Enhancing the provision of ‘public benefits’ as the South African power sector is reformed

1. Enhancing the provision of ‘public benefits’ as the South African power sector is reformed Presentation to the PPC on Minerals and Energy Alix Clark 19th September, 2001 September 19, 2001

2. Important energy sector public-benefits  Electrification and access programmes  Public-interest research and development  Energy efficiency  Renewable energy Customer services Integrated resource planning Public benefits can contribute towards development that is sustainable! September 19, 2001

3. What are ‘public benefits’? Public goods total cost of providing these goods does not increase as customers increase. free-rider problem exists (because of non-excludability characteristic). market will not provide enough of these goods (this results in market failure). efficient provision of public goods requires that consumers pay the MC of consumption = 0. September 19, 2001

4. What are ‘public benefits’? Externalities Externalities costs and benefits arise where private costs (and benefits) do not equal social costs (and benefits) and where ‘externalities’ exist. where costs and benefits of a transaction that are incurred or received by other members of society but are not taken into account by the parties to the transaction. September 19, 2001

5. What are ‘public benefits’? Rights do citizens have a right to social, environmental and developmental (energy sector) goods? Is it a citizen’s right that IRP is undertaken? Do people have a right to reliable, secure, quality supplies of energy? etc. useful here to differentiate between ‘positive’ and ‘negative’ rights. September 19, 2001

6. What are ‘public benefits’? Public benefits have elements of each of the above but are not pure examples of any of them. ‘public benefits’ can be defined as social, environmental and developmental ‘goods and services’ that bring about notable social welfare improvements. goods which society values but the market does not provide for (market failure). they are sometimes referred to as ‘public-service obligations’. September 19, 2001

7. Power sector reforms • Changes may occur in industry • Structure • Ownership • Regulation • Each of these changes can have profound effect on investment in public benefits. September 19, 2001

8. Power sector reforms • Commercialisation • Behavioural change entailing the relinquishment of state control, and a focus on profitability and improved performance. • Corporatisation • Formal and legal move from direct govt. control to a legal corporation with separate management. • Introduction of competition • Entails unbundling activities (horizontal and vertical dis-aggregation); • Introduced at wholesale and then retail levels. September 19, 2001

9. Power sector reforms - structure September 19, 2001

10. Power sector reforms • New regulation • To support these new contexts • Privatisation • Involves a move from public to private ownership • Commonly prepared for through commercialisation and corporatisation activities. September 19, 2001

11. Power sector reforms - ownership September 19, 2001

12. Energy efficiency: Impacts • Investment in public-interest energy efficiency tends to be threatened by power sector reform. • Commercialisation and corporatisation • Downwards pressures on costs, reduced social responsibility, threat of pending competition. • Competition/unbundling • Pressures on reduced utility costs acts as disincentive for DSM spending. • Unclear who should do these programmes. Distribution? Outsourced? • Privatisation • Social responsibility is reduced. • Regulation • New regulation may or may not support DSM programmes • Rationalisation of the distribution industry • Depends on regulation and financial viability of REDs. September 19, 2001

13. Energy efficiency: Options • Regulatory mechanisms • License requirements? • Incentives through good performance? • Benchmarking? • Funding mechanisms • Public benefits charge? • Costs and lost revenues built into tariff negotiations? • Institutional mechanisms? • Support for this area? • Role for monitoring? September 19, 2001

14. Electrification/access progs.: Impacts • Investment in these programmes may or may not be threatened by power sector reforms. Depends… • Commercialisation and corporatisation • Cost pressures, one step removed from government (paying tax). • Competition/unbundling • Overall utility benefits reduced, costs/benefits can’t be spread across utility. • Privatisation • Social responsibility declines. • Unclarity with regard to: Who should fund this? Implement this? Take ultimate responsibility for it? • Regulation • New regulation may or may not support electrification and other programmes • Rationalisation of distribution industry • Electrification progs will depend on funds and fin. performance of REDs September 19, 2001

15. Electrification/access progs.: Options • In South Africa today, it ‘seems’ that this public service is being taken fairly seriously (but only lately on reform agenda). • EDI reform plans include: • An electrification programme • Plans and funds to support capital costs of programme (NEF) • A poverty tariff (EBSST) to support ongoing costs • A transitional structure that supports REDs in this area • A transitional structure that seeks to understand impact on poor • High-level commitment from government • Regulations to support new connections September 19, 2001

16. Public-interest R&D: Impacts • Investment in these programmes may, or may not be threatened by power sector reforms • Commercialisation and corporatisation • Cost pressures, one step removed from government (paying taxes and dividends). Other priorities. Neglected in light of mainstream priorities • Competition • Unbundling, overall utility benefits reduced, costs/benefits can’t be spread • Need to protect information. • Privatisation • Social responsibility declines, type of research needed narrows. • Regulation • New regulation may or may not support electrification and other programmes. Generally an after thought. • Rationalisation of distribution industry • Limited impact September 19, 2001

