Toward universal energy access: Designing a new household electrification strategy for SA

June 30th, 2014, Published in Articles: EE Publishers, Articles: Energize, Featured: EE Publishers

 

Over the past two decades, South Africa has achieved a significant level of electrification: 76% of all households now have access to largely grid-connected power, up from 34% in 1994. Despite successes, the country’s Department of Energy (DoE) and its delivery partners face several barriers to electrifying the remaining backlog of 3,4-million households.

In May 2012, IFC began an 18-month project to help South Africa design a new strategy to achieve universal electricity access by 2025. This paper shares insights that may be useful in future major strategic efforts to provide infrastructure services in a way that is transformative. South Africa is “wall-to-wall” licensed, with the national vertically integrated utility (Eskom) covering about half (by population), and 187 municipalities responsible for electrifying the other half. Eskom is responsible for ensuring sufficient generation and transmission capacity to serve the entire country.

Municipalities buy power from Eskom which is sold on to household and commercial customers at a tariff approved by the regulator, NERSA (This is an important source of revenue for many municipalities). Also, three “off-grid concessionaires” (service providers) have installed over 50 000 SHS (solar home systems), primarily in the provinces of Eastern Cape and Kwa-Zulu Natal. By licensing arrangement, off-grid concessionaires must negotiate with Eskom and/or local municipalities for which households in their service areas receive SHS.

DOE’s Integrated National Electrification programme (INEP) has a mandate to drive the national electrification agenda, ensuring secure and sustainable provision of energy for socioeconomic development in South Africa. The country’s National Treasury finances electrification for poor communities, allocating about R4-billion to the program annually and channelling the funds through INEP, which in turn works closely with Eskom, municipalities, and concessionaires to budget proposed electrification projects and monitor their implementation. In electrification backlog areas, Treasury subsidises 80 – 100% of the capital costs of making grid connections; the balance is covered by local municipalities. Poor (or indigent) households do not contribute to connection costs and receive a monthly free basic electricity (FBE) subsidy to cover the first 50 kWh.

The capital costs of SHS are 80% subsidised by INEP; concessionaires front 20% of the capital, which is recovered through a one-off installation fee and monthly payments. SHS-connected households pay an installation fee of about R150 and a monthly service fee of about R70. They also receive a monthly FBE allowance of about R50 from municipalities to help cover costs; these payments are transferred directly from municipalities to the SHS concessionaires (Figs. 1 and 2.)

Fig. 1: Evolution of electrification in South Africa

Fig. 2: Declining electrification rate

 

Using this publicly financed, decentralised, multi-partner delivery model, the country has made tremendous progress in increasing access to electricity (Table 1).

• In 1994, just over 3-million of about 10-million total households in South Africa had access to electricity.
• Today, 76% of all households are electrified—and given the high number of informal settlements, this equals 82% of formal households.
• Over 5,5-million households have been connected to the grid.
• 52 000 homes benefit from 50–65 W-peak solar home systems (SHS)—one of the largest off-grid programs in the world.
• 12 000 schools and 357 clinics are grid-connected .
• 3 000 schools and 345 clinics in deep rural areas are solar -connected.

Table 1: Electrifying facts

While South Africa’s electrification trajectory has been remarkable by any standard, at the beginning of 2012, INEP was falling far short of its target of connecting 92% of formal households by 2014 —putting it on track to achieve universal electrification no earlier than 2035 (the global goal for universal access to modern energy is 2030).

Of the 3,4-million households that remain to be electrified, 2,2-million are in sparsely populated rural areas and 1,2-million are in urban informal settlements, often densely packed shacks that are unsafe to connect to the grid. The annual connection rate is declining: some 450 000 households were electrified in 2000, but by 2010 this number had dropped to about 200 000, and in 2012 INEP funded just under 150 000 new connections. Meanwhile, population growth means that approximately 200 000 more households must be electrified each year just to stay even. If INEP continues along this trajectory, the backlog will actually grow to 3,8-million households by 2025.

