Better late than never: Government finally moves to break Eskom’s monopoly

President Cyril Ramaphosa has endorsed plans for an independent, state-owned Transmission System Operator, separating grid ownership and control from Eskom's power generation business. The move addresses a structural conflict the Free Market Foundation first flagged in 2009, arguing Eskom could not fairly compete in the electricity market while also controlling the infrastructure its rivals needed to use. The Presidency says the split is needed because vertical integration creates an inherent conflict of interest. While Eskom's performance has improved under Dan Marokane's recovery plan, the case for reform rests on structure rather than management. Phase one has been approved, but the detailed transaction and implementation plan for phase two is still to come..By Nicholas Woode-Smith*.President Cyril Ramaphosa has endorsed a plan to establish a fully independent, state-owned Transmission System Operator (TSO), separate from Eskom. The new entity will ultimately own and control the transmission assets, operate the electricity market, and provide non-discriminatory access to the national grid.This is good news. It is also more than fifteen years late.The Free Market Foundation (FMF) has been arguing for an independent electricity system and market operator since the establishment of its Energy Policy Unit in 2009. Long before South Africa endured the worst years of load-shedding, the FMF identified a basic structural problem with South Africa’s electricity industry: Eskom could not fairly be both a participant in the electricity market and the gatekeeper controlling the infrastructure that its competitors needed to use.For most of its history, Eskom has not merely generated electricity - it has also controlled the transmission network that carries electricity across the country. Any independent producer hoping to compete therefore needed access to infrastructure controlled by its largest competitor.Eskom's monopoly was not an accident; it was built into the structure of South Africa's electricity industry and preserved by successive governments.Even if Eskom was allowed competition, being able to control the grid gave it the ability to destroy any competition. This is partly why Eskom’s privatisation in the 1990s - something that could have saved the electricity industry, was abandoned.Imagine if a single taxi company was responsible for building and controlling all the roads in South Africa. The notion is ludicrous, yet this was the status quo for electricity for decades.But the government has finally come to its senses and realized that decentralisation and an efficient competitive market needs a neutral infrastructural arbiter.The Presidency says the creation of an independent TSO is necessary precisely because vertical integration creates an inherent conflict of interest. The new entity is intended to be independent from market participants, take ownership and control of transmission assets away from Eskom, and provide non-discriminatory access to the grid. The FMF was making the same argument in 2011.When the Department of Energy published the Independent System and Market Operator Draft Bill in May that year, the FMF welcomed the move towards an independent operator, but warned that the proposal left crucial questions unanswered.Merely transferring operation of the system without separating ownership and control of the grid from Eskom would not solve what the FMF described as the “conflicted grid problem”.The FMF argued that electricity generation had to be separated from ownership and control of transmission. Producers that met uniform technical standards should be able to access the grid, while the same transmission rules and charges should apply to everyone. An independent system operator could hardly be truly independent while the grid remained under the control of an electricity generator.On 9 June 2011, the FMF hosted a full-day conference titled “Unlocking the electricity transmission grid: An independent system and market operator for South Africa”. International experts and South African policymakers, businesses and electricity-sector representatives examined models from the United Kingdom, India, Brazil, the United States and Scandinavia. The stated purpose was to advance the implementation of an ISMO and consider which model would work best for South Africa.The FMF was therefore arguing for structural electricity reform before the worst years of South Africa’s electricity crisis made reform unavoidable.But an independent transmission operator was never meant to be the end goal.The FMF’s 2012 Electricity: Vision 2030 envisaged a competitive electricity industry in which generators had open access to the grid, numerous producers could compete, generators could choose whom they sold electricity to, and consumers could ultimately choose whom they bought it from. All participants would compete under equal rules.The objective should not be a better monopoly. It should be a competitive electricity market that considers the economic principles of decentralisation, price discovery and risk mitigation.This distinction remains important because Eskom is doing considerably better today than it was only a few years ago. Under Dan Marokane and the Generation Operational Recovery Plan, plant performance has improved substantially. South Africans should welcome that recovery. A better-run Eskom is preferable to a badly-run Eskom. But an efficiently managed monopoly remains a monopoly.The case for electricity reform was never dependent on Eskom being permanently incompetent. Management changes. Ministers change. Governments change. A resilient electricity system should not require South Africans to hope that one enormous organisation remains well managed forever.Competition spreads that risk. If one generator fails, others can supply the market. If one company makes poor investment decisions, consumers and investors do not all have to pay for those mistakes.Encouragingly, parts of this market are already beginning to emerge. Private generators and electricity traders are increasingly connecting producers and customers. The Energy Exchange of Southern Africa, for example, is one of several licensed electricity trading businesses positioning itself for a market in which electricity can be bought from competing generators rather than only from Eskom.But private generation can only go so far if producers cannot reliably access the infrastructure needed to deliver electricity to customers.Transmission therefore becomes the next bottleneck.That is why an independent TSO matters. The grid should function as common infrastructure for an electricity market, not as an extension of Eskom’s generation business..Read more:.Eskom adds 800MW to strengthen national grid.Ramaphosa deserves credit for moving government in this direction. But approving the first phase of a restructuring plan is not the same as completing the reform. Phase II still must produce the detailed transaction structure and implementation plan.For decades, South Africa built its electricity system around preserving Eskom. Reform should instead build an electricity system that does not depend on Eskom. The FMF understood more than fifteen years ago that Eskom could not be both player and gatekeeper. Government has finally accepted that principle. Better late than never; now it needs to finish the job..*Nicholas Woode-Smith is an economic historian, political analyst and author. He is the Managing Editor of the Rational Standard and a Senior Associate of the Free Market Foundation. He writes in his personal capacity..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.

Better late than never: Government finally moves to break Eskom’s monopoly

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