What a free electricity market could look like in SA: Andrew Kenny

What a free electricity market could look like in SA: Andrew Kenny

Amid Eskom’s failures and looming price hikes, calls for a free market in electricity surge. But what’s the blueprint for this shift? Who stands to gain? Exploring the global landscape of electricity privatization, it’s clear South Africa faces unique challenges. While proponents argue for efficiency and competition, sceptics question whether private entities can truly deliver cheaper power. With Eskom’s struggles, could private firms provide the energy solution South Africa desperately needs?

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By Andrew Kenny*

Eskom’s continued failures and its recently announced price hikes are leading to more and more calls for a free market in electricity. How would it work? Who would benefit? Would it bring the optimum electricity supply? What has been the experience in other countries with electricity privatisation and an electricity market? What are the special circumstances of South Africa’s electricity?

I believe in capitalism, but must once more declare my reservations here, although I know this upsets my free market comrades. It is impossible for a private electricity company to provide electricity as cheaply as a well-run state one. The reasons are simple. Buying and operating a power station does not require ingenuity, skill, quick responses or flexibility, in which private companies excel. They do not require them because there is only one product and it never changes. But it does require huge amounts of capital, and this the state can always obtain more cheaply than the private sector.

Moreover, the state is content with a low return on capital and a long payback period, neither of which would be acceptable to private shareholders. This is why, around the world, privatisation of electricity has never led to lower electricity prices for consumers – although the matter is complicated by regulation and mandatory purchase of renewable electricity, which is always very expensive.

In the bad old days, no private company could have competed against Eskom, which was quite well run and could pay all of its costs, including debt, from selling the world’s cheapest electricity. Today, of course, Eskom is very badly run and cannot provide cheap, reliable electricity or pay its debts. Now private companies might well be able to compete.

The purpose of a private company is to make as much money as it can. In a free market, it can only do so by providing better and cheaper goods and services than its competitors. The purpose of a state provider is not to make money but to provide a service. The original sole purpose of Eskom was to provide electricity to the people. Unfortunately, under the ANC, its main purpose has become racial engineering, “transformation”, BEE enrichment, BEE procurement, cadre deployment and highly paid employment for comrades and cronies. Making electricity is of secondary concern.

For the rest of this argument, I shall assume a state-owned Eskom whose purpose reverts to making electricity. However, since the argument is about a free market in electricity, I shall also assume that this Eskom, like the private electricity suppliers, is interested in making as much money as it can. To do so, it should have to offer more attractive electricity prices and tariffs than its competitors. 

A difficult question arises: should a state-owned company be allowed in a free market? In almost all economic activities, a state-owned company could never compete against private ones anyway; private goods and services would always be better. But electricity supply is different. The state company would have the supreme advantage of a lower cost of capital. I think state companies should be allowed in a free market, provided, of course, they receive no subsidies from the state (taxpayers) or any other special favours.

Anyone who wants to generate electricity should be allowed to, subject only to electricity regulation (on voltage, frequency and phase, and on matters of safety) and should be allowed to sell it to anyone who wants to buy it at a price agreed upon by both parties. It would be practically impossible for every supplier to provide electricity to every customer directly. A man with rooftop solar panels in Upington could not provide electricity directly to a resident in Cape Town. There would have to be intermediaries, which would be a transmission system and a distribution system.

Eskom’s transmission system sends electricity from the power stations to centres of demand, from which it is distributed to individual customers, residential, industrial and commercial. A legal programme is underway to make it independent – to make it an Independent System Operator (ISO). In my free market, it would buy electricity from suppliers on a strictly competitive basis, with no favours to any supplier or any technology. There would be no regulated prices: market discipline rather than law would decide prices. There would be no ceiling on prices. If a customer were desperate for electricity and no other electricity were available, a supplier could charge R1,000/kWh if it wanted. (If the Hillside aluminium smelter in Richards Bay loses electricity for six hours, the plant which costs billions, would be a total write-off. After five hours, it would pay more than R1,000/kWh.) Most important, there must be penalties for unserved electricity. If a company contracts to supply a certain amount of electricity and fails to do so, it must receive heavy fines.

How would the buying be done? What would the purchase contracts look like?

One possibility is a spot market. At every instant of the year, suppliers would put in bids to supply a certain amount of electricity at a certain price for the next half hour to come. The ISO would buy all the electricity from the lowest bidder, then all from the next lowest and so on until the total demand for the half hour had been met. If Eskom were bidding against a renewable company using solar photovoltaic (PV) panels and batteries, it might bid very low when the sun was shining to undercut the renewable company, and then quite high when the sun was not shining. 

