Restructuring South Africa’s Electric Power System

For SA to have a robust electric power supply system, its electricity generation, transmission, distribution and control processes should be reformed as rapidly as possible. Security of short-term and long-term electricity supplies demand that government take immediate action to remedy what is obviously a faulty structure.

The best structure is not a single government monopoly such as Eskom, with centrally controlled oversight and direction. Much better structures are those that have evolved and continue to evolve in the European Union countries, based on the UK example, and the structure that has developed in North America.

An economics or business-driven structure for the delivery of electric power consists of an electricity grid made up of inter-connected high voltage transmission lines supplied by a multiplicity of electricity generating entities that feed electricity into the grid. An even greater multiplicity of distributors purchase electricity from the generating companies or from wholesale intermediaries, draw it from the grid, transform it from high to a lower voltage, and distribute and sell it to end users. For all or most of these functions to be carried out by a single organisation such as Eskom is not a good idea, especially when that organisation’s very existence depends on a legislated monopoly that prohibits competitors from entering the business of generation, transmission and supply of electricity.

There is ample evidence that SA’s electricity generation and supply structure needs to change. For instance, the Ignalina Nuclear Power Plant in Lithuania observes on its website that: ‘Until the late 1980s, the structure of the electric sector in most countries was based on the idea that the most efficient way to provide electricity was to have a national electricity company which was a natural monopoly and so needed to be state owned to protect consumers. However, now experience shows it is possible to divide electricity companies into those parts which are still natural monopolies (for example, high voltage and low voltage networks) and those parts where it is possible to have competition (for example, power stations) and to create a market for electricity. This experience is now being used all over the world to create cheaper electricity by means of competition among power stations and among companies that are in the business of purchasing and reselling electricity. Western Europe has shown that prices to consumers can fall by up to 20% when the market is fully operational.’

According to the website, a May 2000 European Commission report revealed marked decreases in the price of electricity from 1996 to 1999 in Finland -19.6%, Sweden –17.6%, and Germany –9.6%, all countries with ‘100% market opening’. Spain –16.2%, Portugal –14.0% and France –12.7% also experienced significant price reductions with a reduced level of market opening (between 30% and 45%). At the time of the report Lithuania was in the process of meeting the conditions for its 1 May 2004 entry into the EU, one of the conditions being the opening of its electricity market to alternative suppliers, a condition that applies to all EU members.

Other markets are equally, or even more, open. The North American Electricity Reliability Corporation (NERC) reflects the openness of the electric power business in the US and parts of Mexico and Canada. NERC sets and maintains ‘Effective Reliability Standards that are clear, consistent and technically sound, coupled with a strong standards enforcement program, … to help maintain and improve the reliability of North America’s bulk power system.’ NERC is a 501(c)(3) not-for-profit organisation with official backing from the US and Canadian governments. It oversees the grid which supplies electricity to 334 million people, a total electricity demand of 830,000 megawatts, utilises 340,000 kms of high voltage transmission lines, and represents $1 trillion in assets. NERC has twelve different member categories ranging from small and large electricity consumers, electricity marketers, private and co-operative electricity generators to US and Canadian municipal, state, provincial and federal government entities. Trustees, elected by members, run the organisation.

What is clear from the North American experience is that the grid should be separated from the generation and distribution functions and that all the entities directly involved in the operation of the bulk power system should have a say in maintaining the integrity of the system. The UK grid is operated independently and generation and distribution liberalised. The EU is attempting to establish an integrated transmission network and liberalise all aspects of electricity supply.

Eskom has historically had the incentive to prevent all alternative attempts to generate and sell electricity. Pre-1994 a farmer in Mpumalanga who built a dam, generated hydro-electricity, and sold some of it to his neighbours had to stop doing so because Eskom charged him with breaking the law. The SA sugar industry has the capacity to produce a substantial quantity of electricity, using its bagasse by-product for fuel. Mauritius generates about 20 per cent of its electricity from bagasse. A 1999 study by the Mauritius Sugar Industry Research Institute suggested that the SA sugar industry could produce about 2,500GWh of electricity using its existing plant and 5,900GWh with the use of better technology, over and above meeting the needs of its sugar factories. Given freedom of entry into electricity generation the SA sugar industry could play a substantial role in reducing the electricity shortage. There are probably many such potential producers waiting in the wings, ready and able to produce electricity if not prevented from doing so.

Eskom should be broken up into its functional parts. The most logical arrangement would probably be for Eskom to retain ownership of the grid but to be divested of its generation and distribution functions and its statutory monopoly rights. A market for the generation and distribution of electricity will then develop, preferably based on objective rules of entry and an absence of limits on investment based on official discretion. Competing generation and distribution companies will supply consumers with an uninterrupted flow of electricity. Bulk purchasers of electricity will purchase their supplies directly from generating companies or wholesalers and the grid will transmit the electricity from one to the other at a fee. Options of small businesses and households will also improve, as they will have a choice of suppliers.

Most importantly, SA will have a robust electric power supply system and deliberate blackouts will no longer occur.

Author Eustace Davie is a director of the Free Market Foundation. 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.

FMF Feature Article / 08 April 2008

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