Are higher electricity connection charges in South Africa a good and necessary next step?

There is outrage in some quarters in South Africa over reports that energy company Eskom and some municipalities intend to increase the connection fee for electricity consumers who also generate their own power.

A number of commentators – including the Executive Director of the President’s Commission on Climate Change – also criticized the idea, although Eskom said no such proposal had been formally tabled.

We take the opposite view for two main reasons.

First, we believe that grid connection charges are critical to protecting the finances of both Eskom and municipalities. Second, they are needed to support the “just transition” to which the South African government and energy experts claim to be committed.

There is a broad consensus that the world must move to “net-zero” energy sources to avoid global warming. For South Africa’s coal-based society, this transition will have a major effect on people’s livelihoods and living standards. A “just transition” will distribute costs, benefits and opportunities equitably.

The proposed connection fee is a good example of the principle. The charge is needed to cover the costs that electricity suppliers incur in building and maintaining capacity to generate and deliver additional energy when consumers’ private systems cannot provide enough.

Opposition to the connection fee reflects the interests of commercial users and wealthy individuals. They want access to backup power, but they don’t want to pay the cost of providing it “on demand” when the sun goes down, the wind stops blowing, or their own systems fail. They are supported by companies that provide “cheap” renewable energy solutions.

The debates left the general public confused. South Africa’s electricity supply is becoming increasingly unreliable and expensive. Many of those who use solar energy at home seem to think that they should not be charged for what they see as helping to solve electricity problems.

It is our view that both grid connection charges and structured power arrangements are necessary to ensure greater equity in the social distribution of Eskom’s financial woes. The burden of costs should not fall disproportionately on the less affluent middle class, the working class and the poor – or on future generations.

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Connecting the dots

The confusion is exacerbated because the South African government is in the process of splitting Eskom into three separate components: generation, transmission and distribution. We argued that this was, at best, a misplaced priority that risked exacerbating the country’s electricity woes. But it also adds to the confusion.

Eskom has two crises: a generational crisis and a financial crisis.

The generation crisis is most visible to ordinary citizens because it manifests itself in staggered blackouts when Eskom cannot generate and distribute enough electricity to meet demand, especially during peak hours.

The financial crisis is more serious, but seen only in the rapid increase in electricity tariffs over the past decade and reports of corruption. But the crisis is evident given that Eskom cannot afford to repay its loans without regular cash transfers from the government. Although the current CEO has been praised for “reducing Eskom’s debt levels”, this mostly reflects government bailouts rather than better financial management.

The National Treasury recently announced its intention to assume much of Eskom’s debt. This confirms, as we argued before, that society will have to pay for Eskom’s debt.

But the financial crisis could be exacerbated by the government’s decision to allow large-scale decentralized power generation. While this may help reduce power outages, it will worsen Eskom’s financial problems.

Decentralized generation will also undermine municipal finances, as they rely on fees on the sale of electricity to raise revenue.

Why connection fees matter

If businesses and wealthy households drastically reduce their use of electricity from the grid, there will be less revenue, but also less opportunity to raise rates than the rest of the poorer consumers. This is a profoundly unfair outcome that illustrates how flawed the political process has been: the cost implications of these decisions have never been published.

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The financially unsustainable combination of grid failure and higher rates is creating the so-called death spiral of power companies. In this scenario, the government and citizens must either shoulder the costs or allow the utility to fail. Since failure would have a catastrophic impact on the wider borrowing capacity of the government, the costs would inevitably be passed on to citizens through higher taxes and levels of public debt or reduced spending on public goods and services.

This is where network connection fees come in. Wealthy households and businesses that choose to generate their own electricity and “defect off the grid” often stay connected so they can use electricity from the public supply as a backup. Simply put, they use the network as insurance, but no longer pay their fair share of the infrastructure, maintenance, and other costs of keeping a network running. Such costs are traditionally covered by energy tariffs.

A (higher) grid connection fee for these non-performing electricity consumers will reduce financial losses and be less unfair. But that won’t stop wealthier municipalities from sourcing electricity elsewhere, and big companies from going off the grid entirely—those problems will require other solutions.

Some of those who strongly object to such a policy are part of the small elite who can afford the large upfront costs of home solar energy systems. Others have simply misunderstood – or misrepresented – the purpose of the policy.

It is not to penalize electricity consumers for generating electricity from solar energy or other sources. Rather, it is about ensuring fair contributions to the costs of the network.

A separate but related challenge arises in municipalities. Households and home users not only want to use the municipal infrastructure as a backup, but also to “feed” excess energy from their rooftop solar panels when they have more than they need.

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Many consumers do not understand why they have to pay a connection fee and why the credits they receive for the electricity they “load” are so low. For example, Cape Town allows households to use solar power, but they must pay a monthly fee to stay connected to the municipal power supply. They will also have to purchase an “advanced meter” (costing around R10 000) and pay an additional monthly administration fee. Excess electricity fed into the municipal grid is paid only as a “credit” and at a rate less than one-third of what the city charges to ensure supply.

However, after years of criticism and lobbying by wealthier households, the city is proposing to increase the rate and intends to “pay cash” for such electricity. Whether this is fair at the municipal level remains to be seen, but such a dynamic will only compound national inequalities.

Network connection charges and feed-in tariffs must reflect the real costs of building and operating the system. The complexities involved provide fertile ground for critics and lobbyists to push for more favorable treatment of wealthier people. But for a “just transition”, the decentralization of energy production must ensure that the costs and benefits are fairly distributed across society as a whole.The conversation

Seán Mfundza Muller, Senior Research Fellow, Johannesburg Institute for Advanced Study, University of Johannesburg and Mike Mueller, Visiting Associate Professor, School of Management, University of the Witwatersrand

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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