Another possibility is competitive tariffs for extended periods. A bidder would offer his tariffs for the next year. The tariffs could consist of standing charges (a fixed charge, regardless of how much electricity you use) and an energy charge (depending on how much electricity you use). The energy charge could vary according to the time of day, with perhaps low charges at midday and high charges at peak times in the mornings and evenings. The standing cost is the cost of buying and installing electrical equipment such as a generator. This cost is independent of the amount of electricity produced or received. If one household on Eskom electricity consumes 20,000 kWh/year and another 1 kWh/year, the standing costs to Eskom are the same, so Eskom would give them the same standing charge. These are the tariff offers that suppliers might make to the ISO, which would then sell electricity to distributors such as municipalities, which might offer similar tariffs to households and other customers.

Again, if Eskom were competing against a renewable company using solar PV and batteries, it could offer a high standing charge, very low prices during the daylight hours, and high prices at peak times when the sun was not shining. This would undercut the renewable company, since batteries are quite unable to supply large amounts of electricity at an economic price when the sun is not shining. ‘Unfair’, you say? Please define ‘fair’. This is a competitive market, and Eskom is just trying to outbid competitors and make as much money as it can. If you think you might need a bit of Eskom electricity sometime, I’m afraid you’ll have to pay the high standing charge. But it’s up to you. It’s a free market. If you don’t like the offer, don’t accept it. If you live in Cape Town like me, and think you can get through the long, cold winter nights on solar and batteries, go for it!

Eskom now has huge debt, which it cannot pay off with existing tariffs. In this free market, it should be obliged to do so – and not require the taxpayer to do so. It would have to set tariffs that allowed it to manage its debt. This would mean higher prices for Eskom, which might allow competitors to outbid it on occasions.

All the above is about the national electricity grid, a public entity. If a private supplier wants to provide power to a private customer through the national grid, it should be allowed to pay to wheel (transmit) electricity through the ISO, provided there is space for it to do so. In this case, the customer is free to pay much higher than market rates if he wants to – he might chose to buy very expensive solar electricity due to holding a renewable ideology.

All the above also assumes there is an existing national transmission system, which has already been paid for. But what about new transmission lines? They would have to be bought and installed by any company that wanted to use them. Eskom does not need any new transmission lines. Renewable companies do, so they must pay for them.

The present transmission system is more than adequate for Eskom to supply the whole country using coal and nuclear power stations. A few more nuclear units, with Koeberg, could easily supply the whole Western Cape on existing transmission lines. But solar power stations in the Northern Cape could not. Nuclear power can be localised, requiring short transmission lines; renewable power for the grid can only be centralised, requiring long transmission lines. You hear frequent complaints from the greens that our take-up of renewable power has been stymied by lack of transmission lines. They are right. But if they want more transmission lines, they must pay for them, and they are very expensive indeed. 

The Northern Cape has some of the world’s best conditions for solar power. It is at a low latitude and has few clouds. It is a good test for solar power for the grid, and unfortunately solar fails the test. The solar electricity there is expensive. The only renewable energy that can provide dispatchable electricity (electricity when you want it) is concentrated solar power (CSP) with storage. Such units have been built in the Northern Cape. The price for peak power on the latest one is way over R5/kWh – four times Eskom’s average selling price. Solar PV is cheaper but can never provide dispatchable electricity.

The Northern Cape’s electricity demand is tiny and the big customers for its solar power are far away. It will require enormous expenditure on very long transmission lines to bring this power to Cape Town and other centres. And what for? The solar power up there is already very expensive and quite unneeded. It will cost much more by the time it comes down here. The greens seem to be saying they want the taxpayer to pay for very expensive transmission to bring expensive and unwanted electricity to Cape Town so that the renewable power companies can make big profits.

Australia and Britain have moved from a state electricity provider to a market of private providers. The change has seen a huge rise in prices for the consumers, residential and industrial, The German economy has been crippled by high electricity costs because of the strong move towards renewable energy. The same applies in the USA and Denmark. But these are not free markets: mandatory favours and subsidies for renewables are enforced by the state. They are also distorted by the anti-scientific nonsense of climate alarm, where some power stations are punished for emitting CO2. (They should be rewarded for releasing this wonderful, life-giving gas, which has never been seen to have any effect on the climate.)

South Africa’s electricity supply is in a terrible state. It is crippling our economy, and bringing high unemployment and low investment. There is no easy route to salvation. I believe in the free market, and would allow a free market in electricity everywhere, with the state electricity company being allowed to compete. However, in normal countries, I should expect private electricity companies to stand little chance against the state electricity provider. But South Africa is not a normal country, and in our case private companies might often stand a good chance against Eskom.

Eskom’s management and engineering staff are generally hopeless, unsuitable and unfit for their jobs: private companies might well be able to provide better electricity than Eskom.

The ANC might find it impossible to stop political interference in Eskom, which would make it even less competitive. At any rate, all private companies should be allowed to compete to provide electricity for the people.

I believe a free market in electricity is the best way of improving our electricity supply. But it must be really free.

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Andrew Kenny* is a writer, an engineer and a classical liberal.

This article was first published by Daily Friend and is republished with permission

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