'New electricity generation cap increase doesn't go far enough'

The government, bowing under the pressure of the demands of reality, has increased the cap on non-licensed private power generation from 1MW to 100MW. This comes during another bout of rolling blackouts, which the government still insists on calling 'loadshedding.'

This policy change has been hailed as a
small victory for the private sector, which has been constantly signalling its desire to feed its own electricity into the grid.

"The Minerals Council South Africa immediately welcomed the announcement and said it was committed to work with the DMRE and Eskom to ensure that at least 1.6 GW of mostly renewables capacity could "rapidly" be introduced to the grid." 

To a certain extent, it seems that the government and Eskom are listening to business, unions and civil society. South Africa drastically needed the increase, and other electricity reforms, if the country is to outpace the rapidly decaying state of Eskom's generation capacity.

But, to be realistic, this generation cap increase and reform does not go nearly far enough to address the problems plaguing Eskom and electricity generation in the country.

While this limited increase does help alleviate some of the supply concerns, it doesn't solve the problem which is that Eskom is still our fundamental producer of electricity - and that the entity suffers from endemic incompetence. So long as electricity generation is the primary responsibility of Eskom and government, we shall continue to see rampant corruption, tariff hikes and rolling blackouts.

If we are to solve this electricity crisis, we need major private sector alternatives, not just small producers who have to act through Eskom and the flawed grid system.

Appeasement and the Inherent Flaws of Eskom

What is clear is that this electricity generation cap increase is a nominal reform to make it look as though the government and Eskom are doing something. It is simply appeasement without substance. The increase of 100MW is not nearly enough to fulfil demand, especially while it is still a part of an inherently defective system.

The problem with South Africa's flawed institutions, and specifically Eskom, is that it needs fundamental reforms and a shift in its paradigm to succeed. At this point in time smaller reforms aren't good enough. If we do not have sweeping reforms, all the smaller ones will fail individually, and act as an excuse for the government to petulantly tell us: "Told you so!"

The fact of the matter is that Eskom is
inherently flawed due to its monopoly structure. As a state entity and without real competition, it has no incentive to perform its job properly, and even if there is a will to improve, it is unable to take advantage of the price mechanism or other features of a free market to hold itself accountable and improve its performance.

Eskom's problems go far beyond the new South Africa,
and its rot was inherent in its founding as a monopoly. While many romanticise pre-1994 Eskom, the fact of the matter is that it was a flawed company that constructed the foundations of the blackouts we have today. If Eskom (then "Escom") had not pressured private companies out of the market with regulatory powers, we would be living in a fundamentally better South Africa today. At the very least, the lights would be on.


This small cap increase will likely act as a scapegoat for central planners. It doesn't go nearly far enough to address the shortage. Especially while there is a cap at all. Why only 100MW? If the government can readily increase the cap from 1MW to 100MW, why can't they do away with the cap altogether? The grid could and should be overhauled to make allowances for these existing private producers to feed into the grid. And it could further make allowances to eliminate the need for a cap altogether.

If the government truly cared about eliminating our electricity woes, it would lift the cap altogether, and make it as easy to generate power and feed into the grid as possible. But they are ultimately more concerned with control and ideology.

When the private sector fails to address the crisis because of the cap and all the other restrictions, the government will blame the free market and use the failure to vindicate central planning – it won't be the first time.

In the
1990s, the government proposed allowing private competitors to Eskom, but the competitors had to compete with Eskom's unrealistic and unsustainably low prices (subsidised by government and not charging for even the cost of producing the electricity). The private sector can't compete with an irrational entity that doesn't even care about its own survival. Thus, we failed to save the industry as far back as then.

How to Solve Our Electricity Crisis

We need sweeping and fundamental reforms to save this country from perpetual blackouts and economic stagnation.

First, we need to amend the Electricity Act. Eskom must no longer be a monopoly producer and distributor of electricity. And there must be no price controls for electricity. Private competitors must be allowed to rise up, without the need for tendering, and feed into the grid.

Said grid, must be controlled independently of government, but should still be interconnected for practical purposes. There exists
smart technology today that helps manage all the different producers feeding into the grid and manage costs and prices for consumers buying electricity.

Eskom cannot go after non-payers as they are a political entity and the controlling entity requires votes. But the goal of a company is profit, and will hold criminal non-payers accountable, sustaining their business.

These companies need to be able to set their own prices, with competition and the price mechanism acting as their only price control. Profit is needed to sustain production, development and growth. Profit is realistic, and it was Eskom’s refusal to charge for a profit in the 20
th century that has doomed it today.

A deregulated, free market in electricity will attract foreign investors who can rapidly build generation to compete with and surpass Eskom, that at this point should be privatised.

As bitter a pill it may be to swallow for many, prices may rise under this scenario (but I doubt they will rise, as competition necessarily lowers prices). But that would be necessary. We need realistic pricing that reflects reality. Deficits due to excessively cheap electricity do not help the economy.

Conclusion: Electricity Generation Should Be Privatised

The virtue of capitalism is competition. The failure of Eskom is its monopolistic nature. Privatising Eskom but leaving its monopoly, or allowing private small actors to feed into a monopoly, state-owned grid doesn't help matters. Competition requires the freedom to set individual prices, appeal to consumers, and the prospect of failing when one is underperforming.

All these are necessary to provide an incentive to innovate and perform well in the market. Competition holds companies accountable. Government is meant to be held accountable by votes every few years, but we know from experience that it doesn't work that way in reality.

What we fundamentally need to accept is that Eskom as a monopoly can't recover. If we want reliable electricity provision, we need the private sector to take it over; if not as a replacement, then as a rival to ensure that Eskom is forced to take stock, reform, and do its job properly.

This article was first published on City Press on 21 June 2021.

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