If a monopoly is what every true-blooded ambitious corporate desires for itself, it can all too easily be a consumer’s worst nightmare. This is where strong, but even-handed watchdogs are essential. Thembani Bukula, the man in charge of regulating South Africa’s electricity industry, explains it neatly.
“Regulation is meant to simulate what competition would do, to bring about market forces with monopolies that would not feel these pressures otherwise,” he says. Unlike the previous regulator, the National Electricity Regulator of South Africa (Nersa) has real power to bring about compliance and has demonstrated that it is not afraid to criticise. Eskom, which generates 90% of our electricity, was caught off-guard by a damning investigation into the Koeberg power outages. Because new legislation was not retrospective, the utility escaped any severe penalties.
“They were used to a regulator with no teeth,” Bukula muses. We’re in his office in Pretoria and it’s a warm Monday morning. The office is immaculate, and Bukula knows exactly where to find each document and report.
“I was the last regulator to be appointed, in fact, on the day they launched it [Nersa]. My wife said, ‘there’s a fax from the minister, you must be in Sandton’. I had to go out and buy a suit,” he recalls.
The previous electricity regulator had little real power owing to limiting legislation, and was only able to mandate pricing. The new regulator, Nersa, is able to do much more. It issues licences for the electricity, fuel and piped gas industries, acts as a mediator where needed, sets tariffs and prices, promotes optimum usage, and settles customer disputes.
Eskom produces the world’s cheapest electricity, hands down. At less than 36c per kilowatt, it’s 30% cheaper than that of its closest competitor, in Canada. This, it seems, is one area in which apartheid planning has paid off — until now, that is. Most of South Africa’s power stations were built in the 1970s and were paid off at the time, so the present running costs are very low.
The bad news is that the overcapacity Eskom has enjoyed since the Eighties — around a 20% gap between demand and production capacity — is at last running out. “South Africa has enough generation capacity to meet demand,” Bukula says, “but not the reserve capacity required to operate safely.”
He says the reserve margins have now dropped to less than 10%, but the international norm is at least 15%. This is the target the country is aiming to achieve. The problem is that even bringing previously mothballed power stations back on line will not increase the capacity to required levels.
Eskom’s transmission network also needs to be strengthened, particularly in the Western Cape. “When you have a hosepipe on, the more you open the tap, the more unstable that hosepipe becomes if there is no one holding it at the other end,” he says, explaining why a generator is needed in that province.
“It’s a problem with the conduit. We can generate enough power for the whole country,” Bukula says.
The price of electricity in South Africa is set to rise considerably. Two new power stations, operated by the private sector, should be up and running by 2009. A coal-fired power station — the type that presently provides most of our electricity — takes eight years to build. These new stations, however, will be open-cycle gas turbine stations, which are cheaper and quicker to build, though more expensive to run.
“It is likely the cost will go up,” he acknowledges. He shows me a graph forecasting the long-term average price of electricity. The median line — the average — is about R1,20, which the current price is way below. Over the next few years, the graph shows the price line rising far above the average.
But Bukula is quick to add that the regulator will avoid drastic price increases and says the price would have to go up in line with inflation.
“South Africa is taking a cautious approach to privatisation,” explains Bukula, as privatising electricity does not always result in cheaper prices or more efficient operations. Just 30% of the generation capacity will be in private hands for now, with a call for tenders to be advertised in June next year.
But our present cheap electricity also makes alternative energy sources much less attractive. With solar power, for instance, the initial capital expenditure is huge and ongoing maintenance is “not necessarily cheap”.
Where these technologies are used overseas, they are heavily subsidised by governments. Then, solar power can only generate during daylight hours and does not produce very much electricity. Consequently, it is used mainly for heating water.
“In the informal settlements, their last concern is hot water,” he says.
Cooking, electric light and a power source for television are all more pressing. So while solar power has the potential to increase the rate of electrification, its uses are limited. He says wind farms or solar power should be used to provide power for a single community, rather than be part of the national electricity grid.
Gas is another potential energy source, but at present the industry is largely unregulated. It contributes less than 2% of South Africa’s energy needs, though this is likely to grow to 4% in the next few years. Nersa is in charge of piped petroleum gas, but the gas cylinders sold to consumers for heating and cooking don’t report to any authority. “In due course it will be regulated,” he says, adding that piped gas should be made available to homes in the same way that water and electricity is.
Change could be harsh, though. Gas charges are not transparent and Bukula says suppliers have profit margins of between 30% and 70%.
Then there are the questions arising from Nersa’s investigation into the Koeberg outages. Bukula says Eskom flouted its own safety procedures and operating regulations, that there was gross negligence and that existing faults in Koeberg’s configuration were not corrected until some time after the first incident — in November last year — occurred.
But he’s willing to concede that Eskom has already corrected some of the faults identified and says he thinks the utility has started to learn its lesson. It seems evident that electricity will be regulated with a sharper eye than previously. Perhaps this will help avoid the repeated outages that led to the investigation. But whatever happens, it seems certain that our energy industry will be changing considerably in the next few years.