cede their assets to the Reds.
A flashpoint is compensation for loss of short-term revenues by local councils during the transition. Municipalities are currently guaranteed a total of R2,4-billion a year for 10 years after the formation of the Reds. They will then draw dividends from the Reds, which are expected to significantly top their current revenues.
But Venter expects municipalities to be given additional incentives. His association has demanded that Eskom relinquish its distribution assets to municipalities, so that they can “purchase” larger stakes in the Reds and draw larger dividends.
Municipalities would also like Eskom to surrender its 100 largest customers to the Reds, to ensure their viability.
Speaking from London, minerals and energy Deputy Director General Nelisiwe Magubane rejected claims that the government lacked the will to restructure. She cited the intricacy of coordinating legislation between the two departments as the delaying factor.
Magubane said her department was waiting to present the Electricity Distribution Industry Restructuring Bill to the Cabinet. However, this legislation could not be enacted in advance of the Municipal Finance Management Bill.
She said Minister of Minerals and Energy Phumzile Mlambo-Ngcuka had embarked on a provincial roadshow to discuss the envisaged reforms with municipalities.
Phindile Nzimande, CEO of EDI Holdings, which was inaugurated in March with a five-year mandate to set up the Reds, agreed that restruc- turing should now move forward “with momentum”.
The company’s next step would be to ring-fence the distribution assets of Eskom and the municipalities, and evaluate these to determine their stakes in the various Reds.
She noted that Eskom could not be expected to “just give up its assets”, and that key customers should retain their special price deals with the utility, as any disruption of the price structure as a result of a change in supplier would have implications for the broader economy.
Magubane said that when Eskom passed its distribution assets to the Reds it would be compensated “but preferably not with shares”. Options would be to convert the value of the assets to debentures or loans to the Reds, with the government acting as a guarantor, and to assess the net value of the assets and pay out Eskom.
Fani Zulu, spokesperson for Eskom, failed to comment despite repeated undertakings to do so.
The NER has a duty to ensure that the process runs smoothly.
There is little margin for error. California in the United States and Auckland in New Zealand are recent examples of regulatory failure. In the latter case, the city was plunged into darkness.