OK, folks, I know this platform is for agricultural economics related notes, but an exception once in a while won’t hurt. Last night I met up with an old schoolmate, Nikkie Korsten, who is in town for a conference. Nikkie is a doctoral candidate at Stellenbosch University and we discussed current trends in the South African Electricity Supply Industry (ESI) and the impact it has on both the South African economy and society. I found the subject remarkably interesting and relevant and asked her to write down a few thoughts to share with you. Here goes:
On Wednesday Nikkie will be in Pretoria to present the findings of a household solar energy study to the Association of Municipal Electricity Utilities (AMEU). The study gives the results on photovoltaic (PV) investments decisions by the residential sector and is part of a wider project that includes an in-depth investigation of existing electricity distribution systems at the municipal level in South Africa.
This is crucially important information to municipalities who are under threat due to rapidly rising electricity tariffs that in turn, put pressure on their margins. Uncertainty of supply and rising tariffs have made distributed generation options such as rooftop PV increasingly popular over the past several years, with many consumers choosing to install rooftop PV as a means to reduce their electricity bill. These trends are not unique to South Africa and the effects of them are being felt across the world. So what is happening?
Worldwide, the value of private investments into solar rooftop photovoltaic systems has increased exponentially. A number of reasons have contributed to this:
As solar PV panels have become more efficient, the price of solar PV investments has come down rapidly. According to Ernst & Young, although environmental factors initially played a part in encouraging the growth in solar PV, economic factors are now the most important drivers of growing solar investment. Government incentives such as subsidies and Feed-In Tariffs have also made investment in solar PV more affordable and attractive to both private and commercial consumers.
In South Africa, the decrease in the cost of investing in rooftop solar has gone hand-in-hand with steeply increasing electricity prices. As a result, those who can afford the upfront investment of the solar system will consider investing in self-generation technologies. As appealing as this shift towards cheaper, decentralised electricity generation may be, it does not come without its own challenges – especially for municipalities and Eskom. The growth in independently-owned and distributed energy generation is more environmentally friendly and more cost-effective than centralised fossil-fuel based generation, but it also creates challenges.
The biggest problem is that as consumers shift from expensive centralised electricity supply to cheaper renewable options, it reduces the total number of consumers drawing from the grid. Fewer consumers covering the same level of fixed costs means that the utility is forced to raise tariffs again, exacerbating the problem even further. This is known in the sector as a ‘utility death spiral’ – where energy-intensive and wealthier consumers move off the grid to cheaper options and therefore no longer available to cross-subsidise lower tariffs for low income consumers.
Another problem faced by municipalities is that rising electricity tariffs put pressure on municipal margins and make it harder to cover the fixed costs of local distribution.
In the current electricity business model, they will need to increase the price of electricity to recover costs, or they could introduce a fixed tariff paid by all consumers irrespective of where – or how – their energy is produced. This is an increasingly appealing option in order to ensure that the burden of paying for distribution does not fall unfairly onto the shoulders of low-income households who are unable to “opt-out” from the Eskom and municipal supply.
As challenging as these problems are there are always solutions, and as is so often the case, it all comes down to economics.
As long as the means of generation used by Eskom costs more than the options available in the private sector there is little that they can do to reverse a utility death spiral. A recent study by the University of Cape Town’s Energy Research Centre showed that the costs for Eskom’s existing fleet of coal plants continue to rise while the prices for new-build renewable generation continue to fall.
To give you an example, Eskom’s primary energy costs have increased by 300% in real terms over the past 20 years, and future capex and opex needs will also rise as the plants age further. The good news is that there is a solution. At utility scale, new-build solar PV and wind generation are already cheaper than running the majority of existing thermal plants and considerably cheaper than the proposed two new coal IPPs. In other words, shifting from existing coal-fired plants to new renewable generation technology will make Eskom electricity affordable again.
It is clear that a transition to a low-carbon and sustainable energy transition is required both on a global level and in South Africa, but achieving this will require significant thought and delicate policy formulation. The examples of other G20 countries who have already begun the transition show that there are alternatives to achieve a win-win situation that allows for an environmentally positive transition as well as the improvement of social equity. This will probably require some sort of managed phase-out of more expensive coal-fired power stations and the introduction of least-cost renewable options, but it is possible.
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