1. Current and Forthcoming Issues in the South African Electricity Sector Ioannis N. Kessides The World Bank

2. Eskom efficient even by advanced industrial country standards It generates some of the lowest-priced electricity in the world Executed one of the worlds most successful electrification programs Has been exhibiting robust financial and operational performance

3. Emerging problems Structural inefficiencies and financial problems in the distribution segment Tight demand/supply balance Market structure not conducive to economically efficient investment decisions Sectors regulatory structure lacks coherence and independence Eskoms vertical and horizontal market dominance is an impediment to competition Eskoms size and market dominance impede the development of a regional electricity market

4. Price, cost, and financial performance Eskoms tariffs very low by international standards In contrast to most state-owned utilities, Eskom has been entirely self-financed During the past 20 years, Eskom earned 8-12 percent pre-tax rate of return Debt/equity ratio declined from 2.06 in 1980 to 0.3 in 2003 From late 1980s to 2003 Eskoms tariffs increases consistently below inflation

8. Continuity and quality of supply Deterioration of Eskoms generation plant performance in the late 1980s Significant improvements in plant performance following the 90:7:3 program Continuing significant problems in distribution system performance NERs surveys reveal substantial customer dissatisfaction with interruption frequency and durations

12. NERs customer surveys 53 percent of respondents unhappy with interruption frequency and durations 48 percent dissatisfied with response times to repair faults 28 percent not adequately consulted about planned outages 47 percent dissatisfied with power quality

13. Labor productivity Substantial reduction in number of Eskoms employees since the early 1980s Still Eskoms labor productivity well below levels in advanced industrial countries

16. Capital productivity From 1980 to 2000, Eskom had excessive reserve margins Eskoms load factor declined precipitously from 1975 to 1993 Prolonged gross inefficiency in investment raises questions about the sectors governance structure

19. Security of supply By 2002 South Africas high spare capacity came to an end Forward reserve margin declined from 30 to 10 percent between 1998 and 2003 Currently, a very tight demand/supply balance

21. Environmental performance Heavy reliance on low-grade coal has significant environmental implications Because of cost considerations, Eskoms coal-fired station mostly not fitted with scrubbers Eskom is responsible for the bulk of sulfur dioxide pollution in South Africa During the past decade substantial reduction of particulate emissions

23. Electrification Program One of the worlds most ambitious and successful electrification programs Impressive gains in coverage within the span of just a few years Dramatic reductions in the capital investment costs of rural connections Significant urban-rural electricity divide remains Sustainability challenges beyond 2000

29. Performance problems in the distribution segment Structural fragmentation Significant disparities in quality of service standards across the country Lack of financial viability Operating inefficiencies, lack of technical capacity, theft, and non-payment problems Restructuring of the electricity distribution system Progress towards creating the six REDs painfully slow

30. Scope for integrating electricity markets in Southern Africa Complementarity of primary energy resources Benefits of regional integrated resource planning Prerequisites for successful integration of electricity systems Structural weaknesses of bilateral electricity exchange in SAPP

34. Policy challenges Case for radical electricity restructuring in South Africa not very compelling? Continuing inefficiencies in the distribution segment will undermine system security and reliability Eskoms extreme horizontal and vertical market dominance is cause for concern Effective regulation is likely to prove challenging