Municipal Budgets and the Electricity Revenue Cliff

The municipal revenue cliff is the loss of the electricity trading surplus — about a quarter of municipal income — as customers leave the grid to buy power from private traders.

For most municipalities, electricity is not merely a service. It is the single largest source of own revenue, and the margin on it funds much of everything else. Electricity-market reform is necessary — but it is rewriting municipal budgets, and few have planned for what it does to the revenue line.

The mechanics of the reform — the end of generation licensing, the growth of embedded generation, the new independent transmission operator — we set out in our review of South Africa's energy resilience in 2026. This piece is about the consequence almost no municipality has budgeted for: what that reform does to revenue.

What the trading rules change

The detail that matters for municipal finance is being written now. The National Energy Regulator of South Africa (NERSA) published draft Rules for Electricity Trading in October 2025; after an extended comment period, NERSA published a revised draft in April 2026 for a second round of consultation that closed on 23 May 2026; as of mid-2026 the rules remain in draft, with final gazetting still awaited. Draft Rule 9.8.2 — the principle of revenue neutrality — would let a municipality charge for the use of its wires, known as wheeling, but not earn a margin on the energy itself when a customer buys from a private trader. The energy margin is exactly what municipalities have leaned on.

Why municipal budgets are exposed

Electricity sales make up just over a quarter of total municipal revenue — about 26% in recent financial years, on Statistics South Africa figures. That makes the electricity account a financing instrument, not merely a utility function.

The numbers are concrete. In the first half of 2023, municipalities bought R50.2 billion of electricity and sold it for R60.0 billion. The R9.8 billion surplus helped pay for libraries, roads, water and sanitation that their own tariffs do not fully cover.

That surplus is already thin. Most of the country's roughly 165 municipal electricity distributors under-recover the true cost of supply — a weakness flagged repeatedly by the Auditor-General of South Africa (AGSA) and National Treasury — leaning on cross-subsidies from commercial, industrial and higher-consumption residential customers to balance the budget.

Those same customers are the ones leaving. Embedded solar photovoltaic capacity has passed 6 GW nationally — more than four times its 2021 level, on CSIR estimates — and the businesses and households installing it are disproportionately the high-paying users who carry the cross-subsidy. Every rooftop array thins the base that funds the rest of the municipality.

The revenue cliff, quantified

The change is narrow but decisive: it targets the energy margin, not the customer. Three revenue streams move in different directions.

• Energy margin — the mark-up on each kWh sold — is retained by the municipality today, but lost under draft Rule 9.8.2 once a customer buys from a private trader.
• Wheeling, the network use-of-system charge, is limited or absent in most tariffs today, but is retained under the new rules, capped at the cost of using the network.
• Net surplus for non-electricity services — the money that funds libraries, roads and water — is sharply reduced as high-paying customers migrate to private traders.

The exposure is sharpest in smaller and rural municipalities. Industry submissions on the draft rules, as reported by Daily Maverick, warn that electricity can be 34% to 40% of total income in rural municipalities, and that losing the energy margin could remove as much as 60% of operating income unless the rules are amended.

The reporting and audit dimension

The revenue shift must be visible before it is irreversible. Municipalities report in-year against the Municipal Finance Management Act (MFMA) using the mSCOA chart of accounts; the migration of high-paying customers to private traders belongs in the medium-term revenue and expenditure framework (MTREF), not in a year-end surprise.

Audit committees and the Auditor-General of South Africa (AGSA) will probe the assumptions behind electricity revenue, because its sustainability is a going-concern question for the whole municipality, not only the electricity department. Surfacing the exposure early, with a costed response, is the difference between a managed transition and a qualified audit opinion.

Some metros are already ahead. Wheeling frameworks under development in the larger municipalities show that a metered, settled network charge can be administered in practice — and that the municipalities building the capability now will set the terms the rest inherit.

What accounting officers should do now

The reform is not reversible, and municipalities that treat it as a threat to resist rather than a structure to plan for will fare worst. The work is to move the electricity business from reselling energy to operating a network — and to price that network properly. Seven steps matter now.

1. Commission or refresh a cost-of-supply study, so that tariffs reflect what supply actually costs by customer category.
2. File cost-reflective and wheeling tariffs with NERSA, separating the network charge from the energy charge.
3. Design small-scale embedded generation (SSEG) and net-billing tariffs that keep self-generators connected and paying for the network they still rely on.
4. Diversify own revenue — property rates, network and capacity charges — to reduce dependence on the energy margin.
5. Align the electricity function with mSCOA and Municipal Finance Management Act (MFMA) reporting so the revenue shift reaches the audit committee early.
6. Submit comment through SALGA and engage NERSA while the rules remain in consultation.
7. Manage Eskom arrears actively under the National Treasury relief conditions rather than letting them compound.

Done well, the network charge can be a durable, defensible revenue stream — one that grows with connections rather than shrinking with every solar installation. Done late, the surplus disappears before the tariff structure catches up.

The reform does not abolish municipal electricity revenue. It abolishes the part municipalities never priced as a network service — and that is the part funding everything else.

Embedded generation is not the enemy of municipal finance. An electricity business still built to earn a margin on someone else's energy is. The municipalities that redesign their tariffs before the rules are finalised will keep the revenue cliff a slope; those that wait will meet it as an edge.