Ramokgopa on what SA’s first electricity pricing policy change in 17 years aims to achieve (and how)

You can also listen to this podcast on iono.fm here.

JIMMY MOYAHA: Earlier today the Minister of Electricity, Dr Kgosientsho Ramokgopa, held a media briefing to outline South Africa’s revised electricity pricing policy. This policy is currently in a draft stage and will be gazetted later in this week. We’re going to look at this in more detail with the minister himself.

He joins me on the line now to see what we make of this policy and where it puts our electricity conversation. Malume Sputla, lovely having you on the show as always. Thank you so much for taking the time.

Read: Government proposes sweeping changes to power-price framework

Let’s perhaps start our conversation with an overview of the necessity for introducing this policy. South Africa has had quite a bit of change in the pricing structure of electricity over the years – especially I think from 2007 right through to today. The last 20 years have seen quite a change in landscape.

Take us through the need for introducing this policy at this time.

KGOSIENTSHO RAMOKGOPA: Yes, absolutely. Thank you very much, Jimmy, and good evening to you and the listeners. You’re absolutely correct. I think a lot has changed over that 17-year period.

The last time we had a policy of this nature was in 2008.

First, there’s a significant change in the consumption patterns of households. If you look at – let me just take the poorest of the poor, someone who lives in a shack dwelling in an informal settlement today.

Almost all in that household will have access to a cellphone, they’ll have a television set, they’ll have a fridge, they’ll have an electric kettle. The same cannot be said about that situation around 2008.

The consumption profile has changed, and changed significantly.

When you go to the affluent, what are we seeing now? There’s less and less reliance on Eskom as a result, in part, of load shedding [and] the incentives that were introduced as part of the Energy Action Plan to incentivise rooftop solar installation.

We also know that what has changed over that period is that we are now introducing the South African wholesale electricity market.

There are now multiple generators, and we’re going to get to a stage where we’re also going to have the wholesalers as part of this ecosystem.

They need to be informed by some overarching pricing policy that can determine what the rules will look like from a pricing point of view. We are seeing increasingly the proliferation of estates and closed estates; they are buying in bulk from either the municipality or Eskom, and then they on-sell it or reticulate it in those estates. In the process of that, they levy surcharges.

And most significantly, over the period under review – 2008 to now – electricity has increased by about 907%; that is a tariff increase.

Over the same period, inflation has increased about 150%.

It’s an untenable situation. It’s eroding the disposable income of households and, as you know, household consumption is a big part of South Africa’s economy – approximately 60% of it.

Then we are also seeing that our industries are becoming less and less competitive. We are unable to build a very strong, well-oiled export industry because of the uncompetitive nature, in part, of electricity pricing – especially for energy-intensive users.

But the small and medium businesses in the townships are also finding it increasingly difficult, undermining their entrepreneurial spirit and prowess.

The ability of the South African economy to grow is undermined by electricity prices.

ADVERTISEMENT

CONTINUE READING BELOW

So it is our view that it is about time for us to ensure that we revise the policy – and we have put forward a number of proposals that we want the general public to comment on.

Hopefully in the next 30 days we’ll have received comprehensive comments.

On the back of that I’ll go back to cabinet and then firm up the policy. Then it will find expression in the regulation, the manner in which [electricity regulator] Nersa going forward will conduct its oversight role – so that the rules are complied with.

And municipalities and Eskom will now also be subject to this pricing policy, Jimmy.

JIMMY MOYAHA: Minister, can we take a look at the policy proposals in a couple of parts? Let’s perhaps start with what is being proposed for households. I know you and I in the past have spoken about indigent households and getting more free electricity to those households at a retail level. Those households have been the group that’s benefitted the least or that have been subjected to those 900% increases that you touched on. An average of more than 45% per year is not sustainable by any stretch.

Let’s perhaps start with the proposals for them, and then look at the proposals for businesses and so on after that.

KGOSIENTSHO RAMOKGOPA: Okay. Let me do it by first [noting] the benefit to everyone, and then I’ll come specifically to the indigent and then business.

What we’re saying here is to advocate for what we call an efficiency-based pricing. What we mean, Jimmy and the listeners, is that the bills must be unbundled to indicate the following, among other things:

First are the energy costs. Now, when you receive a bill, it’s an aggregate bill, so it just says, ‘Electricity: You owe us R600’, as an example. So we’re saying now, you must disaggregate it further. You must show the energy costs, what are the network charges? The energy costs to the listeners talk to what the cost is of converting, in this instance, coal to electricity. That’s what’s happening at the generation level.

Then the cost of what you call network charges: Transmission and reticulation, getting that electricity into your house. It goes through, if you like, highways in the form of big transmission lines, and then it takes the off-ramp, then it gets to municipalities, gets to the pole close to your house, and then ultimately gets to your house. We need to account for that cost, and it must be reflected in the bill.

