Feature Article: Competition is essential in SA’s electricity supply system

How should the electricity industry develop, in as short a time as possible, so that it can best serve the interests of all South Africans? Is it in our interests that government should continue to dominate as is apparent from the Draft 2012 Integrated Energy Planning Report? Public comment invited by the Department of Energy closed on 15 December. In my view, a fatal flaw in the report is that no mention at all is made of open competition in the generation and supply of electricity.

All developed  and many of the developing economies of the world have, or are in the process of introducing competition in all possible aspects of their energy industries. This draft report, however, which outlines development plans through to 2050, seems to suggest that in South Africa, the government should continue on the current path with a state-owned vertically integrated monopoly, Eskom, in the generation and supply of the bulk of the country’s electricity. There is no sound economic or any other reason for this.

An electricity environment that would be far superior is one in which independent power producers (IPPs) compete with Eskom for the business of consumers. Even more important would be the establishment of an electricity market in which generating companies compete with each other in the supply of electricity. The problem faced by government would be how to introduce private generation capacity into the mix in a manner that will be of greatest benefit to consumers.

The 1998 White Paper adopted by government but not implemented, set out the following goals that needed to be achieved to modernise this country’s electricity sector:

  • Giving customers the right to choose their electricity supplier.
  • Introducing competition into the industry, especially the generating sector.
  • Permitting open, non-discriminatory access to the transmission system.
  • Encouraging private sector participation in the industry.

But if those laudable goals are compared with what has transpired during the past 15 years, we find that:

  • Customers have no choice of electricity supplier and there appears to be no intention to give consumers that choice.
  • Competition has not been introduced into the industry; (producers of alternative energy are suppliers to Eskom and not competitors).
  • Open, non-discriminatory access to the transmission system is not available. If it was, independent power producers would be selling electricity across the transmission system directly to large energy users or into the energy market.
  • Private sector participation in the industry has been actively discouraged and not encouraged as envisaged in 1998.

If government welcomed the participation of private firms in all aspects of the electricity business, it could rapidly create the environment necessary for the development of a market for electricity. There is no reason for government to incur further liabilities or burden taxpayers in order to increase the capacity of the electricity supply system.

The generation of additional electricity can be financed by private firms who could also build and operate the new generation plants. The private sector would do this with alacrity if they were confident that government is intent on encouraging the development of a fully functioning market for electricity. Such a market would provide competition in every possible part of the system, price electricity according to demand and supply, increase the efficiency with which generated electricity is utilised by differential pricing between high and low demand hours, and provide end consumers with a choice between competitive suppliers.

Most importantly, the generating companies that are investing their own money in new generating plants, with no guarantees from government except open access to the electricity transmission system and market, will make the decisions as to what kind of generating plant to build, and not government planners. Cost over-runs of whatever nature will be absorbed by the plant owners and the selling prices of the electricity they sell will be determined, in the final analysis, by consumers and not by regulatory officials.

An electricity market with these characteristics would require substantial changes to be made to the entire current structure of the electricity system. Government’s role in the changes to the structure should consist primarily of reconstituting the various parts of Eskom to fit into a competitive electricity market and to clear the way for competitors to provide the additional electricity required by a growing South African economy.

A document such as the Draft 2012 Integrated Energy Planning Report is suitable only for speculation by an Eskom or a potential competitor of the government-owned state entity as to what might happen in the next thirty years. It is totally unsuitable as a document on which government should base future developmental policy decisions.

Until the price of electricity in South Africa is determined in a market that consists of unconstrained competition in the generation and retailing of electricity, with wholesalers and spot markets playing a role, and transmission and distribution grids that welcome additional business from the various entities wishing to make use of their facilities, no amount of planning will solve the current problems being experienced in the generation and supply of electricity.

It is the structure of the energy supply systems that must change. Government should set general rules applicable to anyone entering the industry and should not attempt to dictate the development of the industry with a comprehensive plan that purports to take into consideration all the factors that may affect the industry in the future. As Professor Friedrich Hayek, Nobel Laureate in economics warned, no one has the necessary knowledge to devise a system that will function better than the cumulative result obtained in a market with competing suppliers vying with each other to satisfy the needs and wants of consumers.

South Africans do not only want the lights on; they want to know that all the productive sectors of the economy have access to the power they need to conduct their respective businesses as efficiently as possible. The livelihood of every single person in the country depends on them.

Author: Eustace Davie is a director of the Free Market Foundation and a member of its Energy Policy Unit. 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.

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