Shed Eskom’s monopoly to solve the electricity crisis

There is no reason for the country to go through years of blackouts and electricity rationing, turning away foreign investment, and curtailing local capital expansion programmes. SA could have electricity without blackouts within a short time if government forthwith abandoned Eskom’s monopoly and allowed competing electricity generators and distributors into the market.

BHP Billiton, SA’s largest power consumer, has three aluminium smelters that use a substantial amount of electricity. How long would it take an American, British, Chinese, French, German, or Japanese power company to come to an agreement with BHP Billiton to erect a power generation plant or plants, and produce all the electricity the company needs and more besides? Certainly not seven years!

Before a deal can be made with a new generating company, BHP Billiton and Eskom would have to untangle their existing contracts. BHP Billiton’s Mike Salomon has acknowledged that the rates agreed with Eskom are lower than those a new plant could compete with in the short term.

However, given the current power supply uncertainties, the aluminium smelting company and others in similar positions would surely make concessions to return to full and uninterrupted production. BHP Billiton has indicated that it needs an additional 700 MW of power to continue with planned expansions and it needs 30 years of assured supply for the purpose. Apparently, if it had the power now, it would go ahead with the expansions immediately.

Coega and other potential power-hungry developments are also in the wings and the government will have to seriously consider dumping its ideological approach to service delivery in SA. The 30 per cent of PPP power-generation it has in mind needs to be ramped up and changed to allow an increasing percentage of SA’s electricity needs to be supplied by private power generation companies. Such companies will supply all the capital required for the erection of the plants and take a load off the liabilities to be guaranteed by SA taxpayers. Total liberalisation of electricity generation, transmission and distribution would provide the best long-term option.

Liberalisation is not without its technical problems. Some problems encountered in liberalised electricity markets relate to making sure competition exists in the various aspects of the industry, thus giving the customer a choice of suppliers. By doing this, efficiency has been increased, customers have received better service, and prices have been reduced. Various countries have wrestled with these difficult issues and there is now a wealth of experience for SA to utilise in reforming our power industry to ensure that electricity becomes permanently available once again.

According to the World Bank, whenever states own and operate infrastructure, four institutional problems appear repeatedly. First, there is a misallocation of resources:a tendency to become involved in large-scale projects that are not economically viable. An example of this, of course, is Eskom producing generating capacity that far exceeded potential demand, as it did some years ago, leading to the ‘moth-balling’/scrapping of high-cost generation plants that were redundant. Or, again just as Eskom has done, the state industry goes to the other extreme and fails to increase capacity to meet demand, causing huge disruption because there are no alternative suppliers, thanks to its legislated monopoly.

The second institutional problem is inadequate maintenance. An examination of the ‘moth-balled’ generation plants is likely to reveal that they were totally neglected, making reactivation impossible, while the records of existing plants most probably will reveal that earlier adequate maintenance would have avoided some of the current problems. A typical example of higher costs caused by neglect, mentioned by the World Bank in its 1994 Development Report, is $12 billion in road maintenance in Africa that would have saved $45 billion in road reconstruction.

A third problem is waste and inefficiency in the operation of infrastructure. For example, port facilities in developing countries move cargo from ship to shore at only 40 per cent the speed of the world’s most efficient ports.

A fourth problem in the operation of much state-owned infrastructure is the lack of a sensible relationship between prices and costs. Prices are set politically, with the result that electric power prices of developing countries are set typically at half their cost, and the negative effects of over-usage are ignored. As Andrew Etzinger, Eskom’s chief of demand-side management said in a recent media interview, ‘The fact is, in this country, for a long time we have had a surplus at a cheap price – far cheaper than in other industrial nations. So it has made sense for the giant investors, whose plant needs massive amounts of electricity, to invest here.’ What he did not add was that these benefits were provided at the expense of past, current and future taxpayers.

Nobody knows what electricity ‘should cost’ in SA. A real price could be determined only through freedom of entry into the generation, transmission and distribution of electricity, unfettered competition between the various providers, and the removal of all special privileges currently enjoyed by Eskom. In other words, Eskom would have to be broken up into separate functioning parts, and the ownership of those parts preferably handed over to the citizens of SA, to whom we are told they belong. These new private companies could then compete with, or be purchased by, the worlds’ most efficient energy companies.

South Africans will derive a great deal more benefit from efficiently, competitively and reliably provided electricity than from the illusion that, as citizens, they ‘own’ and ‘control’ Eskom, especially if they, and most importantly the poor, have had the benefit of a payout from the sale of its assets.

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/22 January 2008 - Policy Bulletin / 09 February 2010