Concerns over costly electricity pricing

South African Nuclear Energy Corporationchair Dave Nicholls has raised concerns about the costly electricity pricing system. Picture: EE Publishers

South African Nuclear Energy Corporationchair Dave Nicholls has raised concerns about the costly electricity pricing system. Picture: EE Publishers

Published Jul 7, 2024


DAVE Nicholls, the chair of the South African Nuclear Energy Corporation (Necsa), has raised concerns about the costly electricity pricing system, arguing that a universal “regulated monopoly” was scrapped for an “unregulated market” system that was not sustainable.

This is after the National Energy Regulator of South Africa (Nersa) recently approved municipal electricity tariff hikes effective from 1 July 2024.

Many organisations have expressed concern about the impact this will have on the country’s economy and households struggling to cope financially.

Nicholls, a former Eskom Chief Nuclear executive and respected energy expert, told the Sunday Independent this week that the cost to meet the national need and the amount of the marginal costs which are directly related to the amount of electricity also known as “primary costs”, were the reason why municipalities were charging more for electricity.

“Marginal costs include fixed infrastructure costs such as the power stations, transmission system, distribution system and the costs of maintaining the system and serving the customer including staff costs, admin costs, and maintenance costs.

“These costs are largely determined by the maximum demand on the system, the number of customers. These costs are not sensibly affected by the actual electricity sales.

“The second set of costs are called the "marginal costs. These are classically the primary energy costs in Eskom's annual report. They vary by technology being about 50c/kWh for coal, 10c/kWh for Koeberg, and 600c/kWh for the gas turbines. These costs are largely a function of the actual cost of the fuel used.

“It is important to note that with the Independent Power Producers (IPP), the so-called primary energy cost in the Eskom annual reports is not variable as the contracts are on a "take or pay" basis and therefore independent of Eskom sales,” he said.

Nicholls said it was clear from this that the vast majority of Eskom's costs and all the municipalities’ costs were not related to the actual sales but to the peak customer demand and number of customers.

He recalled that ten years ago, he was told by a City Power executive that their fixed monthly costs per customer were about R1200, adding that this implied that if a customer installed solar or bought from an IPP it would still not reduce Eskom's costs by much, as it would not reduce the actual integrated peak demand on the system depending on that day’s weather overcast.

“The same applies to the overall Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) if Eskom's peak demand on its dispatchable plant (coal, diesel, nuclear) is not changed.

“This can be seen in the difference in cost between the recent REIPPP Bid Window 5 where the costs were about 40 c/kWh and the RMIPPP (risk mitigation) where the costs were in the order of 160 c/kWh. All conditions were the same except the REIPPP required a simply given technology (wind or solar) with its intermittent supply and the RMIPPP was technology-neutral but required customer-centric performance (guaranteed power from 06:00 - 21:00.

What does this mean for the prices to the customer?

“On the old system (regulated monopoly) the overall cost of the system was averaged over all the sales, giving the previous cost structure. If you go to a "free market" scheme the different parts of the supply chain have to be paid for related to their costs. This will lead to very high fixed costs of probably 70+% of current bills and below R1/kWh for actual consumption. The munics would need to charge a very high connection fee of R1500+ per month,” said Nicholls.

He said this was one of the biggest challenges to the new costing system as the free marketeers wanted the commercially reflective charges, but complained when the utility said it wanted to raise the fixed charges and lower the viable charges.

“This gets even worse when dynamic time-of-use tariffs are implemented. This means the value/costs of kWh follow the grid tariff. In many systems, the value of energy goes negative in the middle of the day when there is lots of solar, meaning you have to pay to supply power to the system and the system would be paid to take the power,” said Nicholls.

Speaking to SABC News last week, Electricity and Energy Minister Dr Kgosientsho Ramokgopa, noted that many households still could not afford the cost of electricity and this would lead to rising energy poverty in South Africa, where power is available through the grid, but many poorer households could not afford to access it.

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