In May 2012, IFC began assisting South Africa in fast-tracking its connections, working with INEP and its partners to design and implement a fundamentally new approach to electrification planning and delivery. And over a 12-month period, IFC put in place a multidisciplinary implementation team to ensure that change actually happens.

Lesson 1: Get minister-level buy-in and build strong steering committee support for change

Given that this was the first time that INEP had suggested that it and other entities needed to do things differently, it was critical for the IFC to secure high-level political support and broad-based stakeholder buy-in while being sensitive to image considerations. Before commencing the project, it ensured that the minister of energy was personally committed to and involved in key decisions that would shape the strategy. Specifically, she guided definition of a minimum service level for off-grid systems, a date for reaching universal electrification, and potential sources of additional funding.

A steering committee, led by one of the ministry’s “top five” team, included representatives from key government departments and segments of the electrification space: National Treasury, Eskom, private sector concessionaires, the Department of Cooperative Governance and Traditional Affairs, the Department of Housing, national research institutions, selected municipalities (representing both small and large municipalities), and the Association of Municipal Electricity Undertakings. Each entity committed to participate in monthly steering committee meetings as well as in smaller working groups that would consider all relevant data and emerging analysis.

The result was strong political buy-in for a new approach. At the budget vote speech in May 2013, DoE presented to Parliament the electrification strategy recommendations, identifying them as being among its priorities for the coming decade. In June, the cabinet signed off on all recommendations, effectively committing the government to rolling out the change programs.

Lesson 2: Use robust data to analyse the issues and innovate ways of gathering it

We needed to remove any temptation to get caught up in emotions and, instead, draw people’s attention to reality — to numbers. Electrification may be the most emotional of South Africa’s basic service delivery imperatives. Political parties want to level historical inequalities, delivery entities are defensive about proper implementation of mandates, and the public increasingly protests the slowing rate of electrification — all combining to make it difficult to get agreement on what works, what doesn’t, and what needs to be done about it.

We focused on the facts — identifying key problem areas, using data to highlight issues, and quantifying their impact on the country’s electrification pathway. With the support of a management consulting firm, the IFC/INEP team started by generating credible figures to move the discussion from emotional to quantifiable.

Specifically, we ensured that there was agreement on the following issues:

Excessive connection costs

As INEP funds projects in deeper rural areas, grid connection costs are increasing. But they are still often 25 to 50% higher than they should be, driven by a lack of technical skills in rural municipalities and by fragmented procurement (Fig. 3).

Fig. 3: Dramatically rising connection costs

Under-utilisation of funds, and undelivered projects

While many municipalities complain that money is the problem, delivery entities are not spending funds that could be used to create more than 60 000 annual new connections (Fig. 4). This problem is not experienced uniformly.

Fig. 4: Unspent funds and incomplete projects

Two groups of municipalities face particular challenges in delivering funded projects: For metropolitan municipalities, delivery difficulties relate to the slow progress of formalisation in informal settlements and difficulties in coordinating with the Department of Human Settlements. Another group comprises 31 ‘‘high-backlog, low-delivery’’ municipalities that spend less than 20% of their annual funding yet will be responsible for making 8% of all future connections. In this segment, limited local coordination, technical capacity, and basic project management skills are holding up electrification projects (Fig. 5).

Fig. 5: Categorisation of municipalities

Lack of coordination and funding discipline

Suboptimal allocation processes often channel funds year after year to municipalities that lack the skills needed to spend them well. There is a need for national monitoring and coordination to align all electrification service providers.

Unsustainable off-grid model

SHS concessionaires are struggling to make their businesses work, facing two key barriers:

  • Lack of clarity on technical choices: Insufficient agreed planning rules guiding Eskom and municipalities for where to use grid versus SHS leads to a strong bias for grid connections, whatever the cost to the government.
  • Unprofitable business model: SHS companies have problems with municipalities paying FBE subsidies and with INEP subsidies that are renewed annually and highly prone to delays. As a result, three of the six original concessionaires have filed for bankruptcy, and no new concessions have been awarded in the last 11 years.