And then ancillary charges. These will have to do with municipalities. Perhaps they’ve installed a transformer to bring down the intensity of the electricity. So that cost must be reflected.

And also the cost of municipal surcharges. By that we mean the municipality will group the workforce that is responsible for the delivery of electricity – it will be administration, it’s the chaps who are doing maintenance and the like. That, if you like, salary bill, gets to be aggregated, so it constitutes the cost of delivering electricity to the end consumer. So we also need to know how you account for that in the bill.

More significantly, Jimmy, is the following: that you and I and all consumers are burdened by the inefficiencies of Eskom and municipalities.

What do I mean by that? We know that there are what you call technical losses. Because municipalities and Eskom have not invested in the reticulation side of the infrastructure, there are line losses.

So our municipalities will buy R10 worth of electricity; before they can even supply it to end consumers, they have lost R3 worth of that electricity.

There’s no room to recover because they’ve lost it as a result of the network that is decaying and ageing.

So what municipalities and Eskom typically do is that that R3 that they’ve lost as a result of their lack of planning, poor capital allocation in refurbishing and maintaining the infrastructure – they factor it in the tariff.

So you are a casualty of inefficiencies from a planning side.

The second thing that they will do is on what we call ‘non-technical losses’: the illegal connections.

When we live in some of the informal settlements, including big industries, including the big suburbs, [we see] people who have just connected themselves illegally.

So instead of municipalities and Eskom removing those illegal connections, those losses get factored in the tariff.

And then there are those who choose not to pay, but have the ability to pay. Those contribute to the rising debt level – that which municipalities owe to Eskom now. That figure is R110 billion.

And that figure which customers owe to municipalities which provide electricity directly to them is sitting at about R450 billion. So if you put it together, the debt is about R560 billion.

ADVERTISEMENT:

CONTINUE READING BELOW

So what do municipalities and Eskom do? Their inability or their lack of enthusiasm to collect that money is then factored into the tariff.

Let me give you a live example: in the current tariff that we are paying now, there’s about 1.5 percentage points of that tariff that is in lieu of Eskom’s inability to collect the debt.

We say no, that can’t be the case. What you are doing essentially is that you are burdening the diligent consumers. As a result of Ramokgopa not paying electricity and resulting in increasing debt, what we do is we choose to penalise Jimmy. Jimmy is a diligent payer, so Jimmy must pay us more because we’re going to factor that into the tariff.

We say no, that’s unacceptable, so you determine the rules. Nersa as the regulator will say there is a threshold above which you cannot factor that amount into the tariff. So how do we arrive at that threshold?

There’s internationally recognised best practice of what should constitute technical losses. Anything above that municipalities can’t recover from the tariff. That applies to everyone.

Now, having said all of the above, you have unbundled the tariff; you account for everything, you remove all the hidden costs because what you are seeing now is you find that people in the more affluent suburbs are levied significantly higher tariffs on account of cross-subsidisation, when in fact the costs are hidden.

So we say no, make all the costs visible to everyone. In instances where there’s cross-subsidisation, we know how it obtains: it’s in the time of use and also the quantum of consumption.

Typically, an affluent household will have a pool, a pool pump, they’ll have multiple rooms, multiple geysers, and therefore their consumption is higher. Once you reach a particular threshold, the rate of the tariff is higher. That’s how you achieve cross-subsidisation.

But currently, the situation is that it is hidden, and you really don’t have an appreciation of what that is.

Then for the less affluent, less privileged, you determine a threshold of what is considered the qualification to be considered a poor household. Generally, what municipalities have been doing is they say: ‘With a total household income of R3 500 and less, you qualify to be indigent.’

That’s fine. But in terms of that indigent policy, we said those who are qualifying households are entitled to 50kWh of electricity per month for free. I just said, when I started, that the consumption profile has changed. In fact, Eskom and municipalities have got real-time data – it’s longitudinal data. Over that period of time we were able to see what has been the changing profile.

We know now that to achieve the level of subsidisation and relief to the poor we need to peg that at a range of anything between 200 and 300kWh per month of free electricity.

But the point we are making is that we don’t need new money.

National Treasury already provides about R21 billion of free basic electricity. If you add sanitation – I think that total amount of subsidy support from National Treasury is about R75 billion, but electricity’s share of that is R21 billion.

So our view is that within that resource envelope we don’t want an additional allocation from National Treasury. We are able to achieve that free basic electricity of anything between 200 and 300kWh.

How do we achieve that?

First, we undermine leakage.

There are a lot of households that qualify for free basic electricity – but they don’t get that allocation per month because of the leakage.

How does the leakage occur? The money flows through the municipalities. It’s not a conditional grant; it’s clubbed with all the grants given to municipalities.

What municipalities do when it reaches them is they reallocate it to other spending pressures.

The same applies to Eskom, because Eskom relies on municipalities to put together an indigent register. There are very few credible indigent registers in the country, so the money is lost in the system. People don’t benefit.

