Electricity in Crisis

South Africa faces an electricity crisis which is costing the economy billions. The new power stations, Medupi and Kusile, will not be completed on schedule or within budget. Mines, manufacturers and other businesses, shopping malls, property developers and others are being forced to limit their operations and curtail expansion.

When devising ways to improve the supply of energy, government must bear in mind that consumer satisfaction is generally achieved by an absence of barriers to entry into the provision of goods and services, allowing consumers a choice between the offerings of freely competing providers. The generation, transmission, and a large percentage of the distribution of electricity in SA is carried out by Eskom with local authorities carrying out the balance of the distribution of electricity.

The persistent threat of power shortages demonstrates that to maintain the state electricity monopoly in its current form is not in the best interests of the nation. Avoidance of blackouts is the first and most important objective. This can be achieved by implementing either or both of two policy options which have diametrically opposite effects on electricity consumers in South Africa.

The first and most desirable option is to bring about a rapid increase in the supply of electricity to satisfy the needs of all consumers, especially large-scale industry, without depriving other electricity users, including domestic consumers. The other option, the one now being inflicted upon us, is to reduce electricity consumption through persuasion, price increases, or selective blackouts when load-shedding becomes unavoidable. This option has huge negative consequences for the economy. Some firms are being punished for “excessive” use of electricity, others are denied access to electricity for new industries or property and housing developments. The cost in production and development loss is enormous.

To increase the electricity supply as rapidly as possible is absolutely essential if we are to avoid stalling the economy and irreparably harming economic growth. The need for additional electricity generation capacity was identified in good time but the existence of regulatory barriers to entry prevented alternative power producers from providing it. Alternative electricity supply environments that ensure no threat of electricity blackouts operate in other countries where it has become evident that private investment and management of electricity generation, transmission and distribution play an important role. Competition plays a critical role in ensuring lowest prices, timely investment, availability of capital, and continuity of supply, and allowing electricity consumers to have a choice of providers.

It is important to have an independently owned and operated high voltage transmission grid. It does not need to have one owner as parts of it can be independently operated. NERC, in the USA, demonstrates that independent supervision of the grid and its operation is essential to protect the grid’s integrity. Another requirement is that objective rules must be established by participants to assure that the integrity of the grid is maintained.

To expedite achievement of electricity security, Eskom should divest itself of the ownership and control of the transmission grid. Sale of the grid to private purchasers would supply much needed capital to pay off debt and finance the building of the new power stations. It would also reduce the burden on electricity customers, taxpayers and the government.

Independent power producers have, according to reports, been ready and waiting to build new electricity generation plants. Their entry should be allowed and should be solely dependent on their meeting objective standards and not on a licensing process based on subjective judgements of officials. Another advantage of the grid being privately owned is that the cost of new generation plants will be borne by their owners and not by taxpayers.

The market for distribution of electricity to end users should be opened up to give consumers a choice of competitive suppliers. Financing local authorities through excessive charges for electricity is not acceptable. A market for electricity will help to smooth supply and reduce peaks and troughs in demand as price adjustments change the behaviour of users and consumers.

One of the proposals in the Electricity Legislation Second Amendment Bill is for the Minister to replace the National Energy Regulator’s current four full-time and five part-time members with a Commissioner and three Deputy Commissioners. Whether this change will prove to be beneficial will depend on the manner in which the Commissioners go about dealing with their tasks as, unfortunately, the legislation places too much discretionary power in their hands.

A recognised principle of good law and a requirement of the rule of law and our country’s Constitution is that laws should be made as objective as possible and, when it creates discretionary power, be obliged to prescribe objective criteria according to which that power is to be exercised. The doctrine of the Separation of Powers, also a part of our Constitution, requires that it is the legislature (by way of statutes) and not the Executives (by way of regulation) that must prescribe those criteria.

There are sound jurisprudential reasons for these provisions being in our Constitution. Were there a better understanding and appreciation of the logic that informs them, there would be less propensity to undermine or ignore them. Unconstrained discretionary power is the primary cause of corruption and the abuse of power, and corruption is one of South Africa’s most disturbing and debilitating problems.

Also in the proposed amending legislation is the intention to establish an Energy Appeal Board, a quasi-judicial body which would not be in the interests of either the providers of electricity or the consumers. The Board, if appointed by the Minister, would be an arm of the executive branch of government and in conflict with the separation of powers requirement of the rule of law. The Board would not be a court and therefore could not possibly have the same legal force as a decision of the High Court. This would appear to be unconstitutional. Cases in which persons whose rights are adversely affected by decisions of the Energy Regulator should be adjudicated upon by the courts.

Changing a large structure that has been in existence for many years is extremely difficult. It is understandable that government has approached the task with considerable trepidation. However, while it is prudent to take care in making changes, a time arrives when to delay further becomes imprudent. Such a time has arrived in dealing with electricity generation, transmission and distribution. Making transmission independent and as neutral as possible has now become essential to save the South African economy from serious harm and the country’s people from unnecessary deprivation. There is uncertainty as to whether the new ISMO Bill will create a sufficiently independent new organisation to operate the grid. The time has come for government to take determined and fundamental action to solve the problem of electricity shortages and potential regular blackouts.

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 Foundation.

FMF Feature Article / 24 April 2012