Access to PV for all: using financial incentives funded by high income customers
Sep 23, 2016
Municipalities have often expressed concerns about how equitable small scale embedded generation (SSEG) is. As a result, some municipalities have been hesitant to promote the installation of solar PV and other systems.
In this opinion piece, Jack Radmore, Energy Analyst at GreenCape, argues that it is possible to create equity in solar PV. He argues that a centralised ring-fenced SSEG fund can pay for the financial incentives (such as feed-in tariffs) needed to ensure that private capital is funnelled into SSEG. This fund, created using tariff increases targeted at specific high-income customers, can also be used to support electricity subsidies that will protect low income customers and/or potentially bankroll continued electrification of low income areas.
Using private funding to support the uptake of SSEG
In the context of climate change and a shifting energy landscape, developing nations, including South Africa, face unique challenges and opportunities. Rising electricity prices, a drop in renewable energy prices and the economic impact of the electricity supply crisis, have created a large demand for viable small scale renewable energy sources.
In this context, how does Government leverage required private funding for small scale embedded generation (SSEG), protect low income customers from resulting tariff increases and distribute the generated SSEG benefits equitably to all South Africans?
Products within this SSEG ‘classification’ are constantly being created and improved, with numerous systems available for use by South African electricity customers. However, none are as applicable to the current South African context, in terms of price, flexibility, economic development potential and environmental sustainability, as solar photovoltaic systems (PV). The growing uptake of solar PV has numerous benefits for individual customers, local governments and South Africa. These benefits include electricity price and supply security based on a diversified energy mix, lower carbon dioxide emissions and the creation of both skilled and unskilled jobs.
However, with the focus still firmly placed on coal-fired generation and more recently nuclear power, there is a need to leverage private funding to support the uptake of SSEG in South Africa. Direct financial incentives and feed-in tariffs are needed to ensure that private capital is funnelled into SSEG. Essentially, all customers who can afford to install SSEG must be incentivised to invest in an installation.
The drawbacks of current incentive systems
That all said, this means that financial incentives are being pushed into a (high income) market segment that can already afford solar PV. Most benefits stemming from the uptake of SSEG are therefore being received by wealthy customers – which is exactly why municipalities are concerned about equity.
Government will be providing financial incentives for the wealthy to continue to earn money and receive benefits based on their financial standing.The funding used to generate financial incentives will most likely be sourced through electricity tariff increases borne by all electricity customers, including the poor. This means that low income customers are carrying the rising costs of ‘subsidising’ the uptake of SSEG for wealthy customers. All of these eventualities associated with the uptake of SSEG, under the current system, need to be avoided if poor South Africans are to benefit.
A ring-fenced SSEG fund – a local or national response?
A potential approach to addressing these challenges, is through a ring-fenced SSEG fund that is funded using an embedded generation charge built into high income ‘non-PV’ and PV customers’ electricity tariffs. In this way, only electricity customers who can afford to install PV will contribute to this ‘SSEG fund’. The fund can then be used to pay for the incentives (rewards for high-income customers who install SSEG), protect low income customers from tariff increases and potentially even support continued electrification. This intervention can be approached on either a local or national scale.
Why a local response is problematic
If this intervention is approached on a local scale then each municipality will manage its own local ring-fenced SSEG fund. This approach will allow each municipality to accurately determine the right customers to contribute to the SSEG fund through targeted tariff increases. This will significantly increase the accuracy and impact of this intervention. Each municipality will be able to tailor the program to suit its specific situation.
However, there are a number of drawbacks:
- It is a large administrative and capacity burden, and smaller municipalities will need considerable assistance.
- With more SSEG systems being installed in a municipality, more subsidies will be needed, even though subsidies will be drawn from a SSEG fund that is being generated by a constantly decreasing number of high income ‘non-SSEG customers’.
- Municipalities that have a very low or no SSEG uptake will get a ‘free ride’, creating few or no incentives for municipal participation. The municipality will benefit from the national benefits of growth in SSEG (economic development, diversified energy mix, environmental sustainability) while having to make little or no contribution.
Benefits of a national response
A national approach will mean that there needs to be a national ring-fenced SSEG fund, managed by a central agency like Prof Dr Tobias Bischof-Niemz’s NETFIT central purchaser. Much like the local fund, the national fund will be created through an SSEG charge built into tariffs. However, the tariff increase will be implemented on Eskom tariffs paid by all municipalities. Each municipality will receive its fair share of the national SSEG fund, based on the penetration of SSEG in the municipality (i.e. its contribution to national renewable energy goals). This national subsidy would then be used to ensure equity within each municipality’s PV market. Equity will mean tariff incentives, protection of low income customers from rate hikes, support for low income community-based SSEG projects, continued traditional electrification, and roll out of municipal-owned SSEG projects).
What are the benefits of such an approach? It will:
- Allow for national control and transparency of a properly ring-fenced SSEG fund.
- Circumvent the potential challenges experienced in the local approach.
- Share benefits nationally and allow the costs associated with the tariff increase to be shared across the country and not just within those municipalities with a large uptake of SSEG.
- Allow the pool of money generated to be equitably spread across all areas of South Africa to ensure the greatest accuracy and impact of this intervention.
However, the added difficulty of a central agency (like the NETFIT concept) adds to the complexity of this intervention. Closely linked to this challenge, is that a national approach (through higher Eskom tariffs) also makes it difficult to accurately target end-use customers that should be paying the increased tariff rate.
Whether local or national, a ring-fenced SSEG fund will ensure that all South Africans benefit from the growth of the SSEG market. The fund should be used to incentivise SSEG installations (through feed-in tariffs), protect indigent customers and bankroll other energy supply security interventions. This approach will safeguard equity in the PV market and ensure that all electricity customers and local governments across the country benefit equally.
 It must be ensured that the fixed costs associated with maintaining and operating the network are recovered through appropriate network charges. This cost needs to be implemented across all consumers. This is done to avoid undue benefits from tariff switching
 The level of uptake or penetration can be controlled by limiting the number of customers that can get the SSEG tariff.
 The CSIR’s Prof Dr Tobias Bischof-Niemz therefore developed a “Central Power Purchasing Agency” (CPPA) concept in which electricity distributors are made financially indifferent to embedded PV, and in which the business case for the PV owner is de-risked at the same time. CPPA is a concept where a government entity with nationwide reach compensates municipalities financially for all lost gross margins due to energy from embedded PV that is self-consumed on site. The CPPA makes a standard offer to the PV owner to pay a guaranteed Feed-in Tariff (FIT). A higher NETFIT can be paid, depending on the level of local components used (up to 0.85 R/kWh). The NETFIT can be adjusted for new installations to steer the size of the embedded PV market towards a target.
 Potential challenges of the local approach are the over penetration of SSEG within a municipality or a municipality taking a ‘free ride’.
 A local municipal tariff policy will need to be drafted to guide how this increase borne by municipalities is then distributed to the correct customer classification.