South Africa: Electricity Costs - We Will Be Held to Ransom If We Don't Fight Back

analysis

Living with an electricity monopoly armed with a mandate to provide basic services can be a double-edged sword.

If well run and efficient it can be a boon for consumers and the public in general. If poorly and inefficiently run, the aftershocks will hurt your pocket and eat at the tax base for a long time to come.

When a utility company holds a monopoly over power plants, the transmission of electricity and large parts of the distribution network, as South Africa's Eskom does, it pretty much holds you to ransom.

As Albert Hirschman in his book on the performance of firms and organizations, Exit, Voice and Loyalty, noted: customers without much option will find it hard to exit a monopoly utility's services.

Even for those who do exit, their flight is welcomed because no utility wants barking customers at its door for fear of influencing others and creating further political pressure.

In turn, neither does the fear of loss of revenue hurt the public utility because there is always the option of a bailout, as we have seen for so many troubled state enterprises in our country. Underperformance becomes the norm.

Despite Eskom's continued woes, it did do remarkably well to provide electricity for millions of people. South Africa's mass electrification programme started in 1994 at a low base of 34% connectivity and increased to 81% connectivity by 2009.

It is anticipated there will be 100% connectivity by 2014. About 80% of the urban population has electricity as does between 50-60% of the rural population.

The positive impacts on households have been studied. The provision of electricity reduces time spent in search of fuel or energy in rural area as well as many peri-urban areas. By 2007, 49% of poor households used electricity for cooking compared to almost none in 1994. But having access is not the same as being able to afford it.

Oversupply of plant capacity in the past did two things. In the pre-1994 period it led to sweetheart deals with major corporations like BHP Billiton for aluminium smelters, which, as court papers show, were well below current generation costs. These deals still exist.

In the post-1994 period, cheap electricity was also the basis for the universal access and provision of Free Basic Electricity (FBE) policy for poor households, implemented in 2003.

However, rising electricity generation costs with the concomitant need for higher tariffs will encumber the state's ability to expand access and continue with the FBE policy in a sustainable manner. Increasing costs have major ramifications not only for continued access, but also the degradation of income due to energy inflation.

So, you may wonder where we are heading and how do we fix things?

In the short-term, at least for the next five to seven years, we will suffer damnation and consumers with different income ranges will suffer differently. The poorest will be the most excluded.

There are three big reasons behind rising costs:

Firstly, electricity tariffs were never increased gradually. This is possibly due to pressure from large industry users in the early days (which is still there today) coupled with politicians being undecided about what to do with a monopoly utility like Eskom.

Secondly, Eskom's energy model is invested in "big is beautiful". It has sought to build state of the art power plants such as Medupi and Kusile where experience is short, as we had not built power plants for three decade.

These new coal plants are complex, have long lead times and are beset with construction and engineering problems, as Medupi is showing with cost-over-runs now three times that of the original estimates.

Thirdly, energy costs are also determined by how balanced and diverse our energy sources are, as well as the management performance of these different power plants. In this regard, it is problematic that 90% of South Africa's electricity comes from coal.

In general there is little transparency regarding day-to-day power plant performance so we simply do not know how well power plants are run or whether they are always performing on full capacity.

In this scenario we are heading in the direction of India and other countries where the cost of electricity generation exceeds the ability to recover these costs from consumers.

At some point the socio-economic impacts become too far-reaching for the full costs to be recovered. But somebody still has to pay and, if it is not at the front end through metered billing, it will be through the backdoor via takings from annual filings to the Receiver of Revenue.

There is already talk of some sort of top-up from the state outside of the normal tariffs in order to keep Eskom going and cover its costs following the regulator granting the utility company only an 8% tariff hike.

This subsidy recipe itself is treacherous and a moral hazard as it does not deal with two problems: a) How to solve the immediate power crisis, as Eskom's reserve margins are too low to deal with sudden blips in electricity demand, especially during the winter months? b) The long-term performance issues related to having a single supplier and the risks it poses to the economy.

There is new talk of having to break up Eskom and flog off parts of this monster utility (which has a grid system the size of Western Europe) to the private sector.

Supposedly miracles will happen. Not that we should be oblivious to the numerous cases in front of the Competition Commission on price fixing and private market dominance problems in our economy.

Better performing private entities can be a good thing if they transfer the benefit to consumers. There is nothing sacrosanct about private models of power generation. Private monopolies or oligarchies can be just as problematic as public utility monopolies.

Looking back at the history of the domination of power supply, interestingly, the US government under Franklin Roosevelt established a publicly owned utility called the Tennessee Valley Authority (TVA) in 1933 to break the monopoly of private providers who supplied close to 94% of electricity.

Consumers had taken enough of the abuse and monopoly practices from private vendors, and the TVA changed the state of play.

Nevertheless, while opening the electricity sector to private vendors may not change performance standards in public utilities, it may offer consumers the space for exit. They can vote with their feet and wallets.

This is already happening, to an extent, with the growing private markets for gas and renewables. But not everybody can participate.

Power can also be supplied - giving consumers some relief - by allowing other public entities to enter the market.

In the past local municipalities in South Africa, such as the Cape Town and Johannesburg municipalities, also generated their own power. The City of Johannesburg, for instance, built a state of the art coal-fired power station in Orlando, Soweto in the 1940s, which was only decommissioned in 1992.

Orlando power station provided 20% of Johannesburg's electricity needs. Orlando is just one example of a host of other plants built, owned and very successfully run by municipalities.

This option that was closed to us soon after 1994 should be revisited again as reliance on one public utility is proving to be fraught with challenges and risks.

State utilities such as Transnet should also be given the option to generate their own power, and perhaps, other state entities too. This has never been seriously in contention, but should receive thoughtful attention.

Perhaps we could also do with another publicly owned power utility that, for example, has investments from worker and government pension funds. Part worker and consumer owned utilities may well change the accountability and performance of public entities - but such models have never really been tested.

Energy is to the economy and people what water is to the whole of life itself. It is far too precious to be left only to the whims of market 'goodwill' and over promising suppliers.

As Hirschman noted, consumers exiting a company may sometimes only be sufficient to maintain the status quo, but where exit and political voice is added in a concerted manner, as it was with the creation of the TVA, something may well change.

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