A real electricity market will rapidly end blackouts

SA’s public enterprises, like Eskom, are remnants of an earlier age. They have survived from a time when many politicians and economists contended that the most important services should be in government hands.

Proponents of government ownership and control of the commanding heights of the economy believed that “only governments had the resources to finance such large enterprises” or they were “too important” to leave in the hands of the private sector or because they were considered to be “natural monopolies”, they would be safer in government hands. The apartheid government clung to the state enterprises as part of its grand plan to make SA self-sufficient and so insulate the country against what it saw as a “total onslaught” against its racist regime.

Experience has since shown that none of these arguments have any validity. In fact, the opposite has proved to be true. It has been found that all business undertakings of the type currently in government hands provide more efficient, lower-cost services when they face open competition and have no statutory protection such as barriers to entry that keep out alternative suppliers. A fully functioning market is nothing more than voluntary exchange between individuals free of third party intervention.

Without a real market for a product or service there is no way of knowing whether resources are being utilised efficiently. Potential suppliers in such a market must face no barriers to entry and the consumers must determine prices.

Through buying, or refraining from buying, consumers control production and prices. Their cumulative activities send signals to producers telling them what to produce, when to produce and how much and when to invest. If consumers embrace a new product or service, producers can change patterns of consumption through innovation and gain handsomely. But if consumers do not take to a new product or service, producers can lose, sometimes heavily.

Governments have a bad habit of interfering in the functioning of markets ostensibly “in the public interest”. They manipulate prices, tamper with the right of new producers to enter markets, or monopolise production in particular markets. Such interventions are generally portrayed as being efforts to protect consumers from the machinations of “greedy” producers, who without the interventions would supposedly exploit the helpless consumer. What they actually do is deprive consumers of their sovereignty; take away their power to compel producers to provide the goods and services that they want, in the form, time and place in which they want them. SA’s electricity blackouts are a consequence of all three of the above-mentioned misguided interventions.

Electricity transmission may appear to present arguments for what is called vertical integration, which means having various processes under the control of a single owner. However, on closer examination we find that even the electricity grid, which consists of the high voltage transmission lines that carry electricity across the country, can have multiple owners as long as there is sound management to prevent the integrity of the grid from being compromised. In plain language that means to prevent someone from doing something irresponsible, negligent or stupid that causes an electricity blackout. The integrity of the North American grid, which has a multiplicity of owners and covers the entire US, Canada and a province of Mexico, is maintained by a private/public non-profit organisation called the North American Electricity Reliability Corporation (NERC).

Whoever owns the grid, its operation needs to be separated from the generation and distribution of electricity. In SA, such a separation would immediately open the way for competitive electricity generators to enter the market without prior government approval or the necessity of coming to an agreement with a monopoly entity such as Eskom. The generating company would merely have to follow the rules for safe operation of the grid and pay the cost of transmitting its electricity to purchasers.

Under current conditions of electricity shortage, aluminium smelters, mines and property developers would be able to search for electricity generators to supply them with the electricity they desperately need at a mutually agreed price. The generating company would feed the electricity into the grid and the purchaser would draw it off the grid, allowing for some loss in transmission.

Paying a higher price for the extra 10 per cent or so of electricity could prove very worthwhile. A loss of 100,000 ounces of platinum production due to power blackouts would convert, at $1,950 per ounce, into $195mn or about R1.47bn, a real incentive to find alternative electricity suppliers if it was not blocked by law or official discretion. Sugar producers, with their existing plant, could generate power and sell it to the aluminium smelters on their doorstep. Desperate property developers who have been told that they will have to place their multi-million rand projects on ice because of power shortages would possibly pay an even higher price for some of the electricity.

In the interim, all companies that currently have the capability to generate electricity should be given access to the grid for the purpose of transmitting electricity to customers. Access should naturally be dependent on meeting standard procedures to ensure that the integrity of the grid is not jeopardised but such procedures should not be stricter than those applied internally to Eskom generating plants. The additional power generators should not be compelled to sell their electricity to Eskom and should not be subjected to unreasonable transmission charges.

This is not a time for government to cling to archaic ideas about the supposed benefits of government ownership. It would also not be wise for labour unions to oppose the introduction of competition into power generation; surely any new power generator will be bidding up the price of skilled labour – their labour. This is a time for government to display economic policy management skills and immediately allow competitors into the generation, transmission and distribution of electricity.

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 may not be shared by the members of the Foundation.

FMF Feature Article/ 29 April 2008 - Policy Bulletin / 19 January 2010