DECLARATION 2- PUBLICATIONS
2.7 Leveraging policy initiatives
This section gives an overview on how policies have impacted on the operations of the power sector, and articulates how best practice AM strategies can leverage policy direction in the sector.
In the early 2000, deregulation of electric power utilities brought a rethink in the operation of the utilities in the world, which saw almost all of them moving from vertical integration to decentralized, profit centered institutions [2], [13]. Under the deregulated electricity market, the power utilities are faced with strict regulatory compliance requirements with regard to the quality of supply and risk mitigation (reduction of customer damage functions), failure of which could result in severe legal and economic consequences [2]. However, the state of affairs has been rather different in Africa. Policies governing the energy sector in most African countries are very similar and are predominantly dictated by the historical background.
Historically, African electric utilities were state owned, and operated as vertically integrated companies, performing the role of generation, transmission and distribution [8], [85]. Policy formulation, administration and regulation were often carried out by one government ministry, with uniform national tariffs applied to consumers with the same load profiles. This is still the case with most African power utilities; and it is also particularly true for South Africa (the second largest economy in Africa and one of the emerging world economies) which, historically, has had electricity supply centralized with the bulk of power generated, transmitted and distributed by Eskom (the wholly state owned and largest utility in South Africa) [85]. Cross-border interconnections and power exchange in Africa began in the early 1950s when some North African countries first linked their electricity networks to exchange power in emergency cases which was followed by linking Congo DRC to Zambia [8]. Later on, South Africa was interconnected with Zimbabwe and Mozambique. Energy policy for South Africa hinges on the 1998 White Paper on Energy which focuses on the security of supply through diversity, increasing access to affordable energy, managing the energy-related environmental impacts, and improving energy governance [61].
The 1998 policy White paper, proposed to rationalize distribution through creation of six Regional Electricity Distributors (REDs) to serve the whole country. Municipalities were to group
their distribution assets and obtain shares in each RED proportional to those assets while Eskom was to hand over its distribution assets, a move that later Eskom objected, arguing it should also have shares in the REDs [85]. Later on, Electricity Distribution Industry Blueprint report recommended that the South African Government should have power to restrict changes in ownership for five years following the establishment of the REDs. In 2004, the Government of South Africa set up the Electricity Distribution Industry (EDI) Holding Company to implement the plan for the six REDs; and in July 2005, set up the first RED in the Western Cape, which was short lived [86]. According to stakeholders, key issues hindering the setting up of the REDs were lack of planning and specificity in setting up the REDs, including lack of clarity on unresolved issues such as shareholding, asset transfer and levies. Eskom and twelve largest municipalities account for more than 90% of the electricity distribution industry and these municipalities also influence the adoption of policies, practices and technologies in the power sector [86].
Globally, there are three approaches to policy issues, namely: political, economic and technical [87]. The political orientation views problem solving in terms of value conflicts, organizational change and modifications in power relations. The economic approach treats energy as a commodity concerned with the use of various sanctions and incentives such as price and investment. The technical approach involves bringing scientific and engineering expertise to help solve energy problems [87, pp.85-92]. The economic approach also dictates the way utilities rethink their strategies regarding supply of electric power in Africa, which in turn affects the risk that firms are ready to take as well as access of electric power to the poor people. For example, in South Africa, one of the greatest setbacks to the creation of the REDs and Independent Power Producers (IPPs) has rested on profitability. The policy direction for South Africa is to supply cheap and affordable electricity which means heavy government subsidies [61], [85]. Potential IPPs fail to get into production or distribution of electricity because the tariffs are too low to make profits, which is perceived as a risk. This scenario is very different from the general global trend where the market is deregulated and policies pursued by the power utilities are driven by profitability, coupled by penalties (set by regulatory bodies) for failure to meet the relevant levels of service [2].
The question that follows the above background concerns recoupment of the investment in the view of the low electricity tariffs. The high and medium income population as well as industries located in the city distribution networks normally bear the cost of that cheap electricity in South Africa [85]. The subsidizing of the rates by the city distribution utilities usually creates some rivalry between Eskom and the municipalities for rights of distribution to the users. Overall, Eskom accounts for 40% of customers but 60% of the value of sales. Furthermore, Eskom, in its New-build policy, embarked on construction of new power generating plants and bringing back mothballed
generating stations into service and mounted an active demand side management (DSM) [85].
Despite Eskom’s new capacity and more active demand management for South Africa, a Medium Term Risk Mitigation Plan (MTRM) assumes high demand hence anticipates short supplies of electric power through to 2016. In view of the foregoing challenges, it is envisaged that reliability analysis and risk mitigation approaches will play a vital role in providing a strategic direction in physical AM policy initiatives in future, as inferred from [6].
Policies for sustainable energy supply have not emphasized on the advancement of technical approaches that bring scientific and engineering expertise to bear on energy problems through asset risk profile trending. Much focus has been placed on DSM [61], which is a form of the non-asset type of strategy aimed at delaying investments in new power plants. Generally, there is neither imperative nor incentive for organizations to take a uniform stand on the implementation of sustainable, risk-based management strategies. This thesis attempts to demonstrate that in order to lobby support from policy makers (or energy stakeholders in general) on the technical innovations, such as component risk trending, there must be evidence of the tangible benefits that can be realized from the innovations. These benefits can be in the form of cost or energy savings. This can provide the imperative for change, as demonstrated by a Turkish study in [88].
The Turkish study was conducted by the National Energy Conservation Centre (NECC) in Turkey. It showed that what drives the imperative for energy efficient systems and technologies is the quantification of the great energy saving potentials that can reduce resource consumption and save money. The NECC study was carried out within the Directorate of Electrical power Resources Survey Administration (called EIE in Turkey). It concluded that the Turkish industrial sector had an annual energy saving potential of approximately 30%, which brought the imperative for establishing a regulation on industrial energy efficiency in 1995.
It is believed that the electricity distribution industry has energy saving potential that would significantly defer new investment in power generators thereby reducing the operating (business) risk. Losses due to the inefficiencies, either because of poor maintenance or wrong choice of technology (or strategy), can lead to increased resource or fuel consumption. This project (research) endeavors to explore the energy saving potential, through the risk mitigation measures, for economic advancement of the power distribution companies. Indirectly, this project works towards increasing access to electricity that will benefit consumers (as they will have to pay less for the kWh), and will reduce the detrimental effects on the environment. For example, in Africa, deforestation occurs due to over-dependence on biomass sources of energy and is a major cause of environmental degradation. For instance, in Malawi, deforestation occurs as people process the firewood into charcoal to supply it to 89% of the population of 15 million people; the processing of
the charcoal mostly uses traditional earth kilns, a technology known for wastefulness and inefficiency [89]. The charcoal industry is worth R231.2 million [≈US$ 23.12 million] per year. It is estimated that 6.08 million standard bags (50 kg bags) of charcoal are used in four largest urban areas in Malawi requiring 1.4 million cubic meters of wood representing 15, 000 hectares of forestland cut per year; of which 60% is from forest reserves and national parks, 40% from customary land and 2% enters Malawi from Mozambique [89]. If half of the population that depends on charcoal gets access to affordable electricity, about R115 million can be saved per year, translating to about R 1.2 billion per decade (in Malawi alone), a saving that can create tangible investment and create more jobs.
If the benefits of component risk trending (advanced in this thesis) can be computed in a similar fashion to the Turkish case study or the Malawian charcoal case study, it would provide leverage for lobbying regulatory institutions to press for reforms in the way electric power distribution firms manage their infrastructure asset risks.