Energy sector has opportunity to change amid ‘disruptive moment’ caused by renewables

As questions remain over what the future holds for South Africa’s power utility Eskom, there is a window of opportunity for utilities in developing countries to build on international power reform experience and design future power markets and operating systems to respond to new opportunities offered by the falling costs of renewable energy.

South Africa has entered a “disruptive moment” in the power sector where prices for renewables are falling rapidly and the share of electricity production from renewable sources is growing on- and off-grid, says University of Cape Town (UCT) Graduate School of Business energy expert Professor Anton Eberhard.

“There are significant implications for utilities to complement these variable energy resources with more flexible options such as gas to power, storage and demand-side management. Utilities are also facing declining sales as distributed and off-grid electricity investments increase.

“US and European utilities are responding to these challenges and there is huge potential for utilities in developing countries to build on international power reform experience and to design future power markets and operating systems to respond to these new opportunities,” he adds.

“The challenge for managers and leaders working in the power sector is to contribute to the industry’s reform and deliver sustainable, affordable services to everyone, while still accelerating economic growth. There is much that we can gain from observing and understanding how this has played out in other economies and countries,” says Eberhard.

Energy Minister Mmamoloko Kubayi earlier this month announced that Eskom would sign the power purchase agreements for 26 independent power producer (IPP) projects already procured by government under the Renewable Energy Independent Power Producer Procurement Programme, by the end of October.

However, she also announced that Eskom would be allowed to renegotiate the tariffs to not more than 77c/kWh. The Minister said the current prices were unaffordable for Eskom, even though solar and wind energy are now cheaper than Eskom’s average cost of supply.

“Frustrations with Eskom’s status as the official buyer of power from IPPs, steep Eskom electricity price [increases] and cheaper alternatives have created a significant increase in investments in embedded generation, as well as energy efficiency.”

The challenge of the current system – where Eskom controls power purchases from IPPs, as well as access to transmission, but also builds and operates its own power stations – is that it can discourage investment in IPPs, make interconnection with the grid difficult or expensive and constrain dispatch.

“Some observers have noted that an energy market of multiple generators, buyers and sellers is the antithesis of South Africa’s historical monopoly model in the energy sector. Although such a shift can be viewed as a threat to monopoly energy utilities, like Eskom, international trends suggest that it presents an opportunity for Eskom to transform its archaic business model,” he says.

The past three decades have seen fundamental reform and restructuring of electricity sectors in countries all over the world. The old model of a vertically integrated, State-owned monopoly has been challenged and new institutional models have been explored and adopted that involve different levels of integration and unbundling, competition and public or private ownership, he explains.

The Managing Power Sector Reform and Regulation Africa short course, which will be hosted at the UCT Graduate School of Business this October, will focus on the opportunities for effective reform of utilities, especially those in emerging markets, and will feature expert input from guest lecturer Professor Ignacio Perez-Arriaga who will present on the Massachusetts Institute of Technology’s trail-blazing Utility of the Future project.