Are the REDs dead?

Conference: African Utility Week
Location: Cape Town, South Africa
Presenter: Willie de Beer
Abstract: Presented by Willie de Beer at African Utility Week

South Africa is currently facing one of the toughest challenges from an electricity supply industry (ESI) perspective. Amongst others the government, mining industry, industry in general, business, professionals and citizens are looking for solutions to the challenge. Many views are expressed and questions asked and amongst these questions are: “Are the Regional Electricity Distributors (REDs) dead?”  There are however people who believes that the current electricity challenge is restricted to the supply side (or generation side) of the electricity supply industry (ESI) value chain. From time to time the statement is made that the EDI does not need “fixing” and the focus should be on the generation challenges. It is therefore essential that we take a brief look at the ESI so that the Electricity Distribution Industry (EDI) and the REDs can be discussed in context.

The ESI consists of three main components, namely; generation, transmission and distribution.  Eskom is currently the biggest participant in the ESI with an installed generation capacity of 38 794 MW as at 17 April 2008. The transmission grid which consists of 765, 400 and 275 kV networks is owned and operated by Eskom.  In the distribution sector we have Eskom and 187 municipalities who own and operate the networks which operate at a range of voltages from 132kV to 380/220 volt. The industry load varies since it is determined by amongst others the activities in the mining, industry, commercial, agricultural and domestic sectors and the load is in the order of 32 000MW. The reserve margins are therefore tight and while there  are many views on what the reasons for the current  load shedding is it is amongst others created by capacity shortage, maintenance challenges, generation output reductions, coal supply challenges and a delay in the generation new build programme. Against this background it is understandable that every “lights off” moment is regarded as a “generation problem” and therefore the electricity distribution industry many a times escape the negative publicity associated with electricity outages.

The current EDI in South Africa is highly fragmented; there are significant maintenance and refurbishment backlogs and many areas where electricity supply reliability and the customer service simply do not meet the expected performance standards. The envisaged economic growth will require to be supported by both additional generation capacity as well as a well functioning distribution business. A recent audit by the National Energy Regulator of South Africa (NERSA) confirmed that there are pockets of good performance but that in general the EDI requires significant interventions to stabilize the industry. EDI Holdings developed an industry model to assist in the design of the future REDs and also to assist in determining the sustainability of the future REDs. The work done in this area confirmed that there are amongst others significant maintenance and refurbishment backlogs in the current electricity distribution industry and that the situation is getting progressively worst. All indications are that at the
current refurbishment and maintenance investment rate, the backlog will not be addressed in the next 10 years. The combined total refurbishment and maintenance investment required is estimated at R20bn. One of the many potential improvement areas is the managing of technical and non technical losses. This is an area which provides for improvement potential in the order of 6800 GWh which compares well with the total annual consumptions of some metro’s.

Against this backdrop it is clear that to leave the current EDI as is and to further delay the establishment of the REDs is simply not an option. The proposed six wall-to-wall REDs which will be established as public entities and be service providers to the service authorities (municipalities) will be in a much better position to address the current challenges since they will focus on electricity distribution and effective customer service.  The RED business will deploy a business model which will be structured to give distinct attention to the wires and retail components of the business. Furthermore there will be a strong focus on business efficiency improvement, asset management, benchmarking and staff development.

The RED establishment project governance and stakeholder engagement structures are in place and functioning. To date 120 of the 187 municipalities signed the accession to the co-operative agreement while good progress has been made to date in addressing some of the critical RED establishment enablers.  Furthermore the Eskom distribution business has been realigned into the “footprint” of the six REDs boundaries. The RED establishment is a challenging process and one of the reasons for this is the absence of enabling legislation. However, never before has the environment for the establishment of the REDs looked so promising. The RED establishment progress is “well and alive” and should the “REDs die” the South African economy will have serious challenges.