By Eustace Davie of the Free Market Foundation
South Africa’s national electricity grid is the largest machine in the country, which has to be constantly and delicately monitored to maintain the “quality” of the electricity on the grid and a balance between the power being withdrawn from and entering the grid. The process is one of the world’s engineering marvels.
Engineers will tell you that, to avert the kind of emergency that occurred recently in South Africa’s electricity network there has to be a comfortable reserve margin. This means that the generating capacity of the fully operational generating plants connected to the grid must at all times be greater by a safe margin than the peak load of electricity ever likely to be withdrawn from the grid.
Electricity generation is in most cases not an instant process. Giant electricity generating plants take some time to get going, so there have to be back-up generating plants such as hydro-electric or gas-fired plants that, in the case of an emergency, can readily be put into operation. If users had not responded voluntarily to calls to reduce power usage, supply to some users would have to be cut without their consent, which is called load-shedding.
Back in the late 1990s, engineers prepared a timeline that showed that South Africa would need extra electricity generation capacity by 2007 and that this needed to be added timeously to avoid a supply deficit. The government took the warning seriously and even appeared to be considering emulating developed countries by dumping the archaic and inefficient vertically integrated government monopoly method of delivering electricity, which had been shown in most countries to be inefficient and costly.
In 1998, the Cabinet approved a White Paper containing some positive proposals for policy changes that would: (1) Give customers the right to choose their electricity supplier (2) Introduce competition into the industry, especially the generating sector (3) Permit open, non-discriminatory access to the transmission system (4) Encourage private sector participation in the industry.
Given government’s decision to rely on private generating companies to finance, build and operate the required new generating plants, Eskom did not plan to build additional generation capacity but prepared for the setting up of a trading system for the new energy market. Large foreign generating companies lined up to supply the new capacity. Then there was a hiatus in decision-making. Nothing happened and the potential foreign investors left. Even local investors who wanted to build generating plants could obtain no clarity on policy.
Eventually, Eskom was ordered by government to build the required plant. Unfortunately, instead of building smaller plants that could be put into operation sooner, a decision was made to build the giant Medupi and Kusile plants.
Politically motivated decisions imposed on the day-to-day functioning and long-term plans of Eskom and failure to allow independent power producers (IPPs) into the electricity market are the primary reasons why SA currently has an electricity supply deficit of at least 5,000 MW of generation capacity. That deficit does not include the electricity that would have been used by the new developments in mining, manufacturing, retailing, and housing that have not occurred or were still-born because of the electricity deficit.
Private companies could make a considerable difference in a competitive South African electricity market. The largest US electricity supply company, Duke Energy has 7.2 million electricity customers, 57,700 MW of generating capacity from a mix of coal, nuclear, natural gas, oil and renewable resources, and has 58,000 km of transmission lines. Eskom supplies electricity to more than 7.5 million customers, has 41,194 MW of generating capacity from a similar mix of resources, and has about 30,000 km of transmission lines.
Showing that a single private company is larger than Eskom is not intended to suggest that it would be good for South Africa to have such an entity in control of its entire electricity supply system; a large protected monopoly is undesirable in any guise. What is important to recognise is that, in the US, Duke Energy has many competitors and has to constantly improve its offerings to gain and retain customers.
South African consumers are missing out on a great deal of technological and other development benefits because of the current structure of the electricity supply system. Duke Energy is, for instance, currently installing smart grids, which will allow its customers to identify the appliances that are costing them the most in energy use and make it possible for them to remotely turn their appliances on and off. Where there are electricity markets, shortages can always be covered by purchases from wholesalers, other generating companies, or on the spot market, avoiding the inconvenience and cost suffered by South African electricity users who do not have that option.
If the 1998 White Paper decision had been followed, Eskom would not have the Medupi/Kusile headache, private generating plants would be operating and supplying the needed electricity, and the calamitous harm to the economy would have been avoided. And if South Africa’s electricity users were unhappy with their power supplier, they would have the option to switch to a supplier of their choice instead of having nowhere else to go.
Eustace Davie is a director of the Free Market Foundation and a member of its Energy Policy Unit.