Cape Town residential electricity tariff; how is it impacted by the installation of a solar PV system

A question came up from a solar PV installer in a forum session that I attended the other day that demonstrated that even those in the industry don’t really understand some of the challenges facing the City of CT with regards to tariff structure.  The question was something along the lines of “Why has the City come up with an embedded generation tariff with a daily charge that can be more expensive than the residential tariff – thereby disincentivising people to install solar PV systems on their home?” I’m paraphrasing.

To start with the basics:

There are two main tariff types for Cape Town households – Domestic and Lifeline. The intention of the Lifeline tariff is to provide low income households or, as it is currently set up, ‘low consumption’ households with free basic electricity (between 25kWh and 60kWh).  Some mid- or high-income households currently qualify, because they have a low monthly average consumption, but the City is planning to address this by including a maximum cap on the value of your property that qualifies (R300,000).

Let’s assume then that if you’re thinking about installing a PV system, you’re on Domestic, and not on lifeline.  If you can afford a PV system you’re probably not the target market for the free electricity programme anyway.

The VAT inclusive domestic tariff is currently set up like this, and will be increasing as of the 1^st July.

• 0-600kWh – 153.63c/kWh

• 600kWh – 186.81c/kWh

This is called an inclining block tariff (IBT) and there used to be a lot more blocks to it, instead of just two.  The more you use, the more expensive each kWh of electricity becomes.

There’s a lot written about IBT’s, and they’re designed to protect low-income households from increasing electricity tariffs.  They effectively represent a cross subsidy of electricity by the middle- and high-income households.

It’s not my intention to discuss the merits and demerits of this tariff structure in this post.

In response to increasing pressure for the City to allow installations of small scale embedded generators (which for the purpose of this post we’ll assume are all solar PV installations), the City developed the Residential Small Scale Embedded Generation tariff.

This tariff, for the first time, introduces a fixed daily fee which is payable, regardless of how much electricity you consume.  It is set up like this (VAT inclusive):

• Service charge – R13.03/day
• Energy charge – consumption – 109.17c/kWh
• Energy charge – generation – 56.68c/kWh

What this means is that, for a 30 day month, you’d pay R390.90 in service fees, regardless of how much electricity you consumed or generated from your system.  However, you’ll notice that your marginal consumption tariff is around 2/3 of what you’d pay if you were a normal residential customer (block 1).  They have split out the fixed costs from the variable costs.

The City also does not allow you to sell them more than you buy, so you can never be a net exporter.  This will likely change in the future, but right now it’s in response to NERSA requiring you to have a generation licence if you sell power to another person, and this is the City’s way of getting around this.

Why has the City set it up like this?

Having the grid available to export electricity into, and effectively using as a battery, costs someone money.  There are maintenance or upgrading costs that need to be accounted for. This daily service charge is the City’s attempt to recoup these costs regardless of how much electricity you use.  This helps to separate the cost of the two services the City is providing; namely the provision of an electrical network, and the delivery of electricity in kWh’s.

If there was no service charge, who would pay for the grid? Ultimately, it would be people who did not have any embedded generation.  And who would that be?  Those who couldn’t afford it.  Which would effectively be a cross subsidy in the wrong direction.

And before you say ‘but it’s green energy, so should have a premium payable,’ that argument is nice for Germany, where people can afford to choose whether they’d like to have an installation on their roof.  It doesn’t work here.  And the recent trends in PV prices mean it doesn’t need to work here for PV to take off.

Commercial tariffs already have a daily service charge, so are already set up to slip nicely into an embedded generation tariff structure.  There is talk of moving the residential tariff away from an IBT structure.  If this happens this issue will become a non-issue and this blog post will become irrelevant.

Also, for the record, 186.81c/kWh is a big tariff to be paying.  If you’re consuming over 600kWh and have moved onto this tariff, you’ll be paying big money each month for electricity.

Notes:

I’ve included the VAT amounts as this is what the average household will be paying.  If I was looking at the commercial set up, I’d probably be using VAT exclusive amounts.

You can read up the impacts that IBTs have had here: http://pdg.co.za/wp-content/uploads/2012/04/Have-inclining-block-tariffs-for-electricity-made-a-difference-published-in-Business-Day.pdf

The City’s current electricity tariffs can be found here: http://www.capetown.gov.za/en/electricity/Elec%20tariffs%20201415/Schedule%20of%20Consumptive%20Tariffs.pdf