Renewable Energy Investors and Municipalities Must Compromise

Investors in renewable energy and municipalities both must give ground if South Africa is to find a lasting solution to the electricity crisis, argues electricity analyst – Chris Yelland

At a recent European Union-facilitated webinar into the generation of electricity by private sector and individuals that I moderated, many attendees lamented the charges that municipalities levy on individuals and businesses who had, or were interested in, generating their own electricity.

“The wheeling [the delivery of electricity generated by a private operator in one location to a buyer or off-taker in another location via a third party network] charge is very high in the city [of Cape Town], something like 25 to 30c per kWh which makes wheeling very uneconomical,” one attendee told Kadri Nassiep, Executive Director of Energy for Cape Town who was one of the panellists.

Their concerns are not unwarranted.

Many South Africans – businesses and private individuals – have invested in solar Photovoltaic (PV) and other renewable energy systems in the last 15 years because of above-average inflation electricity increases, load shedding and the falling cost of the technology, according to panellist Nikkie Korsten, a researcher from the Centre for Renewable and Sustainable Energy Studies at Stellenbosch University.

Most – like listed property investment company Growthpoint who was also on the panel – are also attracted by the potential savings and return on investment to be had, as well as contributing to climate change objectives.

But many have been left disappointed for a myriad of reasons.

One is that an unsupportive regulatory environment has left them feeling like they are part of the problem, rather than the solution.

Another is that few, if any, are realising a return on their investment.

This is due to the charges municipalities levy on PV systems to compensate for the lost revenue they incur.

The reality is most who invest in PV systems will not see a return on their investment for at least eight years, a survey by panellist Sustainable Energy Africa has found. The Development Bank of South Africa – who also participated in the discussion – estimates the return on investment to be, more realistically, 15 – 20 years!


Because of South Africa’s local government revenue model.

The law allows municipalities to generate income by buying electricity from Eskom and selling it on to consumers – which they do after adding a mark-up.

Electricity sales account for the bulk of a municipality’s revenue and councils have, for over 100 years, relied heavily on the surpluses accrued from generating and distributing electricity to cross-subsidise other municipal functions.

Korsten also points out that this money is used to maintain the electricity grid which, as South Africans are more than aware due to increasing blackouts over the last 13 years, is absolutely critical to keeping the lights on.

Revenue from electricity sales also allows municipalities to provide free electricity to those who cannot afford it, and to charge those who use less electricity – typically poorer South Africans – less per kWh than those who consume more – traditionally more affluent ratepayers.

Put simply, the surplus from selling electricity is one of the main avenues of funding for municipalities – on whom we rely for electricity, clean water, sewage, public lighting and a range of other services that contribute to the quality of life we enjoy.

So, the loss of this revenue means municipalities are being left with consumers who use less electricity and are less able to pay, thereby undermining councils’ ability to cross-subsidise municipal functions.

How have municipalities responded to this most serious threat to their existence?

By introducing high fixed tariffs or wheeling charges – effectively making solar PV systems financially unattractive.

This impasse is clearly unsustainable – and poses a clear and present danger to South Africa, our economy and security of energy supply.

South Africans should not be left to the mercies of Eskom which has stumbled from one crisis to another over the last 20 years, bereft of ideas, seemingly unable to resolve the problems it has encountered and for which it is responsible through mismanagement, corruption and lack of foresight, planning and action.

Self-generation by domestic, agriculture, industry, electricity customers and municipalities represent a significant short-term opportunity to meet the needs for new generation capacity in South Africa – and should therefore be grasped with both hands.

Given this parlous situation, what is to be done?

Quite simply, both sides – more affluent South Africans (including business) and municipalities – need to cede ground.

Those who can afford to invest in solar PV systems need to accept that at present, and for several years to come, they simply will not realise their return on investment.

South Africa has the worst Gini coefficient (an aggregation of the gaps between people’s incomes into a single measure) in the world. The difference in income between the top and bottom earners is massive. A farm worker can earn as little as R100 a day while some high-level professionals earn over R3 000 a day.

Ten percent of South Africans earn more than 50% of the household income in the country. The poorest 40% accounts for less than seven percent of household income.

And municipalities instead of killing the goose that lays the golden egg, municipalities need to pursue a revenue neutral model rather than one that is revenue positive. This means that instead of levying high tariffs, making solar PV unattractive, they need to find the “sweet spot” between what they charge the energy generators and what they make.

Given that this is South Africa where finding middle ground is often unattainable, is this at all possible?

According to Sustainable Energy Africa, it is very, very possible.

Modelling they have done shows too-high and too-low tariffs are unfavourable – and unsustainable – in the long run.

They point out that while small scale energy generation leads to a reduction in electricity sales (and a concomitant reduction in revenue), it also results in a reduction in the amount of electricity bought from Eskom.

And because the electricity does not have to travel as far, it leads to a reduction in technical losses.

In addition, the electricity the council buys from small scale energy generators is generally cheaper than that from Eskom, meaning they effectively spend less buying electricity.

By setting their tariffs correctly, the impact of small-scale energy generation on a municipality can therefore be neutral.

From a lose-lose position for both municipalities and those who want to generate their own electricity, setting reasonable tariffs coupled with an acceptance that cross-subsidisation is unavoidable will move South Africa into a win-win position.

But for this to happen, government needs to be more transparent about the tax it imposes for cross-subsidisation. And it needs to move swiftly to address and remove the legal, policy, regulatory and bureaucratic constraints in place in respect of electricity supply and distribution to allow customers and municipalities to become part of the solution.

Chris Yelland, an energy analyst, consultant and electrical engineer, is founder of EE Business Intelligence. He is partnering with the ​EU-SA Partners for Growth Programme.