Why is South Africa experiencing electricity black-outs? Elementary economics tells us it is because there is no market for electricity. The existence of a government- protected monopoly, Eskom, prevents a market from being established. And the occupants of the “War Room” must come to terms with that reality.
Governments have an extraordinary ability to be blind to the contradictions in their policies. Most governments view privately owned monopolies or dominant firms that have come about due to efficiency and excellence of service as “anti-competitive” and detrimental to the interests of consumers. Government-protected monopolies, on the other hand, that fail to deliver efficient services to consumers, fail to carry out proper maintenance, employ excessive numbers of staff, pay above-market wages, show huge losses, or are constantly calling for price increases or taxpayer bail-outs continue to be politically shielded no matter what harm they are causing to the economy of the country.
In an open and freely functioning market in which shortages and surpluses are eliminated by price changes, entrepreneurs do not wait for a shortage to develop before they invest. They anticipate shortages and invest in order to profit in the future from their investments. If they misjudge the situation, they are the ones who bear the costs and losses, not the taxpayers or consumers.
The 1998 government White Paper alerted entrepreneurs to the fact that by 2007 there would be a shortage of electricity generating capacity in South Africa. Representatives of private energy companies set up offices in the country to bid for the building of the necessary generation capacity that would make up the anticipated deficit. Government shunned them, so they packed up and left.
Almost 17 years after the publication of the White Paper, the electricity shortage not only persists, but is aggravated by problems relating to inadequate maintenance, poor technical decisions and even by what appears to be downright carelessness. It is also aggravated by obvious faulty decisions regarding the building of new generating capacity by Eskom. And, most importantly, by a failure to establish an electricity market with competition in all aspects of the generation and delivery of electricity.
Recriminations regarding past history are futile. What is important is for the right decisions to be taken to resolve the problems and increase the efficiency of the electricity supply system as soon as possible. This cannot be done without abandoning the Eskom monopoly and calling in the entrepreneurs, large and small.
A first step must be to open up the electricity market and remove the obstacles that prevent anyone with the capacity to supply electricity to start selling it to any customers they can find. For instance, at the micro level, people who have invested in back-up generating capacity must be allowed to supply their next door neighbours without having to obtain a licence.
According to government officials, access to the transmission grid has not been denied to independent power producers. Charging exorbitant connection and transmission fees and demanding to be the sole purchaser of electricity entering the grid at knock-down prices is tantamount to a refusal of access.
When South Africa has a market in electricity where end consumers have a choice of numerous electricity retailers, such as the choices available to electricity consumers in New Zealand (NZ) and the UK, we will know that the electricity supply system is properly structured.
Examination of conditions in NZ and the UK reveal that an independently owned and operated high voltage grid, and independently owned and operated distribution grids are essential, with numerous generating companies, wholesalers and retailers competing with each other to supply consumers with the best service at the lowest price. These are the separate parts that are necessary to provide an efficient and lowest-cost electricity system. However, in a flexible and competitive market conditions are changing all the time. Innovations such as smart grids, smart meters, and solar panels are introduced, and in some cases considerably reduce that demand for grid-delivered electricity.
Ongoing developments in the generation, transmission and delivery of electricity are a warning to the South African government to get out of the electricity business and allow it to be financed, built and operated by competing private firms. Government ownership and management of electricity provision has been given up in most advanced countries, the most important reason being that a government controlled monopoly is not nimble enough to remain at the cutting edge of new developments. Let competing entrepreneurs, who are experts in the field, take over the overall management, and let investors looking for returns on their money take over the financing.
If government had set out in 1998 to transform the electricity business according to the proposals contained in the 1998 White Paper, we could have had a fully operating electricity market by now and the thought of a “War Room” would not have entered anybody’s mind.
Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the FMF.