Electricity Sector April 2003

Electricity sector in perspective Electrification of households is one of Government’s priority programmes The country generates some of the world’s cheapest electricity Reticulation of electricity has shifted from parastatals (e.g. Eskom) to municipalities, promoting equity Three core electricity functions are generation, transmission and distribution Key role players in the sector –National government through DME: sets policy and legislative framework – Eskom: owns, generation and transmission capacity –Municipalities: distribute electricity to households and other end users –National Electricity Regulator: licenses distributors, oversee standards and regulates tariffs

Sector challenges Key challenge is restructuring of the industry –To create a competitive industry in generation, transmission and distribution Two major restructuring decisions were made –Restructure Electricity Distribution Industry (EDI) and create Regional Electricity Distributors (REDs) wholly owned by municipalities –Restructure Electricity Supply Industry (ESI) and sell 30% of Eskom’s generating capacity Municipalities will play a vital role in distribution –Enabling them to fulfill their constitutional mandates

Electrification backlogs Backlog estimate of 30% of households nationally Likely to persist due to increases in informal settlements Biggest backlogs are in rural areas

Electricity consumption Total consumption in 2000 was megawatts-hours Manufacturing makes up 40%, followed by domestic at 19% Gauteng is the biggest user followed by Mpumalanga

Key electrification highlights Government has allocated R300 m for free basic electricity to poor households Poor household connected to a grid to be issued with 50kWh of electricity per month –Translating into average benefit of R25 p/m Subsidy of R48 p/m for non-grid households households to benefit this year and rollout to households by 2007 Department of Minerals and Energy to fund the National Electrification programme, which includes schools and clinics

Size of electricity sector Eskom recorded electricity revenue of R28 bn in 2002 Distributes 60 per cent of electricity to 40 per cent of customers Municipalities are expected to generate R20 bn or a third of their aggregate budgets Distributes 40 per cent of electricity to 60 per cent of customers Through 177 distributors of various size

Electricity tariffs and subsidies Tariff structures are currently complicated, inequitable and opaque –Due to lack of competition, diverse and discriminatory tariff structures and municipality adopted exemptions Municipalities to balance provision of free basic services with sustainable revenue generating capacity Municipal tariff increases should be below inflation targets set by government High incidences of cross subsidisation has implications for economic activity

Sample municipal electricity budgets Electricity income of R1,9 b comprises 33% of Tshwane budget For Nelson Mandela Metropole this amount is just over R800 m The above amounts exclude annual maintenance spending

Selected Eskom electricity statistics A major challenge facing Eskom and municipalities is the collection of revenue Eskom’s 2002 annual report indicated total debtors of R4,2 b

Purchases, sales and losses in selected municipalities Losses range from 13% in Nelson Mandela Metropole to 7% in Middleburg

Employee costs in selected municipalities The varying employee costs pose a challenge for the restructuring process This requires standardisation of wages across municipalities

Conclusion The electricity distribution industry is fragmented –One large supplier, several medium-sized players and many small players Major risk is that newly created REDs may not be financially sustainable, thereby lowering quality of service delivery Major task in reform will be the transfer of staff, assets and liabilities Ability of electricity to be billed separately –Reduction in efficiencies –Reduction in payment in other municipal services