Western Cape wants to pool municipal buying power

The Western Cape provincial government is considering establishing a company to buy electricity from independent power producers (IPPs) on behalf of participating municipalities – hoping to leverage their joint buying power to negotiate lower tariffs.

Cheaper electricity

According to Alwie Lester, special advisor to Western Cape Premier Alan Winde, the aim is to get cheaper electricity rather than mitigate load shedding. Even if renewable energy sources are combined with batteries and can supply electricity around the clock, the supply will still be vulnerable to load shedding if it is wheeled through the Eskom network.

Lester says the provincial government has appointed consultancy group PwC to assess the feasibility of the project. It is looking at different models, including establishing an electricity trader or a municipal special purpose vehicle.

Public sector trader

Energy regulator Nersa has so far licensed four traders in the country, but not all are operational yet.

The trading model allows the trader to enter into long-term power-purchase agreements (PPAs) with IPPs at a lower tariff than Eskom’s. The margin covers its operational cost and profit, but it must be big enough to still present some discount to potential end users.

Moneyweb has learnt that PwC is of the view that a public sector trader does not require a licence, but in preliminary discussions, Nersa did not agree with that. 

“When the feasibility study has been concluded and the municipalities are keen, we will develop the business model,” says Lester.

He expects that to be around the middle of next year.

Time will tell if there will be enough of a margin to cover the cost of the municipal entity and still provide cheaper electricity to the municipalities.

ALSO READ: Consumers paying the price as City of Cape Town snubs Nersa

Many unanswered questions

Another matter to consider, according to Lester, is whether it is necessary for participating municipalities to jointly form a geographical unit.

He says the concept is currently being workshopped with municipalities, and they are focusing on a few strong councils to pave the way. Cape Town, Stellenbosch and Saldanha Bay are among those being consulted.

Lester says the municipalities have many questions and are concerned about the tariffs. Other issues are whether municipalities that are not part of the project from the beginning will be allowed to join later and whether it will be possible for municipalities to withdraw.

ALSO READ: Nersa under fire for trying to hike power prices more, without public participation

Proposed models

When questioned about its position on the matter, the City of Cape Town said it is too early to discuss it publicly. Representatives of some of the other municipalities, who expressed their views on the condition of anonymity, are sceptical.

Since one of the proposed models is a company with the participating municipalities as shareholders, with their shareholding based on the minimum amount of electricity they agree to buy, they fear Cape Town will dominate. 

ALSO READ: Nersa can’t stop increased electricity tariffs 

A further concern is that should one of the shareholders experience financial difficulty, it may affect those with healthy finances.

One commented that electricity trading is extremely complex, and it can take years to conclude PPAs and eventually see the electrons flow. During this period, the entity will have to be funded.

The participating municipalities must weigh that risk against independently procuring and contracting with IPPs.

Drakenstein and Mossel Bay have also been named as possible participants. 

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.