Eskom in a death spiral – IRR

Eskom’s plan to charge people who installed solar panels more is a cry for help from a monopoly which is in a death spiral, the Institute of Race Relations (IRR) said.

Eskom has recently presented its new electricity price structure to the National Energy Regulator of South Africa (Nersa).

The new structure is aimed at limiting the loss of revenue from clients who are using less Eskom electricity because they installed solar panels.

Eskom’s current electricity pricing includes fixed connection charges and electricity tariffs which vary based on usage.

The fixed connection charge is currently a relatively small part of a monthly electricity bill, with electricity usage charges making up the bulk of what users pay.

This means Eskom clients can significantly reduce their electricity bill by installing a solar solution and reduce their usage charges.

To combat this loss in revenue, Eskom wants to charge far higher fixed connection charges and reduce electricity usage charges.

This will negate many of the cost benefits associated with a solar installation unless people move off the grid completely.

Justifying this change, Eskom said South Africans who are generating their own electricity using solar power are causing problems for them.

Solar installations generate most of their electricity during the day, which forces Eskom to ramp up at a faster rate to meet evening demand. This has a negative effect on the power system.

Eskom added that its current tariffs do not reflect the costs required to run the national grid and supply customers with power.

It argues the current tariff structure has caused South Africans to falsely believe solar generation is much cheaper than Eskom’s rates. It has also created a “falsely attractive business case for own generation”.

The new structure will force solar power users to pay a high fixed cost, independent of usage, which will reduce the attractiveness of solar installations.

Eskom enters a death spiral

Eskom CEO Andre de Ruyter has recently expressed his support for companies to develop their own electricity generation plants to power their operations.

He said Eskom was in favour of supporting “customer-funded capacity” to help them to address the electricity supply problems the country is facing.

What is curious about Eskom’s pricing arguments is that while it is requesting clients to use less electricity and install their own capacity, it is also planning to punish them for adhering to this request.

Eskom is therefore encouraging people to use less of its product but wants to charge them the same – or even more – than what they did before.

The IRR argued that this showed that Eskom has entered a death spiral where it asks customers to use less of its product, and then raises prices to recoup the revenue lost through lower sales volumes.

“The higher prices incentivise more customers to use less of the utility’s product. This self-reinforcing cycle continues indefinitely, with state bailouts keeping the utility afloat, until it changes tack,” the IRR said.

It explained when load-shedding started in 2007 and 2008, Eskom asked customers to use less of its product and to save electricity.

South Africans heeded the call. They installed geyser-control devices, solar geysers and gas cookers, switched to energy-efficient light bulbs and boiled only the amount of water they needed.

“Despite South Africans’ willing and innovative cooperation, Eskom increased its tariffs. And it kept increasing them, year by year, at steep rates, causing South Africans to use less and less electricity,” the IRR said.

Remarkably, Eskom produces less electricity today than it did 14 years ago – a very unusual situation for a monopolist in an emerging economy.

Despite producing less electricity, Eskom significantly grew its workforce and expenses. This increased inefficiency means it needs to make more money to cover its costs.

Eskom also has a tremendous debt burden which further forces them to increase electricity prices to repay this debt.

The solution

The IRR’s campaign manager, Hermann Pretorius said Eskom has to change tack to exit this death spiral.

“Eskom has to start by recognising that prices cannot be raised indefinitely, because doing so only makes things worse,” he said.

“It has to stop increasing tariffs and start stemming the financial losses by cutting costs and increasing its woeful operating efficiency.”

Pretorius added that Eskom must stop punishing its customers for complying with its pleas to use less electricity.

“Customers who save electricity and instal solar panels are paying for this out of their own pockets,” he said.

“They are making a personal sacrifice to help the power monopolist keep the lights on. It is unfair in the extreme to punish them for this.”

He proposed opening up the energy market to allow companies other than Eskom to offer electricity to South African businesses and residential customers.

