Transcript Current and Forthcoming Issues in the South African

Current and Forthcoming
Issues in the South African
Electricity Sector
Ioannis N. Kessides
The World Bank
Eskom efficient even by advanced
industrial country standards
• It generates some of the lowest-priced electricity
in the world
• Executed one of the world’s most successful
electrification programs
• Has been exhibiting robust financial and
operational performance
Emerging problems
• Structural inefficiencies and financial problems in the
distribution segment
• Tight demand/supply balance
• Market structure not conducive to economically efficient
investment decisions
• Sector’s regulatory structure lacks coherence and
independence
• Eskom’s vertical and horizontal market dominance is an
impediment to competition
• Eskom’s size and market dominance impede the
Price, cost, and financial performance
• Eskom’s tariffs very low by international standards
• In contrast to most state-owned utilities, Eskom has
been entirely self-financed
• During the past 20 years, Eskom earned 8-12 percent
pre-tax rate of return
• Debt/equity ratio declined from 2.06 in 1980 to 0.3 in
2003
• From late 1980s to 2003 Eskom’s tariffs increases
consistently below inflation
0
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Average retail electricity prices, 2005 or latest information available
US cents / kWh
30
20
10
Indu stry
Source: IEA (2005).
H ouseh olds
Eskom rate of return on total assets
Source: Eskom. 2005. Annual Report.
Eskom debt/equity ratio, including long-term provisions
Source: Eskom. 2005. Annual Report.
Continuity and quality of supply
• Deterioration of Eskom’s generation plant performance
in the late 1980s
• Significant improvements in plant performance following
the 90:7:3 program
• Continuing significant problems in distribution system
performance
• NER’s surveys reveal substantial customer
dissatisfaction with interruption frequency and durations
Eskom’s Unplanned Capability Loss Factor (UCLF)
14
13
12
11
10
UCLF
9
8
7
6
5
4
3
2
1
0
87
88
89
90
91
92
year
93
94
95
96
97
Eskom’s Unplanned Automatic Grid Separations (UAGS)
8
7
UAGS %
6
5
4
3
2
1
0
90 91 92 93 94 95 96 97 98 99 00
year
Actual
International median
01 02 03
04 05
Annual target
International best quartile
System Average Interruption Frequency Index (SAIFI)
15
10
5
0
97
98
99
00
01
02
03
year
Finland
Italy
Spain
France
Ireland
Sweden
Hungary
Netherlands
South Africa
04
NER’s customer surveys
• 53 percent of respondents unhappy with
interruption frequency and durations
• 48 percent dissatisfied with response times to
repair faults
• 28 percent not adequately consulted about
planned outages
• 47 percent dissatisfied with power quality
Labor productivity
• Substantial reduction in number of Eskom’s
employees since the early 1980s
• Still Eskom’s labor productivity well below levels
in advanced industrial countries
Eskom’s sales per employee (GWh/employee)
GWh per employee
8
7
6
5
4
3
96
97
98
99
00
year
01
02
Source: Eskom Annual Report (various years).
03
04*
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an
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ta
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l t as k B W S
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E e s US
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O S
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Electricity sales per employee for Eskom and selected international utilities, 2002
30
20
10
6.4
0
Capital productivity
• From 1980 to 2000, Eskom had excessive
reserve margins
• Eskom’s load factor declined precipitously from
1975 to 1993
• Prolonged gross inefficiency in investment raises
questions about the sector’s governance
structure
Growth in Eskom’s net capacity and peak demand
Source: Eberhard (2004)
Eskom’s capacity factor
70
65
60
55
50
45
75
77
79
81
83
85
87
89 91
year
Source: Eskom Annual Report (various years).
93
95
97
99
01
03 05*
Security of supply
• By 2002 South Africa’s high spare capacity
came to an end
• Forward reserve margin declined from 30 to 10
percent between 1998 and 2003
• Currently, a very tight demand/supply balance
South African reserve wargin
35
30
25
%
20
15
10
5
0
1998
1999
2000
2001
2002
year
SA RM
Source: Vundule et al (2003).
5 year forward SA RM
2003
Environmental performance
• Heavy reliance on low-grade coal has significant
environmental implications
• Because of cost considerations, Eskom’s coal-fired
station mostly not fitted with scrubbers
• Eskom is responsible for the bulk of sulfur dioxide
pollution in South Africa
• During the past decade substantial reduction of
particulate emissions
Eskom’s relative particulate emissions
Source: Eskom (2005). Annual Report.
Electrification Program
• One of the world’s most ambitious and successful
electrification programs
• Impressive gains in coverage within the span of just a
few years
• Dramatic reductions in the capital investment costs of
rural connections
• Significant urban-rural electricity divide remains
• Sustainability challenges beyond 2000
Electrification targets and connections: 1994-2000
Source: NER (2000). Lighting Up South Africa.
Average cost per connection: 1994-2001
Average cost per connection: 1995 and 2001
Source: Gaunt (2005).
Trends in electrification of households in South Africa: 1995-2003
Source: NER (2003).
Urban and rural electrification connections: 1990-2001
Source: Gaunt (2005).
Performance problems in the
distribution segment
• Structural fragmentation
• Significant disparities in quality of service standards
across the country
• Lack of financial viability
• Operating inefficiencies, lack of technical capacity, theft,
and non-payment problems
• Restructuring of the electricity distribution system
• Progress towards creating the six REDs painfully slow
Scope for integrating electricity markets
in Southern Africa
• Complementarity of primary energy resources
• Benefits of regional integrated resource planning
• Prerequisites for successful integration of
electricity systems
• Structural weaknesses of bilateral electricity
exchange in SAPP
Hydro and coal resources in the Southern African Region
Angola
Botswana
DRC
Lesotho
Malawi
Mozambique
Namibia
South Africa
Swaziland
Tanzania
Zambia
Zimbabwe
Large Hydro Potential (MW)
Installed Capacity
Potential Capacity
980
18,267
n.a.
n.a.
2,416
97,584
75
3,000
304
900
2,184
6,398
240
520
668
n.a.
40
440
630
4,700
1,670
6,683
750
7,200
Total
10,024
Source: Mathangwane (2005).1
145,692
Coal Resources (Mil. Tones)
Proven
Estimated
n.a.
n.a.
32,112
212,000
n.a.
n.a.
n.a.
n.a.
22
1,000
n.a.
3,000
350
n.a.
55,000
n.a.
208
1,000
304
1,200
30
1,000
11,000
26,625
99,026
245,825
1 Mathangwane, F. 2005. “Facilitating Access to Power in SADC and
Ensuring the Region’s Bright Future”. Presented in the Regional
Electricity Investment Conference, Windhoek, Namibia.
Status of power sector reforms in SAPP member countries
Source: SAPP (2004).
Performance of SAPP utilities
Source: SAPP (2005).
Policy challenges
• Case for radical electricity restructuring in South Africa
not very compelling?
• Continuing inefficiencies in the distribution segment will
undermine system security and reliability
• Eskom’s extreme horizontal and vertical market
dominance is cause for concern
• Effective regulation is likely to prove challenging