Tuesday, November 08, 2016

Revenue Protection for Municipalities, a Hidden Dilema

Comments from Paul Vermeulen

1)The first is that distributors do need to make their own investments in RE as a hedge against increasing costs of Eskom energy. A significant investment in RE will fix the price of such a block of energy, that can also be used to reduce the future costs of cross subsidies from commerce and industry and having to use Eskom power to cross-subsidize the poor. The intent is also to ultimately reduce to cost of power to commerce and industry to assist them to be as globally competitive as possible.

2) The second is that we should allow, and in fact encourage slightly over-sized private investment in RE systems on our grids. This can create a surplus that can be bought and re-sold with the same, or better mark-up as Eskom energy. The real key is to correct tariffs (de-coupling is the correct term) – a greater proportion of fixed network charges needs to be charged, with energy charges becoming more of a pass-through cost. This is similar to a cell-phone contract – a fixed network fee needs to be paid to access the system and receive calls and any calls made are charged separately, depending on usage.

At the moment we feel the pain because we try to recover all costs from the energy rates while our customers are reducing energy consumption. The new value proposition of being grid connected is not necessarily to access cheap Eskom energy, but rather to use the grid to balance local supply and demand (which otherwise requires significant local storage), use the grid for backup power and finally, to provide the marketplace for any surplus that a neighbour can consume. From a City’s perspective, it is not always about energy sales – to retain business in a City by allowing them to invest in their own (fixed to the building) energy systems to have a competitive edge and to stay in the City, generates other essential revenues in the form of rates, taxes and levies. We have too much of a dependence on energy sales for City revenues.

3)We need to accept that Eskom perhaps has a new role to play for Cities and Towns – that of backup or ‘supplier of last resort’ to fundamentally provide the balancing and backup services needed in turn at a City level to support localized renewable energy investments. Remember, at a regional level, the renewable energy, particularly PV, within the region has almost no diversity – one large thundercloud moving over a City could in future result in an immediate shortfall of hundreds of megawatts, which the City would look to Eskom to supply.  Eskom’s rates will also increase (perhaps significantly) to fill this new role. A City may be exposed to higher Eskom demand charges as a result, so should also invest in appropriate load management facilities and energy storage systems to manage their Eskom demand profiles and associated costs downwards as far as possible. This is where the smart grid and ‘Internet of things’ will need to be deployed as part of the energy system.

So, Eskom revenues from the municipal distributors will need to change and become more network demand based than energy based. This we need to accept and start changing the system in a gradual manner – the sooner the better. I also believe that Eskom should at the same time introduce a new tariff category for primary industry and reduce tariffs for base load industrial energy consumption as far as they possibly can, and now incentivize primary industry (mining and smelting in particular) to use their power, as they did in the 80’s. This will also ensure a place to evacuate the bulk of the power from their new plant while we are still likely to see a continued drop in commercial building and urban energy use.

Despite the commodities downturn (which will return, being a cyclic phenomenon), why should we not focus on being sufficiently competitive to keep our mining and minerals industries alive and healthy and ready for any future upswing? Who says we need to convert to a service based economy only, when we are in fact well-endowed with minerals? Why can’t we have both? To me it’s like telling the Arabs to stop selling oil.

Look forward to any future debates to find a way forward…


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