Creating a competitive electricity supply in South Africa

The worst possible structure for electricity provision operates in South Africa today: a vertically integrated monopoly. This view is not based merely on opinion or ideology. It is based on the experience of countries that had similar systems in the past.

In New Zealand (NZ), for instance, nine or more retailers compete for the business of consumers in any given area. NZ’s electricity system has been transformed to the point where it has room for over 20 electricity retailers. In 1985, NZ had 61 statutory monopolies, or electricity supply authorities (ESAs), distributing electricity to consumers. A government-appointed Electricity Task Force issued a report in 1989 recommending the total restructuring of the electricity industry that included the corporatisation and privatisation of the ESAs, separate ownership of generation and transmission, and the possibility of creating a wholesale electricity market.


These recommendations have been implemented and the Electricity Authority now urges consumers to shop around for the best prices and to switch from one electricity retailer to another if it will save them money. There are more than 50 generating plants, most owned by five major and eight smaller grid-connected companies. To improve efficiency, increase competition and bring down prices to consumers, management and ownership of the various components of the system were separated. The electricity sold by competing retailers is carried by separately-owned distribution grids that are debarred from being involved in retailing. The high-voltage grid, split off in 1994, is owned by Transpower, an independent state-owned enterprise.


Spot and hedge markets, together with ancillary services comprise the wholesale market. Reconciling transactions on the retail and wholesale markets has been contracted out to the New Zealand Stock Exchange. Transpower, as the owner of the national grid, is the system operator responsible for all the functions that provide security of supply and maintain the integrity of the grid. These NZ reforms prove that there are positive benefits for consumers when the measures adopted increase competition and improve efficiency in electricity, generation, transmission and distribution. 


Ample evidence from other countries shows that SA’s electricity generation and supply structure needs to change. For instance, the Ignalina Nuclear Power Plant in Lithuania observed on its website that: ‘Until the late 1980s, the structure of the electric sector in most countries was based on the idea that the most efficient way to provide electricity was to have a national electricity company which was a natural monopoly and so needed to be state owned to protect consumers. However, now experience shows it is possible to divide electricity companies into those parts which are still natural monopolies (for example, high voltage and low voltage networks) and those parts where it is possible to have competition (for example, power stations) and to create a market for electricity. This experience is now being used all over the world to create cheaper electricity by means of competition among power stations and among companies that are in the business of purchasing and reselling electricity. Western Europe has shown that prices to consumers can fall by up to 20% when the market is fully operational.’


According to the website, a May 2000 European Commission report revealed marked decreases in the price of electricity from 1996 to 1999 in Finland -19.6%, Sweden –17.6%, and Germany –9.6%, all countries with ‘100% market opening’. Spain –16.2%, Portugal –14.0% and France –12.7% also experienced significant price reductions with a reduced level of market opening (between 30% and 45%). At the time of the report Lithuania was in the process of meeting the conditions for its entry into the EU, one of the conditions being the opening of its electricity market to alternative suppliers, a condition that applies to all EU members.


Directive 2009/72/EC of the European Parliament and of the Council dated 13 July 2009 is instructive. It suggests that a nation should not be dependent solely on its own electricity generation plants and transmission networks even if they consist of competing entities, but should establish cross-border connections with suppliers in other countries if they wish to ensure competitive prices and establish security of supply. Cross-border competition, in future, between electricity suppliers based in various Sub-Sahara African countries would benefit consumers in all of them. 


Paragraph 9 of the Directive states that, ‘Without effective separation of networks from activities of generation and supply (effective unbundling), there is an inherent risk of discrimination not only in the operation of the network but also in the incentives for vertically integrated undertakings to invest adequately in their networks.’ The separation of the high-voltage transmission grid from Eskom would go some way towards meeting the requirements expected of EU members for avoiding the risk of discrimination described in the Directive. 


According to the World Bank, whenever states own and operate infrastructure, four institutional problems appear repeatedly. First, there is a misallocation of resources: a tendency to become involved in large-scale projects that are not economically viable – it is highly unlikely that private generating companies would have embarked on building large generating plants such as the Medupi and Kusile plants, which give every indication of being uneconomic. The second institutional problem is inadequate maintenance, such as the failure of SA’s municipalities to upgrade and properly maintain the electricity distribution infrastructure that is under their control and which formed the subject of a recent Portfolio Committee hearing in Parliament.


A third problem is waste and inefficiency in the operation of infrastructure. For example, port facilities in developing countries move cargo from ship to shore at only 40 per cent the speed of the world’s most efficient ports. A fourth problem in the operation of much state-owned infrastructure is the lack of a sensible relationship between prices and costs. According to the World Bank electric power prices of developing countries are, for instance, set typically at half their cost and the negative effects of over-usage are ignored. 


Nobody knows what electricity ‘should cost’ in SA. A real price could be determined only if freedom of entry into the generation, transmission and distribution of electricity was allowed and as long as competition between providers was allowed to develop without any state interference.


FMF Feature Artilce / 2 October 2012

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