Challenges and opportunities in South African and German electricity markets

South Africa’s electricity sector is undergoing a multifaceted transformation brought about by energy security concerns, rising electricity prices, the emergence of renewable energy technologies and the introduction of independent power producers. This article considers the fundamental elements which characterise the German and South African energy markets, highlights the challenges which are prevalent in the energy markets of both countries, and the opportunities that can be exploited in the current structures of these energy markets.

Municipal entities play a strong role in South Africa’s electricity distribution and supply. Around 180 municipalities as well as the national utility Eskom are active in the distribution and supply of electricity. The distribution business is increasingly facing economic and technical problems. This is due to highly fragmented retail markets, aging infrastructure, under-financed municipalities, regulatory uncertainty and some difficulties in governance and institutional effectiveness.

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Many municipal utilities are also exposed to the challenges of growing urbanisation, electricity theft, poverty and tariff cross-subsidisation. For the past ten years, South Africa’s electricity distribution industry has experienced the delinking of economic growth and electricity demand growth. Sales of electricity in the metropolitan municipalities have shown a sustained downward trend over the last years and have in some cases dropped significantly.

Today, the sale of electricity is below 2007 levels amongst all metropolitan municipalities. This development is accompanied by increases in average effective electricity tariffs for the metropolitan municipalities by more than 100%, following sharp increases in Eskom’s electricity wholesale prices. On the consumer/municipal customer side this development has led to a greater interest in energy efficiency and in self-generating electricity for own use from technologies such as solar PV. This trend accounts for all types of energy consumers including industrial, commercial and residential customers, which has led to overall lower municipal electricity sales.

Municipal utilities also play a dominant role in the German electricity market. Traditionally, more than 900 German “Stadtwerke” are active in the energy generation, supply and distribution fields. The pluralistic structure of the German energy industry and the existence of different types of energy companies (publicly owned and privately-owned) have been pivotal in creating competitive and innovative energy markets that are the backbone of the German economy in many areas. Beyond this, the existence of municipal energy utilities has also played a major role in raising local awareness and participation towards fair and sustainable energy generation and consumption.

The decentralised and pluralistic structure of the German energy industry is one of the major reasons for the German energy transition, the “Energiewende”, with a high degree of local participation. With its 180 municipal energy entities, the South African energy market possesses a similar pluralistic structure and, therefore, the potential to further explore and benefit from municipally-steered electricity distribution and supply.

The South African-German Energy Partnership, created in 2013 under the leadership of the German Federal Ministry for Economic Affairs and Energy (BMWi) and the South African Department of Energy (DoE), identified the topic of municipal utilities to be of high importance and considers reliable distribution networks as essential for economic growth, job creation and poverty reduction. Given the massive potential for de-centralised PV-based production of electricity which is mostly fed into the local distribution grid, a strong and reliable structure of local energy utilities seems almost indispensable for a robust and sustainable development of the South African energy markets.

Questions

  • How and to what extent can the know-how and experiences of German municipal utilities be helpful for the South African context?
  • Are there common problems and solutions in both countries?
  • What is the international experience around the restructuring of energy markets and energy transition?
  • Are new business models, especially regarding the switch from commodity supply to provision of energy services, an approach that South African utilities could follow?

In previous workshops that were held under the South African-German Energy Partnership, South African municipalities as well as policy stakeholders expressed great interest in learning more about the German model of municipal utilities. The Energy Partnership was willing to respond to this request and organised a one-week policy discussion workshop on energy market design and municipal utility business models, dedicated to South African officials, at GIZ head offices in Eschborn, Germany, from 4 to 8 December 2017.

Objectives

The objective of the workshop was to discuss and compare trends in the South African and German electricity distribution industry and to identify and address key issues faced by municipal utilities. The workshop drew from international experience in electricity market design and combined policy discussion elements with training and capacity building elements. The workshop investigated new institutional and business models for the distribution of electricity at the city level. It considered future dynamics in supply and demand and learning from leading examples of this transition internationally.

Topics that were covered by the workshop included a brief history on the process of liberalisation of the European electricity markets, mechanisms to finance and operate the distribution grid, municipal business processes for electricity trade and supply, the impact of distributed generation on grid tariffs, as well as emerging municipal business models. Furthermore, the main pillars of municipal utility revenue collection (wheeling fees/grid charges, energy supply and trading, generation business, energy services/efficiency and energy management) were discussed.

This article seeks to provide a closer look into the fundamental elements which characterise the German and South African energy markets, respectively. Furthermore, it highlights the challenges which are prevalent in the energy markets of both countries together with the opportunities that can be exploited in the current structures of these energy markets. This is followed by an action list that was produced and discussed by the participants of the one-week policy discussion workshop on energy market design and municipal utility business models at GIZ head offices in December 2017.

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Contact Tobias Zeller, GIZ, tobias.zeller@giz.de

 

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