Dear Nersa, where are the wheeling tariffs?

In its comment on energy regulator Nersa’s consultation paper on the municipal electricity tariffs that are set to kick in on 1 July, the Association of South African Chambers (Asac) criticises Nersa for failing to address wheeling tariffs.

Wheeling is the transmission of electricity originating from any power producer through transmission or distribution lines – you could, for example, have a private wind farm in the Eastern Cape wheeling electricity through the Eskom network and several municipal networks in order to supply a factory in Gauteng.

While the unit cost of the electricity is determined in an agreement between the power producer and its client, the wheeling tariffs must still be determined.

ALSO READ: Government’s ‘uncertain’ energy crisis plan called out by high court

Electricity and wheeling tariffs are however currently bundled together. This was not previously an issue, but in a competitive market with multiple generators of power using the same network the tariff for the use of the network needs to be stripped out and charged separately.

Asac further proposes a fair and non-discriminatory wheeling tariff for municipalities based on Eskom tariffs.

Consultation paper

The association represents the Johannesburg Chamber of Commerce and Industry (JCCI), Pietermaritzburg & Midlands Chamber of Business, Durban Chamber of Commerce & Industry, Cape Chamber, Middelburg Chamber of Commerce, Nelson Mandela Bay Business Chamber, Border-Kei Chamber of Business, George Business Chamber, Oudtshoorn Chamber, Ladysmith Chamber and the iLembe Chamber of Commerce, Industry and Tourism.

Jointly these chambers represent the employment of close to one million people.

Nersa on 4 April published the consultation paper on what is expected to be the last year it uses the guideline and benchmark methodology to set municipal electricity tariffs, since this was found to be unlawful in two different court rulings.

The court has given Nersa time until next year’s tariff determination to develop a new methodology that bases tariffs on the efficient cost of supply with a reasonable margin, in compliance with the Electricity Regulation Act. The regulator has for at least the past decade merely published a guideline increase and tariff benchmarks every year, and if municipalities adhered to that their real cost of supply was not considered.

The deadline for submissions was 4 May.

On the back of an 18.4% increase in Eskom’s bulk tariff to municipalities, Nersa is proposing an increase guideline of 15.1%, more than double the March CPI of 7.1%.

The regulator is expected to finalise the guideline by 23 May and consider tariff applications from individual municipalities in the month to follow.

Asac says it is surprising that wheeling tariffs don’t feature in the consultation paper at all, “given that wheeling is becoming more and more relevant in the electricity supply industry”.

Rational and competitive wheeling charges are essential for the development of trading in municipal distribution areas, and certainty in this regard is needed to enable investment in generating capacity, Asac states.

“Reliable wheeling tariffs and the competitiveness of wheeling going forward are fundamental to creating an open energy market in the municipal space,” it says.

According to Asac’s David Mertens, few municipalities currently have wheeling tariffs. They are mostly too high to justify investment and Nersa has declined to approve such tariffs, arguing that municipalities failed to provide a proper rationale for them.

Call for fair tariffs

Against the background of uncertainty about the way municipal electricity tariffs will be determined in future, Asac proposes fair, non-discriminatory tariffs based on the current municipal tariffs for electricity supplied by Eskom.

“Wheeling tariffs must reflect the cost of the wheeling service,” it says.

“Our proposal is based on the comparison of wheeling tariffs with existing tariffs for similar or identical services,” Asac argues.

There is no difference in cost for the municipality between the importation (transport) of electricity, whether it originates from Eskom or an independent power producer (IPP).

“As such, the municipal mark-up from Eskom’s Megaflex tariff per kWh (kWh mark-up = municipal kWh tariff – Eskom Megaflex tariff) and the kWh wheeling charge for the same tariff period must be the same,” according to Asac.

“It needs noting that the municipality does not need to add any assets to enable wheeling of power which is supplied through the Eskom grid,” it adds.

“Power usage from the end user will remain identical and does not depend on whether the utilised power is wheeled or not. The KVA/NMD [kilovolt-amps/notified maximum demand] charged by Eskom will hence not change and the municipality will pay exactly the same amount to Eskom for such charges.

“The municipality will still charge the end-user for the maximum KVA/NMD demand on a monthly basis, independent from whether there is wheeling or not.

“Our conclusion is that the kWh wheeling charges must equal the kWh ‘mark-up’ the municipality charges on Eskom supply,” says Asac, adding that the only difference may be in administrative charges (which may be separately reflected) or financing charges (which can be reflected in R/kWh).

It argues that Nersa, when approving wheeling charges, could find no rationale not to approve identical tariffs for identical services.

Given that tariffs will be approved for the distribution of power imported from Eskom, it should then also approve wheeling charges based on the ‘mark-up’ charged by the municipality on Eskom’s power. Consumers then pay the same tariff for the same service, whether the power is originating from Eskom or supplied from an IPP through the Eskom network.

By doing it this way, the financial viability will not be negatively impacted through the introduction of wheeling, according to Asac.

Asac illustrates the proposal using the 2022/23 tariffs in Nelson Mandela Bay Municipality:

Where wheeling within a municipality requires capital expenditure to enable the IPP’s connection to the grid, such costs must be reflected in the wheeling tariff, according to Asac.

Mertens tells Moneyweb it is of utmost importance for the development of the private electricity supply industry that Nersa approves wheeling tariffs for the tariff period starting 1 July 2023.

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

NOW READ: Hawks nab Eskom scalps in Mpumalanga