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South African President Cyril Ramaphosa recently announced that he would soon appoint a Minister of Electricity, with the aim of coordinating the country’s response to its ongoing power crisis. However, critics warn that the creation of a new ministry will only add another bureaucratic layer to the country’s electricity problems without addressing the fundamental issues that caused them. The South African power sector is plagued by regulatory complexities, a lack of market competition, and government monopolies, and experts warn that a true solution will require comprehensive electricity sector reform, including privatisation and the establishment of a competitive market.
The Ministry of Fruit and Vegetables
In 1980, the Soviet and Communist Party leader, Leonid Brezhnev, created a Ministry of Fruit and Vegetables, while retaining the Ministry of Agriculture. The new Ministry failed to raise production and in the 1980s the country went from self-sufficiency to becoming a net food importer.
The reason behind the worsening shortage of fruit and vegetables was the country’s command economy, and creating another ministry without introducing market incentives just revealed the flaws in the existing system.
Brezhnev died in 1982, and the Ministry was done away with when Mikhail Gorbachev became Soviet leader in 1985. Under Gorbachev’s policy of ‘perestroika’ or reconstruction, the size of private agricultural plots was enlarged and farmers were given greater independence. Gorbachev allowed a rise in bread prices, but even with the reforms, wheat, vegetable and fruit production dropped. By mid-1989 there were severe food shortages.
The key problem was that in the Soviet Union farmers were paid the same, regardless of productivity, which meant there was no incentive to produce more. While Gorbachev’s perestroika and glasnost, openness, began a process, it was only with the collapse of the Soviet economic command system and its transformation to a market economy that food production took off.
Last week in his State of the Nation Address, President Cyril Ramaphosa said he would soon appoint a Minister of Electricity. According to the President the new minister will oversee all aspects of the electricity crisis response, including that of the National Energy Crisis Committee, the body set up to coordinate government’s response to worsening power cuts.
Like Brezhnev, Ramaphosa might be deluding himself into thinking that the new Ministry will rid the country of, in this case, a shortage of electricity. The real lesson from the failure of Brezhnev’s Ministry and agricultural reform in the Soviet Union is that reform has to go through to its logical conclusion in order to work. That means market-determined prices and an end to monopolies.
Without a comprehensive vision on electricity sector reform, rather than an attempt to streamline the government’s response to the power crisis, the new Ministry will have problems. International experience shows that what really works in electricity generation and distribution is privatisation and a competitive market.
Another bureaucratic layer
The new Ministry will add another bureaucratic layer into the mess without the promise of a solution emerging.
Reporting to more than one boss usually creates delays, confusion and chaos. We are told that the Department of Public Enterprises will represent the government as the Eskom shareholder and be in charge of the utility’s restructuring, but that the Minister of Electricity will look after matters of policy.
But under law, the policy function is, at the moment, one of the responsibilities of the Minister of Mineral Resources and Energy. And then the Minister of Cooperative Governance and Traditional Affairs, Nkosazana Dlamini-Zuma, will be in charge of drafting regulations around the electricity State of Disaster declared last week.
That will mean that four Ministers will have a role in the formulation of policy. And then there are a multitude of regulatory authorities that also have a say on various aspects of the implementation of energy policy. That is hardly a streamlining that crisis management demands.
With a clearer vision of what it intends to do with Eskom and the entire sector, the President might be better able to manage its response to the crisis. Later this year the government will table the Electricity Regulation Amendment Bill, ‘to transform the energy sector and establish a competitive electricity market,’ in the words of the President in his State of the Nation address last week.
The government has yet to unveil its vision for this competitive market. The big question is whether independent power producers will ultimately be able to sell directly over the grid without selling first to Eskom, and whether customers will be able to buy from competing sellers. And how does government envisage prices being set as part of its vision?
A truly competitive market would mean that anyone meeting the technical requirements of the grid could produce power and sell to anyone who chooses to buy. Ideally, that means the grid has to be privately operated and independent.
One problem the Soviets faced in raising food production was that prices were set at artificially low levels. No Ministry was needed to increase production. Allowing the market to work its way with price as the incentive could have solved the problem.
As Eustace Davie points out in this paper for the Free Market Foundation, Eskom, as owner of the national grid currently, ‘demands to be the sole purchaser of electricity, generally at a sub-economic price.’ Eskom wants to buy at its average cost, which is unrealistically low. Davie points out that Eskom should pay a higher price, closer to that of the cost of the power generated by its diesel-powered open-cycle gas turbines, which are used to reduce blackouts.
According to Business Day, Eskom says it is now implementing a plan to buy electricity from large independent producers. The need to obtain approval on the price from NERSA meant the plan was delayed by six months. Something is profoundly wrong with the energy regulatory regime if takes NERSA this long to make a decision of this nature at a time when urgency is required, particularly when the price should ideally be determined by the market.
If prices were to be set by the market, the grid privatised and independent, and the regulatory framework aligned, there could be the incentive for private operators to build large new generation capacity. But we are not seeing this yet. Given Eskom’s distressed finances, the next generation base load power stations will have to be built by the private sector, albeit in partnership with the public sector.
Giving tax credits and creating a special fund to finance rooftop solar projects, as planned, might be unnecessary if there was a price incentive that was adequate to sell to the grid. Getting prices right is key to the country emerging from power cuts and shortages.
Vietnam, a nominally Marxist country, found this to be the case in getting out of its energy crisis. The Vietnamese brought about regulatory changes to bring about a competitive electricity sector based on market prices and an independent grid. Power sourced from roof-top solar provided a sufficient supply to help the country to emerge from its crisis.
While the US, UK, Europe, and New Zealand have competitive energy markets, the experience of many middle-income developing countries in reforming their electricity sectors has been disappointing.
According to a World Bank report, ‘Rethinking Power Sector Reform in the Developing World’, a big reason for this is that the political environment was not conducive to reform.
That is the case in our country, where the preference is to create ministries rather than solve the basic problem.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.