South Africa should Rethink its Electricity Production

Published on 25th January 2010

Johannesburg at night                  Photo courtesy
Experience elsewhere indicates that in order to ensure security of supply, electricity generation and transmission by competitive enterprises is essential. EU regulation demands that member countries liberalise all aspects of their electricity industries, and in the US, because of the generally open nature of its economy, the electricity industry there is already highly competitive.

Directive 2009/72/EC of the European Parliament and of the Council dated 13 July 2009 is instructive. It suggests that a nation should not be dependent solely on its own electricity generation plants and transmission networks even if they consist of competing entities, but should establish cross-border connections with suppliers in other countries if they wish to ensure competitive prices and establish security of supply.

Paragraph 9 of the Directive states that, “Without effective separation of networks from activities of generation and supply (effective unbundling), there is an inherent risk of discrimination not only in the operation of the network but also in the incentives for vertically integrated undertakings to invest adequately in their networks.” Apply this directive to Eskom and the message is that the utility should preferably be unbundled into three independent operating companies; transmission, electricity generation and distribution. EU rules would also require that barriers to entry into each of these activities be simultaneously removed in order to encourage new entrants. Eskom has certainly not invested sufficiently in its network in that the transmission lines are not capable of supplying an adequate alternative supply of electricity to the Western Cape when Koeberg experiences problems. It obviously also has not invested in adequate generating capacity. If it had, we would not have experienced blackouts.

Paragraph 11 of the Directive could be speaking specifically about Eskom when it says, “Only the removal of the incentive for vertically integrated undertakings to discriminate against competitors as regards network access and investment can ensure effective unbundling. Ownership unbundling, which implies the appointment of the network owner as the system Operator and its independence from any supply and production interests, is clearly an effective and stable way to solve the inherent conflict of interests and to ensure security of supply.”

These two quoted paragraphs suggest that SA can learn a great deal from the EU in setting guidelines to attain similar long-term objectives, which are to “achieve efficiency gains, competitive prices, and higher standards of service, and to contribute to security of supply and sustainability.” Efforts to deny competitors access to transmission networks (grids), failure to make timely investments in generation and transmission capacity, and the failure of distributors to maintain and improve distribution networks, is behaviour that can be expected in jurisdictions that lack competitors capable of providing alternative supplies.

SA’s geographical isolation from other relatively developed countries presents difficulties in achieving the level of competition that the EU considers highly desirable but a great deal of unbundling can take place in the electricity market in order to create benefits for consumers. Creating a separate independent entity to own and operate SA’s transmission grid would be a good start. The purpose would be to open up electricity generation to competitive suppliers: the only way to ensure security of supply and competitive prices in the long run. While the grid owner and operator remains a monopoly, measures would have to be adopted to ensure that no “discrimination as regards network access” occurs, in line with the requirements in Paragraph 32 of the EU directive that, “Further measures should be taken in order to ensure transparent and non-discriminatory tariffs for access to networks. Those tariffs should be applicable to all system users on a non-discriminatory basis.”

No directives are necessary to create a competitive electricity market in the US: the market is already highly competitive. Regulatory errors such as the price controls that caused the California debacle have been removed.

A striking example of the size and diverse nature of the US electricity market is provided by examining the role played by private sector companies in the generation, transmission and distribution of electricity. American Electric Power is one of the largest power generation and distribution entities in the country. It owns the largest electricity transmission system, consisting of 62,000 km of transmission lines and has 38,000 MW of largely coal-fired generation capacity. Arizona Public Service has 9,400 km of transmission lines, 45,000 km of distribution lines, and 6,160 MW of capacity, mainly fossil-fueled and nuclear. By comparison, Eskom has 27,770 km of high voltage transmission lines, 325,000 km of distribution lines and 34,000 MW of generation capacity.

According to the US Department of Energy, the spread of investment in the electricity sector is 60% in power plants, 30% in distribution, and 10% in transmission. There are 3,100 electric utilities; 213 company-owned utilities supply power to 73% of the customers while about 2,000 public utilities and 930 electric co-operatives provide power to the remaining 27% of customers. By far the major share of the US electricity sector is privately owned, including generation, transmission of high voltage bulk power, and distribution of lower voltage power to customers. The North American Electric Reliability Council, a non-profit body elected by members, ensures the maintenance of the integrity of the linked power grids of the US, Canada and the northern part of Mexico.

What should be of interest to South Africans is that no part of the generation, transmission and distribution of electricity can be considered to be a natural monopoly. In fact, for the sake of consumers, all aspects of electricity provision should be subject to open competition. Being dependent on a single entity does not ensure security of supply.

By Eustace Davie, a director of the Free Market Foundation.

This article has been read 2,392 times