by Linsey Dyer, 6th Wave Africa, and Chris Yelland, EE Business Intelligence
Eskom has recently announced plans to launch an innovative new product which is anticipated to contribute to enhanced electricity supply and provide increased customer choice.
The product, known as “virtual wheeling”, is currently at an advanced stage of development. Virtual wheeling is expected to enable industrial and commercial customers embedded within both Eskom and municipal networks to become customers of the growing number of electricity traders being licensed by the National Energy Regulator of South Africa, Nersa.
Other developments in Southern Africa’s electricity supply industry signal further increased electricity supply options through the establishment of electricity markets in the region. With these advances, electricity pricing is expected to become more rational and market-driven. In contrast, diversification and competition in the generation sector could lead to a more abundant and reliable electricity supply.
Limitations of traditional wheeling
Up to now, wheeling in South Africa has been a transaction between a single independent power producer (IPP) generating electricity into the Eskom grid, and a single customer, or off-taker, also connected to the Eskom grid, but located on a different site. Electricity supply is effected through the existing grid, with Eskom charging for use of its system, and crediting the account of the off-taker on a time-of-use basis for the energy supplied into the grid by the IPP.
Traditional one-to-one wheeling agreements typically have tenors of 20 years, which can be an onerous liability for the off-taker, thus inhibiting the uptake of wheeling arrangements. In addition, the electricity supply agreement between Eskom and the off-taker needs to be amended to account for wheeling credits, which can be a cumbersome, expensive and potentially time-consuming process.
Barring a few exceptions, wheeling to off-takers embedded in municipal distribution networks has not been possible. Municipalities generally do not have the necessary wheeling and use-of-system tariffs in place, nor the necessary billing, metering and data processing systems to accommodate time-of-use wheeling transactions across both Eskom and municipal networks, to a customer supplied by the municipality.
How virtual wheeling addresses the limitations
At a recent online event hosted by EE Business Intelligence on 17 August 2023, Onicah Rantwane, Eskom’s senior advisor – electricity pricing, announced the impending rollout of virtual wheeling.
Virtual wheeling allows licensed third-party traders to contract with one or more IPPs for part or all of the IPPs’ energy generated into the Eskom grid. The trader then effectively sells parts of its contracted energy from the IPPs to a basket of customers, with shorter off-take terms than the trader’s power purchase agreements (PPAs) with the IPPs.
Enabling wheeling from multiple generators to multiple off-takers (i.e., many-to-many wheeling) thus addresses one of the major limitations of traditional wheeling, which could previously only cope with one-to-one wheeling arrangements.
In a virtual wheeling arrangement, the customer get its normal electricity supply bill as usual from the electricity distributor (Eskom or municipality), and separately gets a rebate (or excess bill) from the trader. The municipal electricity distributor, therefore, experiences no reduction in its revenue stream.
No changes in the customer’s municipal electricity supply contract are required, nor are any changes required to the municipal electricity billing system, or the customer’s municipal electricity meter. However, the trader will need to install its own time-of-use (TOU) meter (with data communication capabilities) at their customer’s premises.
All of this decouples wheeling from the normal retail billing process and makes many-to-many wheeling transactions easy to administer.
The benefits of virtual wheeling
Virtual wheeling helps a customer reduce its carbon footprint by bringing new or increased low-carbon, green electricity to the grid. In addition, by increasing its own diversity of supply from lower-cost, renewable energy, a customer can hedge at least part of its electricity supply against electricity price increases from Eskom. Finally, virtual wheeling gives the customer the option of significantly reducing the term of a PPA as compared to traditional one-to-one wheeling arrangements.
By unlocking investments in new generation capacity by IPPs at no cost to Eskom or the fiscus, and by reducing barriers to the wheeling of electricity, virtual wheeling has a knock-on effect of increasing security of supply and reducing load shedding caused by energy shortages.
However virtual wheeling (and indeed traditional wheeling) does not change the risk to security of supply in respect of the “wires” business of electricity supply, because this remains in the hands of Eskom and municipal distributors.
The benefits of traders in the electricity supply industry include improved competition and efficiency, better matching of customers and their electricity demand with supplier offerings, improved access to renewable energy options, and opportunities for IPPs to sell surplus generation which may otherwise go to waste as a result of curtailment.
Will virtual wheeling accelerate the demise of Eskom?
This is considered unlikely.
As indicated above, the more new generation that comes to the grid from non-Eskom sources, the less the burden on Eskom – a burden the electricity utility is currently unable to meet, and very unlikely to be able to meet going forward as units in its old coal-fired power stations are shut down. Beyond Medupi and Kusile (whose construction contracts were signed 15 years ago), there is no new capacity planned from Eskom itself.
Several studies indicate that by 2033 South Africa will require about 60 GW of new renewable energy, which the private sector is best placed to deliver. The advent of electric vehicles and hydrogen markets is likely to further drive rapid growth in electricity demand over the coming decades.
Market liberalisation is not happening only in South Africa; it is happening now in the rest of the SADC region, and indeed globally. There are growing numbers of traders being licensed by national regulators in the region, and the benefits of regional energy markets are numerous.
With improved market efficiency and transparency, supply and demand dynamics will determine market prices. A market will support the integration of renewable energy by valuing its contribution to the grid. Through the pooling of energy resources and sharing of reserves, market participants will experience enhanced security of supply and improved power system stability.
Through optimisation of grid and different energy resources, the liberalised market would facilitate the optimal utilisation and integration of diverse energy resources and technologies from across the region, including wind, solar, battery energy storage, pumped water storage and hydropower. Markets also foster innovation, which in this case would be in energy technologies, business models and services.
The shift towards an electricity market is seen as a potential game-changer for the region.
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