Electricity prices should be based on free market principles

Nicholas Woode-Smith, an author, economic historian and political analyst, is a contributing author for the Free Market Foundation. 

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This article was first published on City Press on
12 December 2022 

Electricity prices should be based on free market principles

As Eskom runs out of diesel to power its backup generators, the Koeberg Nuclear Power Station goes down for maintenance (on the 8th of December), and South Africans are left in increasingly longer stages of rolling blackouts, Eskom wants to increase electricity prices by 38%.
The National Energy Regulator of South Africa (Nersa) is currently considering Eskom’s application to increase electricity prices by 38%. This comes as Eskom struggles to balance its budget. Sales of electricity are down by 14.7% due to the economy shrinking – which Eskom plays a huge role in causing.
In response to causing the economy to shrink, Eskom wants to raise prices and further put strain on struggling consumers and businesses; a cold-hearted response devoid of compassion for the poverty-stricken masses and struggling businesses of this country. With inflation high across the board, these price rises may be catastrophic for many.
And as the economy continues to shrink as a result of Eskom’s incompetence, prices will need to rise even more. A terrible cycle that belies that the problem is not with electricity users not buying enough electricity, but with an incompetent state-owned monopoly.
Eskom has always had an irresponsible relationship with electricity prices. Since its
founding as Escom, the parastatal was discouraged from charging for a profit when selling electricity. This seemed fine in the 20s and much of the 20th century. Cheap coal and Apartheid-enforced cheap labour kept prices low. But even with the government subsidising unsustainably low electricity prices, it should have been clear that Eskom couldn’t keep this up forever. But it tried.
In the 90s, Eskom even bragged that it was producing the cheapest electricity in the world. Not because of good governance or intelligence, but purely because it was funded by debt. While it continued to decrease electricity prices and expand electrification to more and more people, it couldn’t afford to build more power plants.
It is only recently that Eskom began to raise its prices to try cover its past and future costs. But it is far too late to make up for the shortfall caused by the hubristic desire to produce dirt cheap electricity. Without the ability to charge for a profit, Eskom became an unsustainable and doomed entity that couldn’t prepare for the future.
Undercharging led to Eskom being unable to build new generating capacity. Political interference only exacerbated the problems by introducing increasingly corrupt elements and disincentivising efficiency.
Eskom’s fundamental problem is that it is a state-owned monopoly. It does not have a competitor to force it to embrace sound behaviour. It can undercharge for electricity because it can keep on getting bailouts from the government. It can overcharge because it has no competitor for consumers to replace it with. All the while politicians use it for corrupt gains and petty agendas.
This creates a perfect storm for an irresponsible entity that is, sadly, essential to the running of the economy and the prosperity of the country.
Perhaps, this 38% price rise is prudent. Low prices caused a lot of Eskom’s problems in the past. But we have no real way of knowing if this is a correct course of action, because Eskom has no competitor to hold it accountable.
This is why electricity needs to be privatised. Without many enterprises competing to produce and sell electricity, prices are just thumb sucked and arbitrary values imposed on consumers by a monopoly that can’t even keep the lights on.
If we privatise electricity, then prices may rise or fall, but it would be a genuine price determined by supply and demand. Not the dictates of the corrupt and incompetent.
Even without privatisation, however, Eskom could already do a lot to cut unnecessary costs and spare South Africans an exorbitant price hike that we can scarcely afford.

66% of Eskom staff are redundant and could be retrenched. This could save the parastatal, consumers, and taxpayers an exorbitant amount. Solving procurement corruption and punishing the staff who purchased mops for over R200 000 would also go a long way to cut costs. That is not to mention sorting out all the corruption and theft surrounding diesel and coal.
Eskom needs to clean house before it demands more money from consumers. Once it eliminates its overstaffing issues, eliminates the corruption, and cuts spending as much as possible, then it will have a bit more of a right to raise prices.
But even then, it won’t truly hold that right. So long as Eskom holds monopoly power and can impose its terrible service and rising prices on South Africans, it holds no real right to demand more from us. The only solution is privatisation. Let a thousand power producers compete. Only then will the price be realistic and economically sound.

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