How load shedding is crippling municipalities

With Stage 6 load shedding more regular, stretching as far as the eye can see, municipalities heavily reliant on electricity sales for revenue – which is most of them – are going to find themselves wards of the state.

Load shedding for eight hours a day means electricity sales could be reduced by a third.

Municipalities: electricity sales account for 80% of revenue

In some municipalities, electricity sales account for 80% of revenue. The impact is less severe in the eight metros, where electricity accounts for an average of 34% of revenues.

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South African municipalities are already in dire financial straits, with only 16% of the 257 municipalities receiving clean audits from the Auditor-General, and many reliant on substantial transfers from the provinces and national government.

“Metros add a margin to their bulk purchases of electricity from Eskom and that allows them to reinvest in the network and to cover other municipal budget items,” says Glen Robbins, head of research at the Toyota Wessels Institute for Manufacturing Studies in Durban.

“Relying on this as a source of revenue appears to be increasingly volatile and is in some cases narrowing. As a result, we can expect further city budget squeezes, made worse by some user defection and persistent billing and payment challenges.”

Frugal users, billing challenges, and those who don’t pay

There are several variables that impact municipal revenues from electricity sales.

There is evidence that users are using power more sparingly, particularly among pre-paid consumers. This could have a delayed impact on municipal revenues as electricity is paid up front and used later, but at reduced levels of demand, says Robbins.

Post-paid customers meanwhile are battling with inaccurate meter readings, as municipalities rely on historical usage patterns for current billing.

These average readings will likely drop in the coming months, with a commensurate drop in municipal revenues.

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Then there’s the problem of illegal connections and meter tampering, accounting for up to 10% of electricity usage, and much higher in some regions, for which there is no revenue.

These are referred to as “non-technical losses”, which is reckoned to cost Joburg’s City Power R2 billion a year. According to one estimate, 50% of electricity purchased by municipalities is being stolen.

None of this factors in the cost of infrastructure breakages caused by load shedding, which has become a major expense item for all metros and municipalities.

Big hit

Municipalities earn a margin of 15% to 25% on reselling electricity purchased from Eskom, but these revenues are now diminishing, says Ratings Afrika analyst Leon Claasen.

“The metros generate huge amounts from electricity sales. Load shedding has therefore an enormous effect on their revenues.

“The revenue foregone is permanent and has long-lasting effects on their financial sustainability,” says Claasen.

“Some of the lowest-scoring municipalities generate relatively large amounts of revenue from electricity sales. Since their financial sustainability [is] doubtful, the effect of load shedding is quite severe on their financial situation and ability to provide services.”

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The metros and best-performing municipalities

Ratings Afrika provided the following tables showing the financial robustness of the eight metros, as measured by its Municipal Financial Sustainability Index (MFSI), which rates municipalities and metros on a scale of one to 100, based on six financial components: operating performance, liquidity management, debt governance, budget practices, affordability, and infrastructure development.

The table below also shows the MFSI scores and electricity sales for the top 10 performing metros and municipalities.

It’s clear the biggest impact will be felt in the metros, where total electricity sales exceed R80 billion.

If a third of this is lost to load shedding, that means close to R27 billion of their combined sales is potentially under threat (should load shedding persist at current levels).

The combined electricity sales for the top 10 performing municipalities comes to about R4 billion. Prolonged load shedding will eat into this vital revenue source, making it more difficult to maintain infrastructure and services at the required levels.

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Now let’s look at the 10 worst-performing municipalities …

These are surviving by a thread, and are crucially reliant on electricity sales to provide whatever meagre services they can. The loss of sales due to load shedding will further deepen the financial hole in which they find themselves.

Robbins says we are likely to see local governments head to court in a bid to shrug out of the national government noose that prohibits them from sourcing power outside Eskom.

The problem many are already encountering is finding a private supplier willing to enter a 20-year supply agreement with a local government body that might not be around in a few years.

Lowest-scoring municipalities (MFSI score; Electricity sales (Rm)

Another visible aspect to load shedding is the rush to alternative power generation means, such as generators and solar panels, by those who can afford them.

In the book Hungry for Electricity, authors Tracy Ledger and Mahlatse Rampedi argue that universal access to affordable electricity can have huge economic and social benefits. Various plans announced over the years, including free basic electricity for the poor, are hobbled by reliance on Eskom’s creaky grid and rapidly escalating costs.

87% Households now connected to the grid

The authors point out that SA’s successful national electrification programme, with 87% of households now connected to the grid – better than most developing countries – should have been a major step towards universal electricity access.

“Instead, real progress has been limited. Millions of households lack the kind of access to electricity that could change their lives. Some have no connection at all – mostly in informal urban settlements and remote rural areas. Many more do have a connection, but cannot afford to use more than a tiny amount of electricity each month.”

Municipalities faced with the legal obligation to provide affordable power bump into the realities of raising revenue any way they can, and they invariably choose the latter.

The authors propose bumping up the free 50kWh power per month to 350kWh based on household nutritional status, which is determined by disposable income. That may seem unrealistic given the state of the Eskom grid, but a compelling case can be made that the economic benefits to the country could be huge.

Low-income households suffer inadequate access to highly priced electricity, and that debars them from full participation in the economy.

In Vietnam, roof-top solar power accounts for 25% of the country’s total installed power, aided by generous tax and other benefits granted by the government. In Australia, more than a quarter of households generated power on their roofs in 2022, resulting in electricity prices dropping to their lowest level in eight years.

There are solutions to be found to SA’s power crisis, but they are not being pursued with anything like the vigour required.

Adding to the sting of load shedding, the National Energy Regulator of South Africa (Nersa) just granted Eskom a 18.65% tariff hike for the coming year, to be augmented by a 12.74% increase in April 2024.

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“There comes a point when electricity tariff increases are unlikely to have much impact on municipal finances,” says Tim Tyrrell, project manager at the Organisation Undoing Tax Abuse (Outa).

“Nor for that matter does load shedding. Illegal connections and cable theft will become more commonplace, and I suspect that the national government will eventually grudgingly concede that municipal bailouts are necessary. Communities will find that their power supplies will be throttled even more than they are right now, and violent protests are likely to be the response.”

Last week, protesters burned four trucks and two bakkies near Witbank, Mpumalanga, apparently in frustration over the lack of power in the area.

We can expect more of this as load shedding becomes a daily feature of life in SA.

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.

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