Municipal Community of Practice on South African energy scenarios

We’re excited to share our work on developing energy scenarios to enable municipal decision making, carried out with National Treasury’s Cities Support Programme (CSP). A municipal Community of Practice on Thursday 14^th March 2024 yielded excellent points and deliberated the multiple challenges of municipal participation in energy generation.

Belynda Petrie presented four scenarios – along with their implications – to a group of ~50 stakeholders. The scenarios show that municipalities can improve their revenue models, meet energy demands, and support indigent communities if they participate in renewable energy generation. Letsepa Pakkies of National Treasury and Dominic Milazi from the World Bank, reflected on the scenarios, observing that a scenario of Productive Collaboration is where we need to be. Critically, interventions are needed to address energy poverty, and Treasury is reviewing the fiscal framework within the confines of associated legalities. Treasury also expressed commitment to ensuring that municipalities are well-positioned to participate. There are however hard municipal constraints, including internal capacities, and the ability of the consumer to pay for energy services. The World Bank further highlighted that the scenarios raise an excellent idea around ‘tipping points’ – “if this point had been made 10 years ago, we would not be where we are now”.

Participants emphasised the culture of nonpayment; the municipal revenue model cannot work if the cost base is not in place. Concerns around the regulatory environment led to the Department of Energy making it clear that municipalities need a ministerial Determination to license procured generation capacity, and “that this will never change”. The issue of cost-reflective tariffs, a key scenario consideration, is currently being addressed by key policymakers. The Electricity Regulations Act is also under review to “… allow all generators to sell into the market”, noting that municipalities must “sweat their assets” and that municipalities must provide business plans.

The CSP head raised how important it is to ensure that municipalities don’t lose their business relevance AND that the poor aren’t compromised. SALGA noted that South Africa is unique – reforms must be intentional and context-specific. Other panelists (Sustainable Energy Africa, and City of Joburg) pointed out that the modular and disruptive nature of renewable energy opens the space for local government. Municipalities will not always be able to compete with the private sector on the IPP model, but could manage grid load, for example through batteries. 20-year contracts should be avoided – they benefit the private sector over municipalities – and there is no blueprint for addressing municipal participation in energy generation. “No other country has done this in a situation where ~ 40% of the market cannot afford to buy electricity”. Municipalities have the advantage of owning distribution rights and do not have to own the means of production. Illegal connections must however be solved, and the electricity tariff must be fair.

Stakeholders agreed that this is all about collaboration and agreed with the framing of the four scenarios. The energy industry is a business and policy must be clear and supportive.