The government’s “Reds” revolution to fundamentally alter electricity distribution is being changed again. Instead of six regional electricity distributors (Reds), there will now be seven, as the government admitted recently that there were “weaknesses” in its initial blueprint.
Reds are intended to replace municipalities and Eskom as distributors of electricity to households and small commercial customers. They should rationalise the more than 2 200 individual electricity tariffs, to stabilise electricity supply and get rid of anomalies, such as those areas where municipalities charge four times the Eskom tariff.
As part of electricity distribution reform, Eskom is intending to cede its distribution assets. Originally, Eskom would have been paid for these assets. Now it will participate as a shareholder in the various Reds based on the value of the assets it contributes.
The first Red, in the Cape Town area, was inaugurated in June and was meant to have included 32 municipalities in the Western and Northern Cape but, to date, none has joined.
The reform initiative has run into opposition because municipalities say they have a constitutional obligation to supply electricity and there was no legislative framework to force them to participate. Most refused to join because they foresaw a loss of revenue.
The government now says it will establish seven Reds instead of the projected six. The six metropolitan areas will each become a stand-alone Red and the remaining municipalities will either join one of the metropolitan Reds or belong to the seventh, national Red. They will not be able to distribute electricity outside of this framework.
Ompie Aphane, chief director for electricity in the Department of Minerals and Energy, said “it has since become clear that there are weaknesses” in the original plan.
Each Red was going to be anchored by a metropolitan municipality. Now the plan is to have the metros form stand-alone Reds. “The rationale for this is that you will be clearly defining 70% of the country’s electricity distribution industry,” said Aphane.
Aphane says the six Reds will be inaugurated “soon after” the local government elections in March next year, but did not specify a time. The remaining municipalities will then either join the metro Reds or form part of the seventh national Red.
Municipalities can cluster to form a Red, provided they have economies of scale, a sufficient customer base and the cost of transition is justifiable, said Aphane. Cabinet is to receive recommendations on the model of a national Red by June next year, with the Red to be implemented within a year.
But the process remains plagued by a number of challenges. One of these is the R2billion a year surplus guarantee, for 10 years, that municipalities were given. A senior official at a Gauteng Metro pointed out that the manner in which the amount was calculated may ignore the fact that income from electricity sales subsidises other areas, and may thus not be enough.
Aphane says there is a framework within which the amount is determined and “the [Reds] process cannot start by interrupting municipality revenues”.
Aphane’s confidence in maximum participation by municipalities stems from the fact that once Metro and city municipalities are assigned metros, about 80% of the industry will be covered. The remaining 20% of the industry “is largely Eskom”, so modelling can be done around a clearly defined entity.
Eskom has also seen a lot of change since Reds were first mooted. Initially, it was to reduce its participation in generation to make way for private players and withdraw from distribution by ceding assets to the Reds.
Now, not only will Eskom meet 70% of new generation needs, it will also play a part in Reds. Aphane says this is to ensure continued stability, especially in the portion of Reds that falls outside the metros. This reduces uncertainty that surrounded compensation to Eskom for its distribution assets, which would in turn affect its standing in the financial markets as it sought to raise funds for its infrastructure spending. Eskom estimates that distribution assets account for 15% of its R100billion asset base.
Compensation for Eskom’s assets will be discussed, along with that of other municipalities and Metros, and options include a shareholding in Reds and instruments such as debentures.
Most importantly, the new dispensation has to satisfy disparate pricing needs from those of metros such as Ekurhuleni on Gauteng’s East Rand, which claims to have the lowest tariffs outside Eskom, to those charging four times Eskom’s tariffs.
Aphane says tariffs will fall under the National Energy Regulator of South Africa’s ambit and a new structure will aim to be “cost reflective”. It will eliminate profiteering and unsustainably low tariffs. Tariffs have to allow Reds to recoup costs and enjoy a return on their assets.