Critical Issues Electricity Distribution Industry Restructuring Electricity Distribution Interests of Distributors Power Shortages and the Economy Importance of Independent Grid The Electricity Crisis Presentation by Eustace Davie, Doug Kuni & Temba Nolutshungu FMF Energy Policy Unit

Restructuring Electricity Distribution Eliminating maintenance backlogs – Cost to fix backlog R35 billion. Value of distribution assets R260 billion (2008 estimated valuation) – Municipalities need capital and the skilled manpower – They can utilise the assets to acquire both through contracting out or the sale of the assets Conflict of interest – electricity versus rest – Distribution grids are being starved of maintenance because municipalities are using electricity resources to do other things – A solution must be urgently found in order to avoid blackouts at the distribution level – There is no perfect solution that will satisfy everyone but there are workable solutions that ensure that the necessary maintenance is carried out and the municipalities derive some income Avoiding distribution level blackouts – Blackouts must be avoided for economic and political reasons – They destroy production and are also politically unpopular

Restructuring Electricity Distribution Contracting out maintenance – Municipalities could hire the capital and skills to catch up on the maintenance and upgrading of distribution grids – This could be in the form of concessions or maintenance agreements – Every local authority could find its own solutions – It is essential that they get expert technical and legal advice Selling distribution grids – Distribution grids could be sold on a basis that stipulates the maintenance and upgrading the purchaser will do and the time frame – Strict quality requirements can be built into contracts – At the end of a period of (say) 20 years the grids could revert back Competing suppliers at consumer level In New Zealand there is competition at the household consumer level Consumers have a choice Competition reduces prices

Interests of Distributors Access to grid by competing generators – Currently SA has a vertical monopoly comprising generation, transmission and distribution – This is the worst of all worlds for municipal distributors – Distributors have no choice of supplies from competing generators Distributors buying directly from competing generators – Distributors should be able to buy from competing generating companies – This would allow them to sell on at better prices Wheeling from generators to distributors – Wheeling power over the transmission grid from competing power producers is essential – Access to the grid by independent power producers would change conditions dramatically for distributors

Interests of Distributors Existence of an electricity market – Increases choice at wholesale and retail level – Aids the efficient use of electricity Efficient use of available electricity – Smoothes the utilisation of power over 24hrs – Reduces the concentration of the off-take in peak hours

Power Shortages and the Economy Electricity generation deficits and blackouts – Why are the lights on? With current shortages where is the electricity coming from? – Given the 5000MW power deficit SA has we should be having load-shedding – It would be less costly to the economy to have load-shedding rather than the measures that are being followed to avoid them Effect on industrial development – The 2007/8 blackouts cost the economy an estimated R50bn to R119bn – Keeping on the lights is equally costly – The loss of production, development and investment is very large – Loss of industrial developments that has not happened must be equally large Effect on property development – Shopping centres, housing and other developments have been halted – Potential developers are told that they cannot go ahead until they provide evidence that they will have access to adequate electricity supplies

Power Shortages and the Economy Loss of Gross Domestic Product (GDP) – The loss of GDP at the 2007/8 level of load-shedding was estimated by a statistician to amount to 2.5% to 6% if carried out every fourth day over a year – Cutting supply to avoid load-shedding if sustained would reduce GDP by 3.3% to 2.5% Loss of Foreign Direct Investment (FDI) – It is not possible to know how much FDI has been lost but investors will think twice about investing in a country with an uncertain electricity supply

Importance of Independent Grid Independently-owned and operated – An independently-owned and operated high-voltage power grid is essential to solve SA’s electricity supply problem – An independent grid will encourage IPP’s to invest in new generation capacity without the uncertainties that currently exist Unobstructed access for IPPs – Unobstructed access to the grid by IPP’s is the key to unlocking increased electricity supplies and the avoidance of load-shedding – By the time current building and planned power production is completed electricity demand will have increased further – More power will be needed and with access to the grid IPP’s could immediately start building plants Wheel to distributors and large users – If IPP’s could wheel directly to distributors and large users they could plan to provide the electricity that Eskom cannot and will not be able to supply – They could bring development to SA that would otherwise not happen

Importance of Independent Grid Introduce competition – Competition plays an important role in all aspects of the economy – It increases consumer choices and makes an economy consumer-directed – It improves the efficiency of the use of resources Bring down prices to customers – Competing providers bring down prices to consumers – They ensure a range of qualities and prices to meet the needs of different consumers – Free competition puts the customer in the driving seat Ensure no more load-shedding – An independent grid and conditions that encourage investment by IPP’s will provide the best conditions for the rapid reduction and elimination of the electricity deficit – Already there is a large pent-up demand that is not being utilised

The Electricity crisis Load-shedding through inadequate generation – Let in the IPPs Threat of infrastructure failure – Contract out maintenance or sell distribution networks The situation is urgent What is required now is urgent action on the part of the Legislative arm of government and urgent implementation by the Executive