Electricity Sector April 2003 Electricity sector in perspective

Electricity Sector April 2003

Electricity sector in perspective • Electrification of households is one of Government’s priority programmes • The country generates some of the world’s cheapest electricity • Reticulation of electricity has shifted from parastatals (e. g. Eskom) to municipalities, promoting equity • Three core electricity functions are generation, transmission and distribution • Key role players in the sector – National government through DME: sets policy and legislative framework – Eskom: owns, generation and transmission capacity – Municipalities: distribute electricity to households and other end users – National Electricity Regulator: licenses distributors, oversee standards and regulates tariffs

Sector challenges • Key challenge is restructuring of the industry – To create a competitive industry in generation, transmission and distribution • Two major restructuring decisions were made – Restructure Electricity Distribution Industry (EDI) and create Regional Electricity Distributors (REDs) wholly owned by municipalities – Restructure Electricity Supply Industry (ESI) and sell 30% of Eskom’s generating capacity • Municipalities will play a vital role in distribution – Enabling them to fulfill their constitutional mandates

Electrification backlogs • Backlog estimate of 30% of households nationally • Likely to persist due to increases in informal settlements • Biggest backlogs are in rural areas

Electricity consumption • Total consumption in 2000 was 188 648 megawatts-hours • Manufacturing makes up 40%, followed by domestic at 19% • Gauteng is the biggest user followed by Mpumalanga

Key electrification highlights • Government has allocated R 300 m for free basic electricity to poor households • Poor household connected to a grid to be issued with 50 k. Wh of electricity per month – Translating into average benefit of R 25 p/m • Subsidy of R 48 p/m for non-grid households • 15 000 households to benefit this year and rollout to 300 000 households by 2007 • Department of Minerals and Energy to fund the National Electrification programme, which includes schools and clinics

Size of electricity sector • Eskom recorded electricity revenue of R 28 bn in 2002 • Distributes 60 per cent of electricity to 40 per cent of customers Municipalities are expected to generate R 20 bn or a third of their aggregate budgets • Distributes 40 per cent of electricity to 60 per cent of customers • Through 177 distributors of various size

Electricity tariffs and subsidies • Tariff structures are currently complicated, inequitable and opaque – Due to lack of competition, diverse and discriminatory tariff structures and municipality adopted exemptions • Municipalities to balance provision of free basic services with sustainable revenue generating capacity • Municipal tariff increases should be below inflation targets set by government • High incidences of cross subsidisation has implications for economic activity

Sample municipal electricity budgets • Electricity income of R 1, 9 b comprises 33% of Tshwane budget • For Nelson Mandela Metropole this amount is just over R 800 m • The above amounts exclude annual maintenance spending

Selected Eskom electricity statistics • A major challenge facing Eskom and municipalities is the collection of revenue • Eskom’s 2002 annual report indicated total debtors of R 4, 2 b

Purchases, sales and losses in selected municipalities • Losses range from 13% in Nelson Mandela Metropole to 7% in Middleburg

Employee costs in selected municipalities • The varying employee costs pose a challenge for the restructuring process • This requires standardisation of wages across municipalities

Conclusion • The electricity distribution industry is fragmented – One large supplier, several medium-sized players and many small players • Major risk is that newly created REDs may not be financially sustainable, thereby lowering quality of service delivery • Major task in reform will be the transfer of staff, assets and liabilities • Ability of electricity to be billed separately – Reduction in efficiencies – Reduction in payment in other municipal services