“If you can have Telkom, a state-owned company, compete against Vodacom, MTN, and Cell C in the cellular industry, why can’t we have a similar situation in the energy market?” he asked.

“Keep Eskom as it is to make sure poorer parts of South Africa can maintain a link to the electricity grid, but open the market.”

He also urged the government to de-politicise Eskom and allow the board to function independently.

Eskom responds

Eskom said it has noted “erroneous statements regarding what is said to be Eskom’s death spiral, and allegations that Eskom is punishing consumers who generate their own electricity from renewable sources”.

Eskom issued a press statement regarding the issue, published in full below.

Eskom notes the erroneous statements regarding what is said to be Eskom’s death spiral, and allegations that Eskom is punishing consumers who generate their own electricity from renewable sources.

Nothing could be further from the truth. In fact, quite the opposite is true. By law, Eskom cannot discriminate against any particular set of electricity consumers, and has to treat all consumers the same.

The statement that Eskom seeks to charge those with solar panels more than other consumers is misleading and based on a poor understanding of the facts. The facts of the retail tariff plan application currently before the National Energy Regulator of South Africa (NERSA) are such that, if approved, the benefits to the consumer are significant.

Eskom’s aim is to unbundle the tariff so that energy charges correctly reflect the cost of energy and network charges reflect the cost of providing a network connection. This is to ensure the right signals are provided for consumption and for the use of the grid. This is applicable to all tariffs, not just those for customers with solar PV. There is significant benefit to be connected to the grid, in that back-up capability is provided and the grid can be used as a battery to store energy for later use.

Most domestic customers who install solar installations opt for so-called “grid-tied” options, which means that the cost of the battery system is reduced significantly by allowing the user to access Eskom power when the sun does not shine and the battery has run down. To enable this access to the grid, Eskom has to maintain an extensive infrastructure to be accessed on demand. The new tariff structure will ensure that the cost of maintaining this infrastructure is recovered, while still allowing the customer to benefit from their solar installation.

For residential customers Eskom is also proposing the introduction of a time-of-use tariff with a net-billing rate where customers will be compensated for energy exported, based on the time of day they use or export electricity. The offset rate is at the same energy rate at which they purchase electricity from Eskom. This will have the effect of reducing their energy portion of the bill and with savings if they respond to the time-of-use signals.

It is also for this reason that tariffs have to be unbundled to reflect energy and network costs separately, so that the compensation is provided reflecting energy costs only, and not providing compensation for network costs. Simply put, this is arebalancing of the charges, will not recover additional revenue, and most importantly, to ensure fairness for the recovery of costs from all customers.

For Eskom’s non-residential customers, Eskom already has tariffs in place that are unbundled and provide compensation for legal grid connected customers with PV installations.

This new offset rate therefore means Eskom is enabling a win-win situation for both the consumer and Eskom in the medium to high suburban customers. Currently other distributors (municipalities) have similar tariffs for their own customers, and Eskom’s proposal is in line with this progressive tariff structure.

Another point to note is that, if approved, the new retail tariff plan will not increase Eskom’s revenue beyond that which already approved by NERSA in the MYPD determinations. Eskom seeks to modernise and simplify its tariff structures, which have been in place since 2012, and have been overtaken by the changing industry dynamics.

Eskom supports opening up the power system as part of decarbonising the energy sector, and as contributing to ending the two-decade long electricity crisis. This modernised tariff proposal is one of the steps we are taking to transform the power system for future generations.

Echoing Eskom’s stance on this, Group Chief Executive Officer André de Ruyter told the Mining Indaba on Tuesday: “For too long, we have compromised our future by how we have responded, or not responded adequately, to the urgency in the present. The imperative is to arrest the electricity crisis now, in a way that sets up the future rather than borrowing from it. This includes establishing a tariff that delivers a sustainable, decarbonised electricity sector.”

Now read: Eskom wants South Africans with solar panels to pay more for electricity

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Eskom in a death spiral – IRR