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South Africa has an energy plan – it just needs to implement it

By the Free Market Foundation Energy Policy Unit

President Zuma’s call for a radical transformation in South Africa’s energy sector in his state of the nation address hit at the core of the country’s energy catastrophe. Without energy the National Development Plan (NDP) and all plans for growth are dead in the water along with prospects for jobs. South Africa has an immediate and future energy crisis. We need a radical policy to secure affordable and reliable energy to solve the short-term emergency and the long-term supply to power essential GDP growth. The good news is that this radical policy already exists embodied within the 1998 Energy White Paper and the NDP for energy.

“We have the plan, now let’s get on with it” was the very strong message delivered at a media briefing on the 12th of June by the Free Market Foundation’s (FMF) Energy Policy Unit (EPU), a group of energy industry experts set up by the FMF in response to the 2008 load shedding to promote a free and efficient market in energy.

That seven foreign government trade commissions booked to attend this briefing is a clear message to government that foreign investment and trade representatives are watching South Africa’s energy policy very closely. Clear direction and immediate action to implement the NDP is urgently required.

FMF executive director, Leon Louw, said that lack of adequate power was having a disastrous economic impact. “Eskom’s focus on keeping the lights on keeps us in the dark about the real state of the catastrophe of South Africa’s energy supply deficit. Failure to implement existing government policy set out in the 1998 White Paper, the Electricity Act 2006, the ISMO Bill and the plan for a competitive market set out in the NDP is creating a crisis of catastrophic proportions. According to Efficient group chief economist Dawie Roodt, South Africa’s economy is 13%, i.e. R366 billion smaller than it would have been had sufficient power been available.”

EPU chairman Terry Markman says that the 1998 Energy White Paper (EWP) clearly sets out the direction and policy measures necessary to ensure the future and security of South Africa’s electricity supply. Government will encourage competition; remove distortions and encourage energy prices to be as cost-reflective as possible. It will also work towards an investor-friendly climate, restructure Eskom into separate generation and transmission companies and divide the power stations into a number of companies to enable competition in generation.

The EWP says that to improve efficiencies and reduce prices, government will have to consider giving customers the right to choose their supplier and encourage private sector participation and competition via IPPs (independent power producers) in the generation sector and open access to the transmission system.

According to the EWP, the government also needs to allow licensed privately owned distributors to co-exist alongside other public and private distributors to distribute their own generated electricity, subject to approval by the national energy regulator.

The NDP reflects the policy in the Energy White Paper and says legislation is required for transmission lines to provide for non-discriminatory open access and, where appropriate, to encourage competitive markets and greater opportunities for investors to provide innovative solutions.

The NDP says that the economy urgently needs increased competition in electricity generation, that gas should be explored and new generation capacity should be divided between Eskom and IPPs.

Also in the NDP, and mentioned again by president Zuma in his speech, is the plan for an ISMO to be quickly established and that transmission assets should be transferred to the ISMO making it an independent transmission and systems management operator (ITSMO).

It states that regulatory uncertainties need to be resolved including how IPPs can sell to customers other than Eskom; the right to access to Eskom’s grid and for IPPs to trade electricity.

The EPU believes that the immediate action required is to instruct Eskom to allow access to the grid; pass the ISMO/ITSMO bill; replace Coal 3 with IPPs and deregulate. Also, allow cross border trading and establish common trade rules and policy such as those in the EU and NoordPool free markets in energy.

Fortunately South Africa’s government does not have to work in isolation and can avoid other countries’ mistakes.

Energy researcher Lisa Harraway says that there were very clear lessons from other countries. Case studies* undertaken by the EPU from the UK, New Zealand, Brazil and Chile show how moves towards energy privatisation and free market policies have been tried elsewhere with successes but also mistakes which South Africa need not repeat. New Zealand stands out as an excellent blueprint for a successful functioning energy market providing affordable and reliable power into the economy. (*Available on request from the FMF)

Louw says that although Eskom was not to blame for the failure to implement the energy policy, it is responsible for protecting its monopolist market dominance by placing unnecessary hurdles for IPPs to access the grid thus preventing the move towards a more free market for energy supply as envisaged in the NDP. Also, it has failed to bring new capacity (Medupi and Kusile) on stream, on time and to budget.

He also says that we have no idea of what the real price of electricity might be and only a competitive market could determine this but that Eskom’s proposed increases would further damage the ailing economy. “What Eskom proposes is a 574% price hike over nine years (406% inflation-adjusted). Eskom said it would ‘need’ 25% after that, which means it is asking for 1,750% (1,525% inflation adjusted) over 14 years,” Louw says. Energy regulator Nersa has approved 403% (235%) but there has been no formal request from Eskom or a ruling yet on ensuing years.

The Energy White Paper and the NDP together provide the strategic plan to rescue South Africa from the immediate and future energy crisis. All we need now is the political will to implement it.

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