As the unbundling of State-owned utility Eskom gains momentum, both internally and through legislative processes, the unbundling of tariffs is equally important, and there are a number of considerations attendant on this, speakers averred during the South African Independent Power Producers Association’s ‘Tariff and Wheeling’ webinar on November 2.

Independent energy consultant and former Eskom pricing manager Hendrik Barnard emphasised that unbundled and transparent tariffs would be a cornerstone for the future market and that it was crucial for independent power producers (IPPs) to be able to understand how and where to play in the market.

He explained that the concept of tariff unbundling involved the splitting of the various different types of costs and showing those separately in the electricity tariffs.

Barnard outlined several reasons for the unbundling of electricity tariffs.

Firstly, it would help consumers see what they are paying for, thereby increasing appreciation for all the costs involved in getting electricity to one’s home or business.

Secondly, it will facilitate the implementation of wheeling of electricity, so that the network and service components are known and charged fairly.

Thirdly, it will enable potential investors in the market, such as IPPs, network suppliers and consumers with own generation, to make rational decisions about the costs they are avoiding.

Fourthly, it will facilitate the most efficient use of resources in the country, such as, for example, cooking with gas rather than electricity if the associated environmental costs are shown in coal generation prices.

Fifthly, it would facilitate the implementation of a more market-driven industry as a driver for lower prices, thereby enabling wholesale and retail competition owing to the different costs being known and charged for separately.

Lastly, it will highlight the hidden costs, such as the environmental levy, local government tax, cross-subsidies between customer categories and costs of excessive losses, which could become drivers to reduce these on the productive part of the economy.

Barnard said IPPs needed to be cognisant of the Eskom tariff changes as this represented the current biggest opportunity cost for municipalities, with time-of-use (TOU) periods, TOU rate ratios, the introduction of generation demand or capacity charge and expected future price increases.

He stated that the industry was on the cusp of considerable changes; however, many practices in industry were creating incorrect messages regarding renewable energy

Barnard emphasised that considerable work was still needed to get quality industry standards in place.

Outlining the last mile for municipalities, Ricardo Energy and Environment senior consultant Sarisha Ojageer said that, rate design considerations, such as who paid for what and when, should be covered in the National Energy Regulator of South Africa’s wheeling framework.

She added that this also needed to address the treatment of losses and “legacy” subsidies, so that this was applied in a consistent and transparent manner.

Ojageer emphasised that it was essential to consider that cost of supply and wheeling pricing were very closely interlinked.

She noted that use-of-system charges must be unbundled and cost-reflective to protect both the utility’s revenues and to ensure fair and transparent pricing to end-users.