It’s time to free South Africans of the Eskom monopoly – FMF

JOHANNESBURG — Monopolies that are funded and protected by the state are bad news. One just needs to look at the disaster that is South African Airways (SAA) and its never-ending bailouts. South Africa really doesn’t need a national airline. At the bottom of Africa, South Africa is also poorly placed to become a major, global airline hub. However, South Africa does have the potential to become a major global hub for independent electricity producers owing to the country’s high levels of sunshine as well as its long coastline that is ideal for wind power installations. So, it’s highly disappointing that Eskom and government are dragging their feet when it comes to opening up the market more for Independent Power Producers (IPPs). The potential for job creation among IPPs is significant and they can help plug any shortage in power capacity. Meanwhile, the falling cost of solar, in particular, makes it a no-brainer. The days of Eskom being a monopoly should be over, yet government seems intent on protecting it. Perhaps it will take the ANC being voted out in 2019 for that to change, especially as other parties like the DA are intent on pursuing IPPs in places such as the City of Cape Town… – Gareth van Zyl

By Chris Hattingh*

What is the fundamental difference between a state-supported monopoly and a monopoly that develops in the market? The former has the state using taxes to shore up its failures and is protected by legislation preventing others from competing with it – the latter is a business that has gained monopoly status because it competed with others by offering better services and products. When an entity is protected by legislation, it becomes a monopoly. If a private company manages to attain a dominant position in the market it is because that company has offered better products and services than its competitors – a monopoly can only be described as such if it is backed by force.

Eskom’s latest annual financial statements record irregular expenditure of almost R3bn. The auditor’s opinion points out “reportable irregularities” i.e. fraud, and that Eskom’s procurement processes do not meet legal requirements. Irregular compensation funds, shady tender processes and the link between the company’s financial director, Anoj Singh, to the Gupta family are all part-and-parcel of the Eskom story. Furthermore, Eskom’s long-term debt is now R336.8bn – the South African taxpayer is going to have to foot this bill along with every other tax imposed on them. This rightly outrages us, but nothing will change if we do not end Eskom’s iron grip on the energy industry, with its state backing and continued taxpayer-funded bailouts.

Electricity pylons carry high voltage power lines from the Hendrina power station, operated by Eskom Holdings SOC Ltd., in Middelburg, South Africa on April 13, 2016. Photographer: Waldo Swiegers/Bloomberg

Instead of expecting Eskom to continue to generate 95% of the country’s power, South Africa needs a competitive energy market. The market must be opened up so that independent power producers (IPPs) can compete with each other for customers’ money – whichever producer is the most reliable and offers the best service at the best price will gain the most customers. Those who fail to do so will have to close – zero government bailouts for failures.

Take energy generation, for example. If private companies were sure that government would not interfere, they would feel secure enough to invest their own capital into modern, reliable generating plants. Private companies could both fund and operate these plants, and thereby create jobs – those who offer the best packages will attract the best workers.

A decentralised energy market would encourage competition in every possible part of the system: electricity would be priced according to demand and supply, efficiency would increase as suppliers gained clearer knowledge of high and low demand hours, and consumers would have a choice of suppliers.

Because private companies would be investing their own money, they would have increased incentive to build the best possible generating plants and distribution networks. With no government guarantees or possibility of receiving bailouts, these private companies, in competition with others, would have to do their absolute best to gain customers by offering competitive prices and efficient service. The price of electricity needs to be closely linked to the people who pay for this vital resource right now – South Africans – not government bureaucrats who simply decree a price and then pay their own salaries as they see fit.

The trend around the world is toward less government control. The South African government could be at the forefront by setting the rules for a competitive energy market and then stepping back, allowing South Africans to forge the way ahead. No one person has all the necessary knowledge to run an industry, never mind one as complex and important as energy supply and generation. As the economist Friedrich Hayek pointed out, no system can be as effective as one in which competing suppliers vie to meet the needs and wants of consumers.

