The adoption of solar energy in South Africa has witnessed a swift upswing, leading to a decrease in the demand for energy from the conventional grid. Consequently, this decline in energy demand has resulted in diminished revenue generation for local municipalities through electricity sales.
Although this poses a challenge for municipalities, it also presents an opportunity for revenue recovery if appropriate policies are established.
The surge in solar installations across South Africa is encroaching on the revenue streams that municipalities traditionally derive from electricity sales.
Revenue from electricity sales serves as a vital source of income for municipalities, playing a crucial role in facilitating bill payments and service provisions.
Recent data released by Eskom has unveiled that the rapid embrace of solar energy within South Africa has led to a reduction in electricity demand from the grid, thereby causing a decline in electricity sales.
Eskom’s estimations indicate the extent of “rooftop solar” generation by comparing electricity demand at the substation level on days with varying cloud cover. These comparisons were made under consistent conditions, apart from cloud cover variations.
According to Eskom’s assessments, uncontracted solar panels in South Africa generated a maximum of 4,411.50 megawatts of electricity. This significant increase in solar output, which is not tied to Eskom contracts, has risen by almost 350% within a span of 16 months, indicating the swift adoption of solar energy by households and businesses.
Additionally, the proliferation of solar panel installations is evident in the import data shared on the platform formerly known as Twitter, now referred to as X. This data, posted by Gaylor Montmasson-Clair, a senior economist at the independent think tank Trade and Industrial Policy Strategies, indicates that the first half of 2023 saw South Africa importing solar panels worth R12 billion—more than double the expenditure on solar imports in the entirety of 2022.
To boost solar adoption, South Africa has also put in place a range of solar incentives.
Revenue Challenges
The rapid uptake of small-scale embedded generation (SSEG) is beginning to impact municipal revenue, notes Matthew Cruise, an energy expert at Hohm Energy.
Cruise explains that the increased SSEG output reduces the demand for grid-based electricity, subsequently leading to reduced revenue generation from electricity sales for municipalities.
Chris Gower, the revenue protection manager at Buffalo City Metropolitan Municipality (BCMM), estimates that BCMM is losing approximately R350 million in electricity sales revenue.
During the annual convention of the Southern Africa Revenue Protection Association, Gower stated that a recent cost-of-supply study conducted by BCMM indicated declining electricity sales within the metro. Moreover, BCMM’s tariffs were not reflective of costs, meaning that providing electricity services costs the metro more than it can recuperate from tariffs.
This trend of declining electricity sales is exacerbated by load shedding and was not originally considered in the cost-of-supply study. Gower notes that factoring in the revenue loss due to SSEG, BCMM’s budget is running a deficit of around R800 million for the current financial year.
Gower emphasizes the need for urgent intervention and mentions that tariff redesign is underway to address the revenue shortfall. BCMM is also taking steps to reduce internal costs, including trimming down staff expenses and cutting excessive overtime payments. Additionally, the municipality plans to curtail bulk purchases from Eskom due to reduced electricity demand.
However, the inability to collect revenue from electricity sales will adversely affect municipalities’ ability to fund development projects and meet their financial obligations, which in turn will impact service delivery.
Shifting Landscape of Electricity Revenue
The primary source of income for municipalities is the revenue generated from electricity and water sales.
The Medium Term Revenue and Expenditure Framework (MTREF) for 2022/23, released by the National Treasury, offers insights into the significant expenses and revenue sources for South African municipalities.
Service charges were projected to contribute nearly half of the R487 billion anticipated revenue for all municipalities in 2022/2023.
Although the MTREF suggests that revenue from service charges is poised to increase in the coming years, the potential influence of SSEG on electricity sales revenue prompts a reevaluation. Gower notes that electricity services are no longer the “golden egg” they once were.
Proposed Solutions
Matthew Cruise suggests that the implementation of smart meters and feed-in tariffs could transform the revenue challenge posed by SSEG into an opportunity for municipalities to bolster their income.
Feed-in tariffs allow solar energy producers to be compensated for supplying excess electricity back to the grid. This surplus electricity can then be sold to other customers by municipalities, generating profits.
Cruise highlights that appropriately priced feed-in tariffs incentivize the adoption of smart meters. Additionally, the introduction of smart meters helps prevent customers from tampering with or bypassing their meters.
As municipalities begin to experience the impact of SSEG on their revenue, the urgency to establish feed-in tariff policies could rise, driven by the financial implications. Cruise suggests that this financial pressure could serve as a motivating factor for municipalities.
In conclusion, the rapid adoption of solar energy in South Africa has disrupted traditional revenue streams for municipalities. While this presents a challenge, strategic policies such as smart meters and feed-in tariffs could enable municipalities to transform this challenge into an opportunity for revenue growth.
