South Africa’s virtual wheeling model was designed to solve a political problem as much as an energy one: how do you let businesses buy cheaper renewable power without suddenly stripping municipalities of electricity revenue? The answer is to leave the municipal bill largely untouched. A factory still pays its municipality for the electricity it consumes, including energy and distribution charges, while Eskom separately refunds the customer for the renewable portion covered by its private power agreement.
That means municipalities do not immediately lose the money they depend on. Their energy margin remains on the bill, while they continue earning distribution revenue from the wires carrying electricity to customers. Eskom handles the separate refund using metering data and the value assigned to the wheeled renewable energy. On paper, it is a neat arrangement: businesses get access to private renewable power, while municipalities avoid an immediate hole in their cash flow.
But the problem is what happens as the market grows. If more of a municipality’s biggest commercial and industrial customers sign virtual wheeling deals, an increasing share of their electricity consumption is effectively being supplied through private contracts. The municipal tariff may still appear unchanged, but the customer’s effective energy cost falls because of the Eskom refund. That puts pressure on the growth of the energy margins municipalities have traditionally earned from selling electricity.
And that could fundamentally change what a municipal electricity utility is. Instead of making money partly from selling electricity as a commodity, municipalities would increasingly depend on charging for access to their networks. In other words, they become wires businesses. That may be the direction the electricity market is heading anyway, but it creates a serious problem for municipalities that use electricity surpluses to support other services and infrastructure.
That is why virtual wheeling may ultimately prove to be more than a temporary bridge between two very different electricity models: one where municipalities make money selling power, and another where private companies generate and trade the power while municipalities mainly operate the grid. Virtual wheeling protects municipal cash flow today, but it does not answer the bigger question of how local governments will fund themselves when their biggest customers no longer need them to be their electricity supplier.