It is crucial for the beleaguered South African economy that we have sufficient energy supply and generation capacity – we simply cannot run at a deficit and expect to create jobs. The world is trending towards green energy, but, whether it is coal, gas, wind turbines or solar, we need as much energy as possible. And the best way to get more people using sustainable energy would be to offer reliable, cheap sources as only a competitive energy market would be able to do.

  • Chris Hattingh is a researcher at the Free Market Foundation. 

Energy minister calls on City of Cape Town to engage

By Chris Yelland*

In an interview on Friday 4 August 2017 with EE Publishers investigative editor Chris Yelland, Energy Minister Mmamoloko Kubayi confirmed that the Department of Energy (DoE) and the National Energy Regulator of South Africa (NERSA) has been served with court papers by the City of Cape Town demanding the right of the City to purchase electricity from independent power producers (IPPs).

This court action effectively challenges the so-called “single-buyer” model in South Africa, whereby Eskom is given the exclusive right to procure electricity from generators of electricity for resale, including electricity from renewable energy IPPs.

In the court papers, the City of Cape Town warned that if the court ruled current legislation and/or ministerial determinations prevent the City from procuring electricity directly from IPPs, the City would challenge the constitutionality of such legislation and ministerial determinations.

In the interview Minister Kubayi sharply criticised Cape Town Mayor Patricia de Lille for “running to court” before engaging further and exhausting intergovernmental cooperation efforts to resolve these issues between the City and the DoE.

“This is a premature case. When there is a dispute between two spheres of government, the constitution and law provides for negotiation. Mayor de Lille has not sought this”, said Minister Kubayi.

Minister Kubayi further called on Mayor de Lille to withdraw the court papers and to engage with her. “We are going to sit with SALGA and COGTA to have a full discussion on these matters”, she said.

The matter is particularly relevant for the City of Cape Town and other municipal electricity distributors in South Africa in light of Eskom’s application to increase its electricity prices by some 20% to Eskom customers on 1 April 2018, and by 27% to municipalities.

Even before this proposed increase, the price of electricity from new wind and solar photo-voltaic (PV) IPP projects is now lower that Eskom’s average cost of electricity supply, and significantly lower than Eskom’s price of electricity to municipal electricity distributors. This cost differential will further increase significantly in the years ahead.

Minister of Energy Mmamoloko “Nkhensani” Kubayi sworn in by Justice Sisi Khampepe. 

The matter is also relevant to clarify whether of municipalities can procure electricity from small and medium sized electricity generators, such as domestic, commercial and industrial roof-top solar PV systems embedded within municipal electricity distribution systems.

Embedded distributed generation is likely to make an important and growing contribution to electricity supply in South Africa, but has been completely ignored in the draft update to the national Integrated Resource Plan for Electricity, IRP2016, presented by the Department of Energy in November 2016 for public comment.  

In the interview with Chris Yelland, Minister Kubayi indicated that the DoE had taken note of this omission in the Draft IRP2016, and that embedded generation would be addressed in the final IRP2016, which is due to be gazetted by the end of February 2018.

Just a few weeks after the appointment of Minister Kubayi on 31 March 2017, the Cape Town High Court judgement on 26 April 2017 on the proposed nuclear procurement by Eskom raised issues in respect of the validity of Section 34 ministerial determinations by her predecessors for new generation capacity.

Minister Kubayi said she had communicated with Mayor de Lille on this as the judgement also impacted on the validity of other ministerial determinations, including those for renewable energy IPPs. She said she advised Mayor de Lille that the DoE needed to study the court ruling carefully before engaging further.

Mayor of Cape Town Patricia de Lille

“We messaged each other about a month ago and I told her I can’t determine anything until after we had studied the court judgement. We asked Mayor de Lille to allow us to work on it and to have a look in detail at what she is requesting. She didn’t tell me she was unhappy with my response. The next thing it’s at the court. I don’t think that is how we should operate as government.

“I’m looking forward to engagement to look at how we can separate responsibilities between local and central government, and what municipalities can do – where and how. I have to look at the whole picture, and the fiscus, so that we don’t duplicate infrastructure and responsibility”, said Minister Kubayi.

  • Chris Yelland, investigative editor, EE Publishers. 
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