With our consultants, we used stakeholder working groups to review findings, generate agreement, and secure buy-in for recommendations to be fed into the final output of the project. To encourage participants to share their thoughts, we held “gallery walks” — where we placed posters with key analysis on the walls of a conference room, and members of working groups and the steering committee used post-its to anonymously register concerns and express agreement. Each comment was reviewed and addressed in the group setting to demonstrate that their ideas were taken into consideration “live”. IFC and INEP made their responses clear to all, further adding credibility to the analysis and decision-making process.

Lesson 3: Bring international experience to bear

Based on the experience of other countries that have successfully implemented large-scale electrification programs, we identified a number of important lessons to be considered in making recommendations, including:

Master planning

In most countries, a national least-cost grid/off-grid masterplan is commonly used to set rules and time frames for electrification rollout. It is often supplemented with clear guidelines for choosing particular technologies. (South Africa did not have such a plan; electrification priorities were determined at the local level without national aggregation.)

Off-grid

The most successful programs award legal concessions, carving out an exclusive service area for off-grid systems. They institute 10 – 20-year installation contracts and maintenance obligations that provide long-term stability and, where needed, subsidies to support the business and funding model. And they often involve local government in the decision to deploy off-grid technologies.

Delivery units

Electrification agencies are common, the most effective ones appearing to be backed by strong political support. They also are transparent, with targets, plans, responsibilities, and national as well as regional presence. They enjoy cross-departmental government collaboration and long-term government support for their programs (While INEP plays this role, it is not empowered to the extent needed to push partners to deliver).

Funding sources

Many successful electrification programs have drawn on broader funding sources, such as microfinance, passing a larger portion of costs on to the consumer in the form of a connection fee (amortised and paid off over time), and private sector funding.

We shared these lessons with the working groups and steering committee at key points during the process, explaining which aspects were relevant to South Africa and which ones were just interesting to know — to avoid giving the impression that IFC was taking a cookie-cutter approach to complex problems. Coordinating with the World Bank, IFC also arranged two study visits, to Peru and Brazil (countries with levels of economic development and growth aspirations similar to South Africa), to see utility-run rural SHS and urban “slum” electrification projects. This international experience served to open minds in a country that historically has had limited exposure to other ways of doing things, perhaps as a result of its relatively mature energy industry.

Lesson 4: Define a clear way forward: even if recommendations aren’t easy, simplify what needs to be done

The output of this project was specific, covering a new target date for achieving universal electrification, grid and off-grid technologies to be used, planning and delivery processes to be de-bottlenecked, additional funding requirements, and key activities to be undertaken by whom and when. The elements of a new National Household Electrification Strategy for South Africa were defined as follows:

Target date and minimum specified service level

  • By 2025, access to a minimum level of service (defined in off-grid areas as sufficient to power four to six high-quality lights, cellphone charging, 48 cm colour television, radio) for 97 to 98% of the population (This reflected potential challenges in connecting informal settlements whose formalisation falls under the remit of the Department of Human Settlements).
  • Electrify about 3,1-million households with a grid connection and provide SHS for about 300 000 households (based on our initial least-cost plan estimates).
  • Electrify urban informal households as they are formalised.
  • For remaining households in urban informal areas, electrify with the grid where it is safe to do so.

Improved planning and delivery processes — to increase efficiency and ensure that all funds are properly spent

  • Create a national least-cost electrification masterplan that will coordinate stakeholders and guide all INEP funding allocations (taking important political priorities into account).
  • Tighten and clarify funding criteria (such as alignment with historical delivery track record) and reporting requirements.
  • Heavily support delivery for high-backlog, low-delivery municipalities to implement projects.
  • Create an attractive environment for SHS service providers through revised off-grid contracts, improving service perception and monitoring off-grid service quality to avoid a sense of “us” and “them” for off-grid versus grid recipients.