To give you and the listeners a sense, that R21 billion can support about 2.5 million households in the country. Only 400 000 of the 2.5 million are getting that subsidy. Two million households are not getting it as a result of the leakage. So that’s one thing.

Secondly, instead of continued over-reliance on fiscal support, what we can do is to build microgrids in the form of solar PV hybrid solutions.

Then we know we are bringing down the cost of primary energy because we’re using the sun and then we store it, and then during this peak period we draw from the storage – that’s the battery.

ADVERTISEMENT:

CONTINUE READING BELOW

We have live examples. We have rolled out multiple microgrids. The latest that we have done is in the two villages of Mabvete and Madimbo in Musina. That programme has been running for close to a year, one gigawatt of supply. We know that we can really suppress the cost of electricity [to] significantly lower than what even Eskom generates.

We know it’s possible.

So you are going to use part of the R21 billion to build these grids, and you don’t have to be reliant on the fiscus into perpetuity; and that’s the point we are making.

The last thing is on the Negotiated Price Agreements (NPAs). What are these NPAs, in short? These were instruments in the current electricity pricing policy which we are updating. That says that industries that are in distress can go to Eskom and then go to the regulator and ask for relief from a tariff point of view. These are energy-intensive users.

The recent example is what we have done with Glencore and Samancor. They issued Section 189 notices on the back of their inability to compete with the Chinese players, because the Chinese smelters are significantly subsidised; they are paying 62 cents/kWh of electricity; they were [previously] paying us, Eskom, about R1.35. They can’t compete.

Read:

Glencore-Merafe halts layoff plans as Nersa throws smelters a lifeline
Is SA pricing itself out of global manufacturing markets because of energy costs?

And then there’s a number of requirements: there is a minimum amount of electricity you must consume; you must run the machines for 24 hours; there are qualification criteria. They met all of that and we gave them the 62 cents. We are now dealing with about seven other entities; they’re in a different category. They are subjected to that robust treatment.

Remember, the key here, Jimmy, is that we’re not going to socialise that cost. Eskom has a clinical way of how we are able to accommodate and absorb that reduction in the tariff.

That instrument was used solely to provide relief to companies in distress. This policy makes another argument. That’s the one side.

The other side is that you can use electricity as a lever to catalyse the South African economy.

So the dtic [Department of Trade, Industry and Competition] can identify as part of the industrialisation strategy to say: ‘No, but there are these sectors that – if they were to be supported – are likely going to give us the fastest growth, employment absorption. They are transformative, whatever the case may be. And if they are to be given a reduced tariff, they are likely going to thrive.’

In this instance, it’s not a defensive instrument, it’s an offensive one – offensive in that you see an opportunity, you are pursuing it. So we are making provision for that in this policy.

And the last two points I want to make are that we are also incentivising rooftop solar. But this is what we are doing on rooftop solar: it’s really about net billing.

What we are doing is that there are periods of the day where you have installed rooftop solar, you generate maximum electricity that your system can theoretically generate, you feed it back into the grid, and then during this period you are drawing from the grid.

So we’re saying that we’re going to net it, and where there’s a positive we credit it to your bill. So it’s not a physical transfer of money, it’s not an exchange of money, but it’s how we credit your bill.

In this way, people can see the return on investments on their rollout of rooftop, because you can see the bill is coming down substantively.

Let me just make the last point: there’s an issue of resellers in the country. So you have a Jimmy who stays in a suburb somewhere in Mooikloof, Pretoria East. The person who developed the estate buys electricity from Tshwane in bulk, or buys bulk from Eskom, and then resells it to the developer in that estate, who places a surcharge on that.

We say no, it can’t be arbitrary, that surcharge. You must show that there’s value you have added. So if you have reticulated, you have connected the houses, there’s a transformer that you have bought using your own money – account for that, but it can’t be arbitrary.

If you go to a township, my mother’s house there, you find that there are backyard dwellers. Someone purchases electricity, of course gives it to the tenants, but charges the tenant significantly more than what they purchase [it for] from the municipality. You say no, that can’t be allowed.

So we’ll come with the regulations on the back of policy to define the role of the resellers, because people are overburdened in some of these estates.

Of course, many of them come as a result of seeking security – at least those who are affluent – but then you get to be subjected to these costs which are arbitrary.

That’s what the pricing policy does, Jimmy, in a nutshell, and we are inviting comments from the public.

JIMMY MOYAHA: A revision of South Africa’s electricity pricing policy is underway, and its fundamental goal is to ensure better, equitable distribution of electricity and more affordable electricity for South African households.

We’ll have to leave the conversation on that note. Dr Kgosientsho Ramokgopa, Minister of Electricity and Energy, has given us a sense of the policy currently out for comment, which will be gazetted to parliament after that comment window has closed.

#Ramokgopa #SAs #electricity #pricing #policy #change #years #aims #achieve