Some circles in South Africa have been outraged by reports that energy company Eskom and some municipalities intend to increase connection fees for electricity users 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 there was no official proposal.
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” that the South African government and energy experts claim they are committed to.
There is a broad consensus that the world must switch to net-zero energy sources to avoid global warming. For South Africa’s coal society, this transition will have a major impact on people’s livelihoods and living standards. A “just transition” will equitably distribute costs, benefits and opportunities.
The proposed connection fee is a good example of the principle. The fee is needed to cover the costs incurred by electricity suppliers to build and maintain capacity to generate and deliver additional energy when private user systems cannot provide enough.
The opposition to connection fees reflects the interests of commercial users and wealthy individuals. They want access to backup power, but don’t want to pay to make it available “on demand” when the sun goes down, the wind stops blowing, or their own systems break down. They are supported by businesses that offer “cheap” renewable energy solutions.
The debate caused confusion among the general public. South Africa’s electricity supply is increasingly unreliable and expensive. Many of those who use solar panels at home believe that they should not be charged for what they see as helping to solve electricity problems.
Our view is that both grid connection charges and structured delivery mechanisms are needed to ensure greater equity in the social distribution of Eskom’s financial burdens. The burden of costs should not fall disproportionately on the less affluent middle class, the working class and the poor – or on future generations.
Connecting the dots
The confusion is compounded by the fact that the South African government is in the process of splitting Eskom into three separate components: generation, transmission and distribution. We argued that this is, at best, a misplaced priority that risks exacerbating the country’s electricity problems. But it also contributes 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 phased blackouts where Eskom is unable to produce and distribute enough power to meet demand, especially during peak times.
The financial crisis is more serious, but it has only been visible in the rapid increase in electricity tariffs over the past decade and reports of corruption. But the crisis is clear when you consider that Eskom cannot afford to repay its loans without regular cash transfers from the government. While the current CEO has been praised for “reducing Eskom’s debt levels”, this largely reflects a government bailout rather than better financial management.
The National Treasury recently announced its intention to assume a significant portion of Eskom’s debt. This confirms, as we argued earlier, that the public had 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 woes.
Decentralized generation will also undermine municipal finances because they rely on fees from the sale of electricity to raise revenue.
Why connection fees matter
If businesses and affluent households drastically reduce their use of electricity on the grid, there will be less revenue, but also less opportunity for the remaining poor users to raise rates. This is a very unfair result that shows how flawed the policy process has been: no costings of these decisions have ever been published.
The financially unsustainable combination of off-grid and higher tariffs is creating the so-called electricity death spiral. In such a scenario, the government and citizens must either shoulder the costs or allow the utility to fail. Because failure would have a catastrophic effect on the government’s broad borrowing capacity, the costs would inevitably be passed on to citizens through higher taxes and the level of public debt or reduced spending on public goods and services.
This is where the payment for connection to the power grid comes in. Affluent households and businesses that choose to generate their own electricity and go “off grid” often stay connected to use electricity from the public resource 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 the network operational. Such costs were traditionally covered by energy tariffs.
A (higher) grid connection fee for these negative electricity users will reduce financial losses and be less unfair. But this will not prevent wealthier municipalities from getting electricity elsewhere, and large companies from being completely disconnected from the grid – these problems will require other solutions.
Some of those vocally opposed to such policies are part of an elite few who can afford the large upfront costs of home solar energy systems. Others simply misunderstood – or misrepresented – the purpose of the policy.
This is not to penalize electricity consumers for generating electricity from solar or other sources. Rather, it is about ensuring a fair contribution to the costs of the network.
A separate but related problem arises in municipalities. Households and home users not only want to use municipal infrastructure as a backup, but also “feed” excess energy from their rooftop solar panels when they have more than they need.
Many users do not understand why they have to pay connection fees and why the credits they receive for the electricity they “supply” are so low. For example, Cape Town allows households to use solar energy, but they must pay a monthly fee to connect to the city’s electricity 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 a third of what the city charges for supply.
However, after years of criticism and lobbying by wealthy families, the city is proposing to increase the rate and intends to “pay cash” for such electricity. Whether this will be fair at the municipal level remains to be seen, but such a dynamic will only exacerbate national inequality.
Network connection fees and preferential tariffs should reflect the actual costs of building and operating the system. The complexities involved create fertile ground for critics and lobbyists to push for more favorable treatment of wealthier people. But for a “just transition”, the decentralization of electricity production must ensure a fair distribution of costs and benefits in society as a whole.
Sean Mfunda Muller, Senior Research Fellow at the Johannesburg Institute for Advanced Studies, University of Johannesburg and Mike Mueller, visiting adjunct professor in the School of Management, University of the Witwatersrand
This article is republished from The Conversation under a Creative Commons license. Read the original article.