Powering progress: The urgent need to reform South Africa’s electricity sector – FMF’s Eustace Davie

South Africa’s electricity sector, dominated by the state-owned Eskom, faces a dire threat of power shortages and frequent blackouts. To avert this crisis, FMF director Eustace Davie sees two policy options that emerge: rapidly increasing electricity supply or persisting on the “blockade path” with dire economic consequences. Davie argues that the key lies in introducing private investment, competition, and an independently operated transmission grid. Emulating successful models from other countries can ensure lower prices, timely investments, capital availability, and continuous supply. Reforming the electricity sector is vital for South Africa’s economic growth and energy security.

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Rolling away the South African electricity blockades

By Eustace Davie*

The generation, transmission, and a large percentage of the distribution of electricity in SA is currently carried out by Eskom, which is a vertically integrated Public Enterprise. Local authorities carry out the balance of the transmission and distributing of electricity. The actual and persistent threat of power shortages and the current frequent abrupt termination of power to certain areas (blackouts) demonstrate that to maintain the state electricity monopoly in its current form is not in the best interests of electricity consumers, the employees of Eskom, or the government – in fact, the entire nation. The interventions are veritable “electricity blockades.” A widespread consensus exists that a method has soon to be found to terminate the blackouts threats and to build in a safety margin between minimum expected electricity supply capacity over potential maximum electricity consumption. 

Avoidance of blackouts is the first and most important objective, which can be achieved by implementing either or both of two policy options which have diametrically opposite effects on electricity consumers in South Africa. The first and most desirable option is to bring about a rapid increase in the supply of electricity to satisfy the needs of all consumers, especially the needs of the large-scale industrial electricity users but without depriving other electricity users, especially domestic consumers.

The second option, which has huge negative consequences for the economy, is to continue the current “blockade path” and to retain and extend it. Apart from the “voluntary” reductions, there are firms that are punished for “excessive” use of electricity, and others that are denied access to electricity for new industries, property developments and even the building of new homes. The cost in production and development loss is enormous. The first option, to increase supply as rapidly as possible, is without doubt essential to avoid stalling the economy and doing continuing harm to economic growth. 

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Increasing electricity supply 

Inadequate progress has been made in increasing the country’s electricity supply. There appears to be no good reason why the government did not in good time allow independent power producers to build generation plants and increase the security of the country’s power supply. Delays have already resulted in huge economic losses and escalating costs due to power outages and the capital investments that electricity users have made in back-up plants to keep their plants and equipment operating and the lights on. 

If electricity generation, transmission and distribution had been in private hands, with no barriers to entry preventing competitors from entering the market, this situation would not have arisen. 

The need for additional electricity generation capacity was identified in good time, but because of the existence of regulatory barriers to entry, alternative power producers were prevented from providing the required additional capacity. 

There is no point in dwelling on past errors but there is every reason to ensure that the problem of insecurity of supply of electricity is resolved as soon as possible. There is also every reason to establish an electricity supply environment that will ensure that the current disastrous electricity insecurity, once addressed, never again occurs. 

An alternative electricity supply environment 

An alternative electricity supply environment that will ensure that there is no repetition of the existing perennial threat of electricity blackouts must necessarily emulate the most successful arrangements operating in other countries. There is no doubt that private investment and management of electricity generation, transmission, and distribution play an important role in the most successful electricity environments. The most important reasons for this phenomenon are the critical role played by competition in ensuring the lowest prices, timely investment, availability of capital, continuity of supply, and choice of providers available to consumers. 

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Independently owned and operated transmission grid 

Of all the features that appear to provide an assurance of smooth operation, an independently owned and operated high voltage transmission grid appears to be the most important. The entire grid need not have one owner. Parts of it can be independently operated but NERC and its associates in the US have demonstrated that independent supervision of the grid and its operations is essential to protect its integrity. NERC is responsible for supervising connected grids that cover much of Canada, the US and part of Mexico. 

It is essential that objective rules be established by participants for assuring that the integrity of the grid is maintained. It is also essential that any generator of electricity who abides by the rules should not be prevented from utilising the grid to sell electricity to customers. Similarly, purchasers of electricity who follow the rules, should not be prevented from drawing electricity off the grid. 

There is consequently a strong case for Eskom to divest itself of ownership and control of the transmission grid. Sale of the grid to private purchasers would supply much-needed capital to finance the building of new power stations or to pay off debt and reduce the burden on the government, taxpayers, and electricity customers. 

Independent Power Producers 

Independent power producers have, according to reports, been ready and waiting to build new electricity generation plants in South Africa. Once the transmission grid is independent, the conflict of interest that has unavoidably played a role in delaying the entry of independent power producers, will have been removed. Entry of further power producers could then be entirely dependent on their meeting objective standards and not on a licensing process based on the subjective judgements of officials. No restriction would be necessary to prevent “excessive” investment in generation capacity. If there is inadequate business to sustain additional entrants, the cost will be borne by such entrants and not by taxpayers. Opening the production, distribution, and competitive supply of electricity in South Africa would bring about a dramatic positive change in the efficiency and productivity of the entire energy delivery system in the country.  

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*Eustace Davie is a director of the Free Market Foundation. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation

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