Economic and energy advisory company Meridian Economics is warning that the immediate implementation of Eskom’s proposed retail tariff plan could severely disincentivise investment into the large distributed generation plants required to reduce or end load-shedding.
The plan, which the utility says is necessary to rebalance variable and fixed charges in light of technology changes under way in the sector, has already met with stiff opposition from some residential customers and opposition political parties after the plan was submitted to the National Energy Regulator of South Africa for approval.
There has been particular anxiety over reports that Eskom customers with solar systems will be charged a ‘levy’ of more than R930 a month to remain grid connected; reports that Eskom has refuted, stating the restructuring will apply to all customers and forms part of a ‘revenue neutral’ effort to modernise the tariff structure to be more cost reflective.
The utility has acknowledged, however, that individual customers may pay more or less, depending on the changes approved and their consumption profiles.
In a new briefing paper, Meridian Economics says it supports the restructuring of Eskom’s tariffs to become more cost-reflective.
However, it raises concerns about what impact the proposed changes will have on the nascent distributed generation market, and in particular on those large independent power producer (IPP) facilities that intend wheeling electricity to multiple smaller customers.
This market has been stimulated only recently by a reform that initially raised the licence-exemption threshold from 1 MW to 100 MW – a cap that is in the process of being eliminated entirely in line with interventions announced by President Cyril Ramaphosa on July 25 to tackle the worsening load-shedding crisis.
However, Meridian warns that a large portion of the wheeling market for IPP power could “grind to a halt for several years” if the tariff restructuring being sought by Eskom were to be implemented from April 1, 2023, as proposed.
The paper asserts that, while the rebalancing might be appropriate in a market that has sufficient supply, it is “fundamentally counterproductive” in a market that is short of energy, as it sends the incorrect pricing signals to generation investors and purchasers of power.
It also presupposes that Eskom is indeed able to provide generation “backup” to customers when it patently is not able to do so, Meridian adds.
The analysis shows that under the prevailing tariff structure, there is sufficient margin for a customer entering into a power purchase agreement (PPA) with a wheeling solar photovoltaic (PV) or wind IPP to achieve a meaningful saving of at least 10% on their electricity bill for both PV and wind wheeling projects.
Should the new tariff structure be implemented next year, however, there will be a 25% decrease in the value of PV energy that is wheeled, and a 15% decrease in the value of wheeled wind energy.
The calculations emerged from an analysis of how changes to time-of-use periods and the introduction of fixed standby or generation capacity charges, together with commensurate reductions to the energy charges, will affect 100 MW wheeling wind and PV IPPs.
“This reduced value proposition has the potential to delay investments towards the end of the decade, once the overall Eskom tariff has increased and the market PPA range has decreased sufficiently to offer a meaningful saving to the customer.”
To address this unintended consequence at a time when the country is seeking to accelerate rather than retard investment in distributed generation, Meridian says Eskom should commit not to implement the restructuring “overnight in 2023”.
To further reduce the regulatory uncertainty for investors created by these proposals, clarity should be provided on how and when these reforms will be implemented in a way that does not undermine the required market expansion.
“While further detailed work will be required to confirm these proposals, we provisionally recommend the following: firstly, that the tariff restructuring is phased in over seven years… and, secondly, that the wheeling tariff structure applicable at the time each PPA power comes online, remains in place for approximately ten years for that PPA.”
Meridian stresses that it is not proposing that the reforms should not be implemented at all, but is instead advocating for a “phased approach”.
“In the context of South Africa’s current energy shortage, we cannot afford to have any disincentives for power generation investment over the next couple years.
“If the current proposed changes are implemented in 2023 or ‘overnight’, the implications of these changes may disincentivise project investment, if economic cost is the only factor customers are considering.
“[But] obviously many customers may choose to invest in such projects anyway given their green power requirements.”