Small town tests system to cut electricity prices in South Africa

An electricity consulting firm is piloting a project in Graaff Reinet that aims to help municipalities increase their margins without charging residents more.

The CEO of Utility Consulting Solutions, Christo Nicholls, told Cape Talk that residents’ electricity prices depend on how much the municipality pays to buy it in bulk from Eskom.

He gave the example of the Dr Beyers Naude municipality, where Graaff Reinet is located, which spends an average of between R2.10 and R2.15 per kilowatt of electricity purchased from Eskom annually.

The municipality then adds a tariff to this cost, determining the price residents will pay for electricity. Nicholls says this often brings the price close to R3 per kW.

However, he argues that if the price of electricity increases above the Consumer Price Index plus two, it becomes unaffordable for residents.

Nicholls suggests using a battery and the principle of arbitrage to solve this issue while allowing municipalities to generate more revenue from electricity distribution.

“Eskom sells electricity to municipalities in what they call time-of-use tariffs. So, they have a rate for all the electricity the municipality buys during peak times, Nicholls said.

He added that there are peak periods in the morning and evening, a standard time in between, and off-peak after 10 in the evening.

So, the principle is simple. You charge a big enough battery during the cheapest time at night. Then, you run the municipality on the battery for the period of the two peak periods and the standard time.

However, the biggest challenge with this solution is the cost of the 1MW battery required, which costs R4.5 million.

Nicholls says that because many municipalities’ balance sheets cannot offer investors any security for the battery’s funding, Utility Consulting Services needs to step in as an aggregator and collect revenue on behalf of the municipality.

According to the Municipality Funding Act, this is permissible if approved by the council, which has allowed the company to convince local businesses in Graaff Reinet to invest in purchasing the battery on the basis that it will be repaid.

Deputy Energy and Electricity Minister Samantha Graham-Mare praised the project at the end of 2024.

“This programme aims to provide affordable electricity to residents while securing revenue so the municipality can pay off its Eskom debt and keep up to date with monthly current Eskom payments,” she said.

Eskom is also piloting an active partnering approach to assist municipalities in getting back on their feet.

The approach involves the municipality remaining the licensed distributor of electricity. However, it enters an agreement allowing Eskom to assist with billing, revenue collection, infrastructure maintenance, and reticulation services.

The municipality entering the agreement also requires its electricity accounts to be separated from other municipal finances and the free basic electricity grant to be administered by the state utility.

Additionally, Eskom will help precincts invest in infrastructure upgrades through municipal borrowing, grants, and Public-Private Partnerships.

Ramokgopa pointed to the case study of Maluti-a-Phofung Municipality in the Free State, which had one of the worst-performing electricity distribution administrations, as proof of the initiatives’ effectiveness.

This included massive arrears to Eskom, severe infrastructure neglect, and over 60% of customers consuming electricity illegally.

However, by implementing the Active Partnering Model, Eskom helped Maluti-a-Phofung to recover R2 billion in outstanding payments and reduce electricity theft and illegal connections.

Eskom also assisted the municipality in reducing unplanned outages by repairing infrastructure and investing in meter audits to improve billing accuracy.

Maluti-a-Phofung is no longer adding to its Eskom arrears, and revenue from paying customers is being used to fund infrastructure upgrades.

Ramokgopa noted that the programme has also been implemented in the Modimolle-Mookgophong, Thabazimbi, and Bela Bela municipalities and will soon be extended to others in the Free State and North West.