17. Public-interest R&D: Status and options • Used to be significant funds and institutional capacity for public-interest R&D (DME, Eskom, CSIR, AEC, coal research, South African universities etc.). • Institutional capacity and funding has dropped off considerably (Electricity and energy industries being reformed, pressure on govt. resources, budgetary declines). • Ex: Eskom’s research must contribute to its bottom-line and public-interest research funding/interest is much reduced. • There is currently a DACST-initiated Cabinet memo on national capacity for R&D (proactive as opposed to reactive). Funding mechanisms? Electricity focus. • Also the PIESA initiative. • Government must consider institutional and funding mechanisms to support this public-service obligation because this activity yields NB social and customer benefits. September 19, 2001

18. Bulk-generated renewable energy: Impacts • Power sector reforms could assist investment in this area • Commercialisation and corporatisation • Cost pressures, one step removed from government (paying taxes and dividends). Renewables are expensive at the best of times. • Competition • Unbundling could bring about non-discriminatory access to transmission, cost reflective pricing, and reduced market power. • New investment capital, international acceptability, GHG reductions but social responsibility of state-owned utilities still in decline. • Regulation • New regulation may or may not support bulk-generated renewable energy. • Rationalisation of distribution industry • Depends on regulation and financial viability of future REDs. September 19, 2001

19. Bulk-generated renewable energy: Options • Currently its very difficult for anyone other than Eskom to make investments in this area. • If investment in this area is seen to be important, then incentives must be offered. • NER could require that REDs energy balance include a certain percentage of energy generated from renewable resources (linked in with Local IRPs). • NER could require that Transmission purchase/wheel a certain percentage of energy of this nature. • BUT, cost considerations which link directly with industrial competitiveness and social equity. September 19, 2001

20. Distributed generation of renewable energy: Impacts • Power sector reforms may, or may not encourage investment in this area. • Commercialisation and corporatisation • Cost pressures, one step removed from government (paying taxes and dividends). Renewables are expensive at the best of times. • Competition • Unclear whose responsibility off-grid electrification will be. • Privatisation • Reduced social responsibilities. • Who will fund this? • Regulation • New regulation may or may not support distributed generation of renewable energy. • Rationalisation of the distribution industry • Depends on how grid and non-grid are integrated. September 19, 2001

21. Distributed generation of renewable energy: Status and options • An off-grid concession programme was established by govt. in 1999. 7 concession companies were chosen. Various of these have fallen out of the running since then. • The concession programme has ‘inched’ forward. Contractual issues (roles) have hampered the process. • R64 million has been set aside for the first phase (23 000 connections). • Concession programme will focus on SHS but will also look at thermal energy services) • Concession companies will receive a subsidy (R3500 per connection) from government, and perhaps a poverty tariff. This prog. is only being implemented by the private sector because of govt. support. September 19, 2001

22. Integrated Resource Planning: Impacts • Power sector reforms may or may not promote investment in this area. • Commercialisation and corporatisation • Threat of competition, why invest in a national asset? Utility perspective is important. • Competition • Why invest when there are cost pressures and competitors. • Unbundling => insufficient information. • Privatisation • Who takes responsibility for this? • Regulation • Regulation and legislation may or may not support formulation of IRPs at different levels (LIRP, NIRP and RIRP). • Rationalisation of distribution industry • Depends on regulatory requirements September 19, 2001

23. Integrated Resource Planning: Status and options • Most capacity and skills in this area rest within Eskom. • IRP in Eskom is a ring-fenced activity • There have been discussions about transferring this capacity into an independent Transmission company, or a separate entity that would conduct IRPs for South Africa as well as support formulation of IRPs at distribution levels. • IRP is identified as an important aspect of energy policy. • NER has proposed that IRPs be a component of license agreements between NER and distributors, generators and transmission. • There is a short-term danger that skills in this area will dissipate (as a result of industry uncertainty). • Given the important societal benefits of IRP, this issue should be tracked by the PPC. September 19, 2001

24. Conclusions • Public benefits yield considerable benefits for society (bulk-generated renewable energy tho’?) • They are public service obligations that the market will not invest in. The public sector must take this on… • Grid and non-grid electrification are ‘being looked after’ for now. Focus should be on follow-up and ensuring successful implementation. NEF and DME performance must be monitored. • DACST memo on energy research and development must be supported and monitored. September 19, 2001

25. Conclusions… • Customer services (reliability, security of supply, • Energy efficiency and IRP need serious attention. • Mechanisms to support such investment must be sought out, analysed from a South African point of view, then implemented. • DME and NER policy in this area must be developed. • These issues are not on the reform agenda. It is unlikely that the electricity industry will accept another upheaval subsequent to this power sector reform upheaval. • Is the term ‘public benefits’ a worthwhile term, or is it more appropriate for lobbying purposes to refer to specific goods (for example: energy efficiency?) September 19, 2001

26. Thank you! September 19, 2001