Feature Article: Why is the state ignoring its own power policy?

Exporting coal to Newcastle — that’s what Eskom proposes. The coal-to-Newcastle idiom arose because England’s Newcastle prospered for centuries by exporting coal. Importing or keeping it sub-optimally would have been as foolhardy as it would be for us to ignore the lessons of history.

Stripped of obfuscation, Eskom wants the government to perpetuate the moribund electricity policy inherited from the 1920s by extending its failed monopoly indefinitely, increasing electricity prices by nearly 500% in nine years and curbing coal exports. If it agrees, the government will reduce employment and investment, force marginal, small and black economic empowerment (BEE) mines out of business, and make consumers finance Eskom’s capital.

It is rational for Eskom to lobby for its own interests — that’s what vested interests do. Our energy catastrophe is not Eskom’s fault. Eskom and South Africa are victims of policy failure. That Eskom lobbies for extreme benefits is natural. The duty of responsible governments is to be sceptical of seductive lobbies. The left hand should know what the other left hand (sic) is doing. The government diverts resources to "export promotion". Yet Eskom wants the opposite: export reduction. It wants the government to be like a mother feeding her baby and throttling it simultaneously.

Should the government cave in to Eskom’s request for mines to be forced to supply coal below world prices? Should the government continue ignoring its own energy policy? Doing so would cut foreign exchange earnings, increase balance of payments deficits, close marginal mines, drive investment abroad, suppress growth and condemn thousands more workers to unemployment and destitution.

Eskom also wants the National Energy Regulator of South Africa to perpetuate its monopoly and condone monopoly pricing, not because it costs 500% more to produce electricity but to amass capital avariciously. Private investors, if allowed, would finance power stations without fleecing consumers.

What is government policy and why is it being ignored? Fifteen years ago, the government opted for "consumer choice and … market forces". According to the 1998 energy white paper, "greater emphasis is being placed on commercialisation, corporatisation and … privatisation. Energy markets are being restructured to encourage competition." The government should be "giving customers the right to choose their electricity supplier … especially the generation sector". There should be "open, nondiscriminatory access to the transmission system and … private sector participation". Private distributors "will be allowed to coexist" alongside Eskom. Competitive models and private sector participation "hold the promise of benefits for … consumers". Eskom will be "restructured (into) separate generation and transmission companies". Power stations will become "a number of companies (to) assist the introduction of competition (and) opportunity for … BEE". Our electricity catastrophe is due to that policy not having been implemented and will continue until it is.

Eskom also asked the government to ban the merger of coal suppliers Xstrata and Glencore, which is surreal: a giant monopoly using antimonopoly policy to block a competitive merger.

The government should implement its policy and reject all three proposals — suboptimal coal prices, perpetual monopoly and hostility to mining companies — not just because they would be bad for South Africa, but because short-term expediency would be long-term disaster for Eskom. Price controls and hostile mining policies increase capital flight and ensure long-term shortages. Eskom is merrily building gigantic power stations on an assumption of affordable coal indefinitely. Do its requests imply that it thinks it committed a giant blunder?

Far from cutting production and exports, we should mine, consume and export all we can because the gas (fracking) revolution and emissions controls may render low-grade coal superfluous. Eskom’s day may come sooner than expected. If coal prices tumble, its power stations characterised by ghastly cost and completion date overruns could become viable.

• Louw is executive director of the Free Market Foundation.

Source:This article was first published in Business Day on 23 January 2013. 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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