HomeFeatures/AnalysisElectricity costs: South Africa’s double-edged energy sword

Electricity costs: South Africa’s double-edged energy sword

South Africans can expect as much as a 15% increase in their electricity costs from mid-2021. This will mark more than a decade of average annual increases of 14% relative to average inflation of just under 6%.

It is these increases in energy tariffs that are driving the growth of alternative energy sources, including solar, wind and energy storage, particularly among large commercial and industrial energy users.

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But the growth of renewables, if not managed correctly, might chart a risky course for South Africa’s energy sector.

Overall electricity costs of the grid-tied power system could increase, while municipalities who rely chiefly on electricity tariff incomes will increasingly struggle to fund their essential service delivery as companies defect from the grid.

This is according to Jonathan Skeen, General Manager at the SOLA group in Johannesburg, who asserts that Eskom’s sharp escalations in electricity costs have fundamentally changed the economy.

Having impacted both the affordability and availability of electricity for poor South Africans and put pressure on struggling manufacturing and mining sectors, the increases have also occurred in parallel to decreasing grid reliability, with 2020 already shaping up to be the worst year on record for loadshedding.

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Escalating electricity costs

“A decade ago, average Eskom tariffs were more than 200% lower than they are today, and the costs of installing solar PV were two to three times higher,” says Skeen.

“This has fundamentally changed: Eskom and municipal tariffs are now substantially more expensive than solar PV on an average, lifetime cost basis. This is driving strong uptake of own-use solar generators, despite persistent policy and regulatory barriers”.

In addition to declining costs, the uptake of solar PV has increased due to new procurement avenues. Historically, the upfront investment in solar PV often exceeded the available capital of electricity consumers seeking alternatives.

However, many local businesses are now choosing to buy power from independent power producers (IPPs) who own and finance the solar assets on their behalf. Reputable IPPs now have the skills and experience to offer reliable solar power at a substantial discount relative to the grid, making solar electricity available to a wider pool of consumers.

The role of battery storage

In parallel, advances in energy storage technology are improving the range of useful applications of variable solar and wind power. For solar (or wind) to be a ‘dispatchable’, 24-hour alternative to the grid, it needs to be coupled with battery storage or other flexible sources of energy demand or generation.

Historically, storage has been an expensive option, limited to areas with no grid access or grid capacity constraints. But today there are already several industrial and commercial grid tariff structures that make off-grid solutions a cheaper and more reliable alternative.

“This has major implications for the future of South Africa’s power system: it means that some electricity consumers on expensive tariff structures can already choose an alternative to Eskom or their local municipality,” says Skeen. “Many who are on cheaper tariffs may follow as grid tariffs rise and solar and battery equipment gets cheaper.”

The double-edged sword

However, large-scale grid defection might not be the ideal outcome for all South Africans: it will erode the economies of the national grid and increase costs for many segments of society. Power sector reform is needed to urgently facilitate an efficient and equitable transition to renewable energy.

If policymakers suppress or fail to enable private and distributed generation, they may inadvertently encourage large-scale grid defection as businesses choose to forego an unreliable and expensive grid. This will erode both Eskom and municipal revenue streams, driving more tariff increases and worsening the cycle.

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“By comparison, effective grid modernisation can turn potential defectors into ‘prosumers’, who choose to remain grid-connected and participate in a more open and mutually-beneficial electricity market,” says Skeen.

The modern grid makes use of enhanced infrastructure for better management of variable renewable energy, equitable electricity costs and pricing that ensures fair, cost-reflective use of the public grid, advanced demand response to increase flexibility, and energy storage to support grid stability.

The way forward

Immediate steps can be taken in this direction: laws and standards must be updated to cater for all technologies in the energy mix. Grid operators should be assisted with tariff modernisation.

Arbitrary size restrictions on embedded generators should be reset based on rational technical and cost considerations. Permitting and licencing authorities must be held to their mandates and assisted and upskilled where needed.

“The alternative is to slow-play the energy transition, and allow South Africa’s power system to devolve into something undesirable and inequitable for the majority of South Africans,” concludes Skeen.

ESI Africa
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