Current and Forthcoming Issues in the South

African Electricity Sector

Ioannis N. KessidesThe 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 development of a regional electricity market

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

Average retail electricity prices, 2005 or latest information available US cents / kWh

0

10

20

30

Industry Households

Source: IEA (2005).

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)

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14U

CL

F

87 88 89 90 91 92 93 94 95 96 97year

Eskom’s Unplanned Automatic Grid Separations (UAGS)

0

1

2

3

4

5

6

7

8U

AG

S %

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05year

Actual Annual targetInternational median International best quartile

System Average Interruption Frequency Index (SAIFI)

0

5

10

15S

AIF

I - in

terr

upt

ion

s p

er c

usto

mer

pe

r ye

ar

97 98 99 00 01 02 03 04year

Finland France Hungary

Italy Ireland NetherlandsSpain Sweden South Africa

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)

3

4

5

6

7

8G

Wh

pe

r em

plo

yee

96 97 98 99 00 01 02 03 04*year

Source: Eskom Annual Report (various years).

Electricity sales per employee for Eskom and selected international utilities, 2002

0

6.4

10

20

30S

ale

s (G

Wh)

per

em

ploy

ee

EDF (FRA)

Delta

Ele

ctric

ity (A

US)

ENEL (ITA)

EnBW

(DEU)

Endesa

(ESP)

EDISO

N (USA)

South

ern

Elect

ric (G

BR)

CFE (MEX)

Eskom

Kyush

u (J

PN)

KEPCO (J

PN)

Salt R

iver

Pro

ject (

USA)

San Ant

onio C

PS (USA)

Nebras

ka P

PD (USA)

Seattl

e C

ity L

ight (

USA)

Amer

ican E

lect

ric P

ower (

USA)

ConEdi

son

(USA)

Florid

a PLC

(USA)

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

45

50

55

60

65

70G

ener

atio

n L

oad

Fa

cto

r - %

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05*year

Source: Eskom Annual Report (various years).

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

0

5

10

15

20

25

30

35%

1998 1999 2000 2001 2002 2003year

SA RM 5 year forward SA RM

Source: Vundule et al (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

Installed Capacity Potential Capacity Proven EstimatedAngola 980 18,267 n.a. n.a.Botswana n.a. n.a. 32,112 212,000DRC 2,416 97,584 n.a. n.a.Lesotho 75 3,000 n.a. n.a.Malawi 304 900 22 1,000Mozambique 2,184 6,398 n.a. 3,000Namibia 240 520 350 n.a.South Africa 668 n.a. 55,000 n.a.Swaziland 40 440 208 1,000Tanzania 630 4,700 304 1,200Zambia 1,670 6,683 30 1,000Zimbabwe 750 7,200 11,000 26,625

Total 10,024 145,692 99,026 245,825

Large Hydro Potential (MW) Coal Resources (Mil. Tones)

Source: Mathangwane (2005).1

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