The National Energy Regulator of South Africa (NERSA) is refining its focus on empowering municipalities to play a more significant role in the country’s electricity distribution sector. With municipalities already responsible for distributing 60% of South Africa's electricity – including energy purchased from independent power producers (IPPs) – NERSA is aiming to solidify their role through enhanced regulatory support and licensing.
Speaking at the 70th Annual Convention of the Association of Municipal Electricity Utilities in Mpumalanga from October 20-23, Welile Mkize, Acting Executive Manager for Regulation at NERSA, said the energy regulator needs to ensure municipalities are licensed and authorised to operate effectively in this space. “As the regulator, we need to define the role of municipalities going forward. We must license them so that they are enabled to fulfil their role with confidence, knowing they are duly authorised to act in the electricity distribution sector. Eskom currently distributes 40% of electricity to customers while municipalities distribute 60%, including electricity they buy from IPPs, making their role undeniably significant.”
Sustainable municipal distribution
This involves defining municipalities’ roles and ensuring they can operate sustainably while addressing ongoing challenges such as municipal debt and infrastructure maintenance.
Municipalities’ reliance on purchasing bulk electricity from Eskom is no longer sustainable. With many municipalities struggling to meet their financial obligations to Eskom – resulting in growing debt – the situation has become critical, Mkize said. “One potential solution is to transition the industry towards a market-based model with all distributors, including municipalities, purchasing electricity from the market. This would require municipalities to have the financial capacity to buy electricity upfront, which is a significant shift from the current debt-based model.”
The reforms NERSA is pursuing will not only ensure municipalities are properly licensed but will also address the sustainability of municipal distribution businesses, Mkize said. This includes exploring new revenue models that can support their electricity distribution activities – particularly relevant given the unsustainable nature of their current business models. “Municipalities collectively owe about R78 billion to Eskom – much of this is irrecoverable. It is clear that we cannot continue on this trajectory. Municipalities need other revenue-generating opportunities beyond electricity distribution to maintain financial health.”
Infrastructure and maintenance deficits
In addition to licensing and financial sustainability, NERSA is also focused on strengthening municipalities’ ability to manage and maintain their electricity infrastructure. Technical audits show that many municipalities underspend on critical infrastructure repairs and maintenance, leading to deterioration and costly emergency repairs. “Many municipalities are facing serious challenges due to infrastructure that has been neglected for years. The underspending on repairs and maintenance leads to equipment failures such as substations blowing up and transformers needing urgent replacement. Urbanisation is only exacerbating this problem as illegal electricity connections further stress already overburdened systems,” Mkize said.
Some cities are losing approximately R2 billion annually to these challenges with half of those losses from non-technical issues, including theft and illegal connections, he added.
NERSA is working on providing municipalities with financial models to help them manage the complexities of electricity distribution. These models will consider factors such as increasing use of embedded generation, the number of indigent customers and the levels of tariffs. “Many municipalities are already facing volumetric risk with a reduction in electricity use due to energy efficiency or embedded generation affecting their ability to recover costs, including network and demand charges. We are working on creating tools that allow municipalities to make long-term, strategic decisions to ensure sustainability,” Mkize said.
He also provided an update on the Metro Trading Services Programme partnership between NERSA and the World Bank. This programme is designed to increase the financial resilience of municipalities by improving access to finance and sustainable funding for essential services, including electricity distribution.
Compliance and cost-reflective tariffs
As part of its reforms, NERSA is also revisiting its compliance framework to ensure municipalities meet their licensing conditions. Mkize stressed that NERSA will not tolerate non-compliance, particularly concerning tariff setting and cost of supply studies. “In the introductory phase of the 2024-2025 tariff review, about 102 municipalities failed to provide their cost of supply studies as required. This will no longer be accepted moving forward.”
NERSA is developing a standardised methodology for cost-of-supply studies to streamline submissions and improve its ability to assess them accurately. Mkize said the goal is to move towards cost-reflective tariffs. While many South Africans feel tariffs are high, NERSA’s studies show, in some cases, tariffs have been set below cost-reflective levels. “This will need to be managed carefully to balance the socio-economic realities of the country.”
