Major municipality in South Africa dumping Eskom

The Midvaal municipality in Gauteng is turning to a 20-year public-private partnership (PPP) for electricity procurement, as it seeks a way to outsource its power supply away from Eskom.

According to the City Press, the municipality is turning to the private sector as part of a bid to improve infrastructure and secure a stable electricity supply.

The municipality put out a notice about the PPP back in September, with briefings taking place in October.

This presents a significant problem for the national utility as Midvaal is one of the only municipalities that is not in arrears with the group, and is one of the most financially stable in the country.

If Eskom loses one of its more reliable paying customers, it risks growing debt problems as more defaulting municipalities remain.

The notional power utility already has a mountain of debt owed to it by municipalities, reaching close to R90 billion at last reporting.

Most recently, the utility had to threaten cutting power supply to the City of Johannesburg to get the municipality – supposedly the richest in the country – to cover its unpaid bills.

Previously, Eskom has had to take legal action against municipalities like the City of Tshwane, or take over power supply at smaller municipalities that could not pay their bills.

The government has warned that, if not addressed, municipal debt owed to Eskom could reach R200 billion over the next few years, creating a massive crisis for the economy.

It also exacerbates a so-called ‘death spiral’ for Eskom, where non-payment by customers like municipalities leads to revenue shortfalls which have to be recovered through higher tariffs.

Higher tariffs, in turn, lead to higher levels of default.

Eskom has already applied for multiple years of double-digit price increases through to 2027 which municipalities and customers are pushing back against, saying they are simply not affordable.

Energy regulator Nersa will be holding public briefings on the pricing over December.

Midvaal’s move

According to Midvaal, the objective of turning to a private supplier is to maintain the existing net electricity revenue for the municipality while shifting capital funding risk, revenue risk and technology risk to the PPP company.

This will allow for the benefits of PPP efficiency and effectiveness in electricity service provision, improving electricity supply, and giving broader options for supply, countering risks of things like load shedding.

Notably, it said it wants to give the best possible value for residents, outside of a monopoly.

The municipality said that the PPP company will have to assume control, possession and use of its existing electricity distribution, and has to be a ring-fenced special purpose company whose sole purpose is implementing the deal.

It has to be licenced by Nersa and operate as a stand-alone system, not using shared assets or resources.

It may only engage in ancillary business activities that are associated with and complimentary to its electricity distribution services and that are approved by the municipality.

The municipality told the City Press that it will still hold the distribution licence, with the PPP company being its acting agent.

As such, the winning bidder will receive grant support from the municipality through what it receives from government in the budget.

Read: Big changes for prepaid and solar users in South Africa in Eskom tariff overhaul