Additional funding required to reach universal access by 2025

INEP will request an approximately additional R600-million annually from 2014/15 onward to make the 350 000 connections per year needed to meet the 2025 target. Scaling up the connection rate by 2015 will be critical for making a case that increased funding can be absorbed and will result in impact.

Eskom’s mandate broadened

Institute service-level agreements between Eskom and delivery-challenged municipalities to leverage the national utility’s project execution strength, helping speed connection rollout.

Lesson 5: Provide boots on the ground and extensive hand-holding to kick-start delivery

The project began with a 10-week, intensive consultant assignment to develop a draft electrification strategy, with the IFC task team leader as a fulltime team member. Once the strategy was drafted, IFC’s focus was on ensuring that INEP would rapidly begin doing things differently and demonstrate that a new way of working was possible. This “delivery” lasted 10 months, during which the IFC task team leader was embedded in INEP—to stay close to the client at the most fragile stages of implementing recommendations and show our commitment to the change agenda. We established a “war room” in the client’s office, with a designated client project manager and client “electrification delivery team.” We also instituted a set of rules that each client team member agreed to abide by, including committing to leading a specific work stream, feeling personally responsible for whether or not INEP succeeds in electrifying the country, and being obligated to dissent when there was disagreement.

We held weekly meetings with the full team, made daily contact with the INEP project manager, called in at random hours to check that team members were doing the work that had been promised, and spent more time than usual on a Blackberry responding to client messages related to operational challenges, big and small. In interactions with Eskom and when visiting municipalities, IFC and INEP were “the DOE team,” showing that IFC was as invested in change as INEP was. It also helped build INEP’s credibility among stakeholders who weren’t used to seeing the INEP team trying to move a big agenda in a short time.

Conclusion

While not without its challenges, IFC Advisory’s work with the government of South Africa on the new National Household Electrification Strategy demonstrates how a strategic intervention — rounded in strong analytics, tactical stakeholder engagement, and a commitment to onsite delivery support — can produce demonstrable results in a short time. Granted, many (potential) clients have long experience tackling difficult issues and often know their national landscape perhaps better than anyone else. However, an external perspective, a fresh approach, access to lessons from parts of the world that clients may not otherwise be exposed to in such depth, and objectivity in dealing with complex stakeholder views can bring significant value.

This intervention shows that there is room to shape policy not only in lower-income countries but also in more mature markets. South Africa is a middle-income country that in many ways has a highly sophisticated energy sector (for instance, in size Eskom is one of the top 10 utilities globally, runs several nuclear power plants, and has a new coal fleet that is among the largest in the world). Nevertheless, governments around the world struggle with defining sound policies and delivering results. With the right approach, IFC Advisory can be a strong sparring partner and supporter in finding new pathways to solving old problems.

Acknowledgement

This paper was originally written as a SmartLesson, and is republished with permission. SmartLessons is a World Bank Group knowledge management programme which enables development practitioners to share lessons learned in development operations. SmartLessons are short papers (2 to 4 pages), written by professionals for professionals that share first-hand, practical lessons that can be useful for colleagues working on similar projects/programmes or facing similar issues.  For more information, please visit http://smartlessons.ifc.org

Pepukaye Bardouille is a Senior Operations Officer with Clean Energy Advisory (within the Sustainable Business Advisory Department). She leads much of IFC’s global work on energy access, focusing on innovative, commercially viable business models to extend electricity and clean fuels to the base of the pyramid.

Contact Abiola Johnson, International Finance Corporation, aojohnson@ifc.org

Related Articles

  • Industrial label printer
  • Decline in storage costs “staggering”
  • AMEU president’s legacy awards programme 2019: Call for participation
  • Standard Bank withdraws funding of new coal IPP projects in SA
  • Measurement parameters for burner and boiler systems