1. Background to the Energy Sector
2. Electricity Supply Industry (ESI)
3. Renewable Energy in South Africa
4. Energy Efficiency in South Africa

2. Electricity Supply Industry (ESI)

2.1. Structure and Performance Indicators

Electricity generation in South Africa is dominated by Eskom, a single, vertically integrated and state-owned utility. Eskom also owns, operates and maintains the national transmission grid and is thus still a de facto monopolist on both the generation and the transmission level. In contrast, the electricity distribution industry (EDI) is highly fragmented. In 1990, about 430 separate distributors ranging from Eskom through large metropolitan councils through to small transitional management boards were responsible for the supply of electricity to customers, historically divided along racial lines of previously white or black areas. To date, about 375 licensed municipal distributors still exist, many of which comparatively small numbers of customers, sales and annual revenue. In contrast, Eskom as the largest single distributor accounts for more than 56 % of energy sales for final consumption and 39 % of total of customers. Figure 3 gives an overview of the institutional structure of the South African ESI prior to the current restructuring process.

The financial performance of the various distributors and Eskom shows substantial differences. Although Eskom is entirely state-owned, it is completely self-financed through internal reserves and debt raised on the capital market in the form of bonds. Eskom's debt/equity ratio decreased over the years from 2.06 in 1980 to 1.73 in 1994 and 1.25 in mid 1996 (Eskom 1997: 7). The target had been to come down to a ratio of 1:1 by 1997. On the other hand, a large number of municipalities and local authorities experience a difficult situation in terms of financial viability. This situation has an impact on both the quantity and quality of service delivery and electrification, and is one of the main drivers for the ongoing structural reform of the ESI.

Figure 3: Structure of the ESI prior to restructuring

Eskom's total net maximum installed generation capacity is roughly 36 GW, plus another 669 MW on order. About 89 per cent are coal-based, nuclear power accounts for 4.9 per cent, and hydropower including pumped storage schemes for 5.4 per cent.

In 2000, the peak demand on the integrated Eskom system was 29 188 MW, an increase of 33.5 per cent over 1990. Eskom capacity reserves are still at around 20 %. Sales to other countries in the Southern African region ranged between 4 and 6 TWh during the last few years. Imports are negligible.

Figure 4: Electricity sales by Eskom in South Africa 1985-2000

Figure 5: Figure 5: Power stations and power grid in South Africa (source: EDRC)

Table 1: Eskom: supply data Source: Eskom Annual Reports 1985-2000

2.2. Prices

Electricity in South Africa is amongst the cheapest in the world. In 1999, the average price for electricity sold to industry was 12.83 c/kWh, while commercial customers paid 22.47 c/kWh, and residential customers paid an average of 24.59 c/kWh. Annual price changes have been negative in real terms for several years. From 1987 to 1991, real prices decreased by 14 per cent (Eskom 1992: 5), which was followed by another reduction of 20 per cent over the period 1992 to 1996. In 2000, Eskom increased its tariffs at a rate marginally higher than the Consumer Price Index (5.5 % vs. 5.3%).

Table 2: Electricity Prices for South Africa 1999 Source: NER

Until recently, in the fragmented distribution industry, more than 1000 different electricity tariffs were applied which show variations of up to 230 per cent (EWG 1996). After the creation of the new National Electricity Regulator (NER), new principles and pricing criteria were formulated. All tariffs and tariff changes are subject to approval by the NER. For domestic customers, different tariffs were designed for "high consumption" versus "low consumption" customers, where the latter are being subsidised by the former.

In November 1999 President Thabo Mbeki announced the government's commitment to provide free basic water and electricity in an effort to provide poverty relief. For this end, the so-called Electricity Basic Service Support Tariff (EBSST) was suggested and is currently being tested. Under the EBSST, the first 50 kWh of electricity consumption (and 6000 litres of water) are free for all household customers on a monthly basis. Eskom estimates its customers affected by this initiative to about 3 million households. The anticipated shortfall in revenues would amount to approx. R 500 million per annum. Government approved funding for a first pilot phase which is currently running (since October 2001) and ends in February 2002. This small scale piloting in 10 selected areas is supposed to deliver information on implications of different funding options in combination with metering and billing systems, on the impact on customer spending and load profiles and on related aspects. Based on the evaluation of the pilot phase, government will decide on the future of the programme.

2.3. Restructuring of the ESI

The context for restructuring the electricity supply industry in South Africa is different from that in many other developing and industrialised countries, although there are also some common themes and characteristics. In 1993, a National Electrification Forum (NELF), representing all major stakeholder groups, was set up to develop and recommend strategies for a rapid and viable electrification programme. Among other things, NELF recommended the setting up of an independent regulator to oversee the process of restructuring, but did not reach consensus on the final structure of the ESI. Two broad options were offered: a national generation and transmission utility (Eskom), but complemented by a separate national distribution utility, or alternatively, a set of distributors.

After the 1994 elections, NELF was disbanded and the National Electricity Regulator (NER) was established which replaced the Electricity Control Board, the former regulatory institution, and extended its power, independence and responsibilities. ¹ The NER, by means of issuing licences according to economic and technical criteria, was expected to achieve the rationalisation of the EDI. However, it soon became clear that the Government had to take preceding decisions on major issues if restructuring was to proceed effectively. These issues concerned the politically desirable structure for the EDI and the status and financing of local authorities. These decisions were to be weighed against the objective of providing low-cost electricity. The NER initiated the establishment of a further investigation committee, the Electricity Working Group (EWG), to address these issues. EWG recommended a move to cost-reflective tariffs with separate transparent taxes to fund electrification and municipal services, and to consolidate the EDI into a limited number of independent regional distributors (RED). Subsequently, a number of committees, working groups and eventually a professional consultant were convened, all of which essentially agreed upon the same principles as EWG.

The EDI restructuring proposals came up with suggesting to establish six independent regional distributors and an independent, national, state-owned Transmission Company. As transitional mechanism, Cabinet approved an EDI Holding Company model. Eskom will maintain a dominant role "in order to meet Government's developmental and social objectives" (Electricity Regulatory Journal, August 2001). Market entrance for Independent Power Producers (IPP) is being encouraged, however. The implementation of the proposed reform, is slow in making progress.

2.4. Electrification

An ambitious electrification programme has been carried out since the demise of apartheid. Within its Reconstruction and Development Programme (RDP), the government committed itself to the electrification of an additional 2.5 million urban and rural households by the year 2000, thereby increasing the level of access from about 36 % to 72 %. Eskom itself, together with a number of local authority distributors, took the initiative in electrification at a very early stage. Subsequently, these commitments and the connection targets have been extended.

Between 1991 and 2000, the level of household access to electricity is estimated to have risen to around 70.4 %. In urban areas 84 % of households now have access to electricity, whereas the figure in rural areas is at around 50 % (Figure 6). ²

Figure 6: Electrification in South Africa

The electrification programme in many respects is a success story in terms of meeting basic needs. However, with regard to the efficiency of the investment and the efficiency of energy supply and demand, substantial inadequacies became evident. Financial and structural implications of the electrification process are enormous and represent significant barriers to the implementation of a viable and efficient electricity system, in particular with regard to distribution to final consumers.

For the objective of further electrification, it has been suggested to create an independent and centralised mechanism (a fund or a national electrification planning agency) with transparent subsidies.

1.It is interesting to note that the staff of NER are largely dominated by former Eskom staff members.

2.Source: NER Electricity Regulatory Journal, June 2001.