Should government continue to dominate energy supply as is proposed in the government's latest declared plans? Will this make it at all possible for the electricity industry to develop, in as short a time as possible, to serve the best interests of all South Africans? The fatal flaw that lurks in government’s plans and predicts failure is that no mention is made of open competition in the generation and supply of electricity.
All developed economies, and many developing ones, have introduced, or are in the process of introducing, competition in their energy industries. In South Africa, government reports outlining development plans through to 2050 seem to have suggested that the South African government should continue with Eskom as a state-owned, vertically integrated monopoly in perpetuity. No sound economic or socioeconomic justification supports this approach.
A far superior electricity environment would allow for independent power producers (IPPs) to compete with Eskom for the business of consumers. Even more important would be the establishment of an electricity market in which independent companies compete in the supply of electricity. The problem faced by government would be how best to introduce efficient, private generation and distribution capacity into the energy mix.
The 1998 White Paper adopted by government, but not implemented, set out the following goals that needed to be achieved to modernise the electricity sector:
- Give customers the right to choose their electricity supplier.
- Introduce competition into the industry, especially the generating sector.
- Permit open, non-discriminatory access to the transmission system.
- Encourage private sector participation in the industry.
But when those laudable goals are compared with what has transpired during the past 20 years, we find that:
- Customers still 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, IPPs 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 was 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 consumers with a choice between competitive suppliers.
Most importantly, the generating companies investing their own money in new generating plants, with no guarantees from government except open access to the electricity transmission system and market, would make the decisions as to what kind of generating plant to build, and not government planners. Cost over-runs of whatever nature would be absorbed by the plant owners and the selling prices of the electricity they sell would 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.
Government should set general rules applicable to anyone entering the industry and should not attempt to dictate a comprehensive plan that purports to take into consideration all the factors that may affect the industry in the future. The livelihood of every single person in the country depends on the development of the most efficient and lowest cost electricity supply system.
South Africa’s outdated power model, where one single entity is responsible for all the generation, transmission, and a large part of the distribution, has been abandoned in every commercially competitive country worldwide. The South African government needs to take urgent steps to unbundle Eskom and allow private competitors to enter the market to secure our energy future. If it does not, the very dim light at the end of our tunnel could very well be extinguished altogether and leave us all in darkness.
Jasson Urbach is a director at the Free Market Foundation
This article was first published in Sunday Independent on 3 March 2019