It is increasingly clear that South Africa’s energy security predominantly lies in the hands of the IPPs to generate renewable energy and distribute it to customers over Eskom’s electricity grid. However, the lack of a standardised wheeling framework governing the distribution of this energy is creating investment uncertainty and thus hindering progress.
By Bonga Maliwa: Unlisted Credit – Investment Analyst, Futuregrowth Asset Management
What is wheeling?
Wheeling refers to a bilateral agreement between the renewable electricity generator and the off-taker who uses the electricity. The power is wheeled over the Eskom and/or municipal transmission networks.
Right now, there is ambiguity about the wheeling and use-of-system charges. Eskom charges a wheeling tariff, but that rate hasn’t been standardised.
In the few contracts concluded between Eskom and the wheeling parties, the wheeling and use-of-system charges have been negotiated on a case-by-case basis, which is both time-consuming and unpredictable. We believe it is crucial to develop a general wheeling framework that applies to all IPPs, to maximise the potential private sector energy generation can offer to alleviate the power crisis.
Simplifying the costs and how the wheeling agreements will work, will provide power producers with more certainty and enable them to fast-track wheeling arrangements with Eskom and the municipalities. We recognise the work the National Energy Crisis Committee of Ministers (NECOM) is doing to set out the national wheeling framework.
However, we think that Eskom and government should be taking the lead in finalising the process. It will inevitably take a while to clear up the ambiguity, as the state-owned entity is currently splitting the existing business into three independent divisions: generation, transmission and distribution.
To date, the wheeling arrangements that have been concluded are few and far between, because of the prolonged nature of negotiations with Eskom about how much they will charge the IPP to distribute the electricity to its end client. It becomes even more complex when the power also needs to be distributed across municipal grids to get to the end customer, as separate agreements need to be put in place between Eskom and the municipalities.
Virtual wheeling platform
Instead of focusing on providing a transparent and standardised framework for one-to-one wheeling arrangements, Eskom has announced its intention to establish a virtual wheeling platform. This differs from direct wheeling contracts between an IPP and a corporate client, in that Eskom controls the platform by connecting multiple buyers with generators. While clients will be able to source private sector electricity over the grid, Eskom will control the electricity tariff, and there will be no room to negotiate with the IPP on the cost of the electricity provided to them in a one-to-one agreement.
The virtual wheeling contract will also be complex in that the client will be charged a set amount for electricity each month. Then, Eskom will calculate the amount of electricity used and determine the buyer’s wheeled energy refund. Unlike with one-to-one wheeling arrangements, buyers will be exposed to Eskom’s financial risk because they will have to rely on Eskom being able to repay clients for the electricity they haven’t used.
Part of Eskom’s process is dealing with the significant third-party debt it has built up over the years, and determining which of the three entities will become responsible for that debt after the restructuring. Billions of rands are needed, but the utility is technically insolvent and doesn’t have the money to meet its debt obligations.
By freeing up private generators’ ability to trade power over the grid, Eskom is effectively bringing the private sector on board to assist in servicing that debt. Revenues from the wheeling charges paid by the IPPs are expected to impact Eskom’s revenues positively. The main driver of this is to ease the pain of loadshedding on the economy and corporate sector and achieve energy security as soon as possible.
So, it’s not a case of choosing one wheeling model over another. Instead, off-takers should be able to choose which energy source suits their need better and, where direct wheeling arrangements are the preferred option, power producers should be able to operate within a standardised framework that allows for simple contracting. This would accelerate much-needed progress.