As electricity in South Africa transitions to a more open market-driven system, it has many implications for the electricity distribution industry, particularly municipalities, with stakeholders working on a reform roadmap for the distribution industry to ensure municipalities remain financially sustainable.

National Energy Regulator of South Africa (Nersa) electricity regulation interim executive manager Welile Mkhize noted during an address at the Association of Municipal Electricity Utilities convention on October 21, that many metropolitans and municipalities were facing volumetric risk with electricity revenues given the current structure of their tariffs.

“There is a need to adjust the structure of tariffs and the overall business model of the electricity trading service,” he added.

With high vacancy rates of more than 35% in some electricity divisions in the country, it is one of the key obstacles to operational performance and ultimately affects the financial performance and service delivery of local government.

Mkhize expects both institutional reform and increased investment in trading services infrastructure to contribute towards improved service outcomes. Advancing this reform agenda will enhance municipal business efficiency, with the potential to reduce operating and overhead costs.

He urged electricity distributors, such as municipalities, to participate fully in reforms to avoid being left behind. Reformed metros and municipalities with clean audits and good balance sheets will be able to participate in revenue-enhancing schemes such as wheeling in future.

Municipalities will soon start competing with electricity traders by providing customers with renewable energy bought from independent power producers (IPPs) at competitive prices.

The wheeling of electricity from the source of power to the end-user may or may not take place with a trader facilitating the transaction, but municipalities need to become aware of the risks related to these transactions and adapt accordingly.

Mkhize is of the view that wheeling and getting involved with electricity trading can provide municipalities with an opportunity to enhance services offered to customers within their area of jurisdiction by providing renewable energy to customers that prefer or need it; enhance revenues by charging use of system charges to customers; play a needed role in regional and distribution grid integration and reduce dependency on Eskom for all bulk energy and capacity requirements.

Additionally, municipalities can start looking into buying various ancillary services to cater for intermittency in renewable energy supplied by IPPs, including storage systems, to cater for customer needs.

To ensure orderly development of the industry as required by the Electricity Regulation Act, Nersa is developing the national wheeling framework to ensure uniform implementation of wheeling across the country.

Nersa will be conducting public hearings to solicit further views and evidence in November to inform the framework. The regulator still has to announce the dates.

Mkhize suggested that the move toward cost-reflective unbundled tariffs was being made possible through the cost-of-supply methodology, which better ensures sustainability for municipalities.

Nersa is developing a standardised methodology for cost-of-supply studies to streamline submissions by municipalities and improve Nersa’s ability to assess submitted studies. This comes as civil rights organisation AfriForum challenged Nersa’s approval of various municipalities’ tariff applications without them having submitted the necessary cost of studies.

Looking ahead, Mkhize said Nersa wanted to see improved data underpinning the cost of supply studies. Nersa is also focused on increasing scrutiny over costs in tariff applications to ensure that inefficiencies are not passed on to customers.

The regulator also continues to explore international best practice regarding enforcement of licence conditions and monitoring key performance areas.

Meanwhile, Mkhize confirmed Nersa was reviewing its compliance framework and would increasingly become intolerant to issues of noncompliance, especially noncompliance with licence conditions, Mkhize confirmed.

Nersa is in an audit process to assess the financial and technical health of a sample of municipalities. In the initial phase, three municipalities have been chosen and this number may increase pending funding availability.

The audit exercise will also include an assessment of the governance processes with the sampled municipalities.