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SA urged to open power sector to private firms

South Africa must embrace private sector involvement in the electricity sector if it wants to solve a power crisis that threatens to derail its growing economy, a top business group said on Tuesday.

Mining companies and other major consumers of electricity have seen their power supply rationed since the national grid came close to collapse in January, forcing large gold and platinum mines to shut down for five days.

Power failures spurred a 22% drop in mining production in the first quarter of 2008, fuelling interest in private sector production for the national grid and business customers such as mining firms and industry.

With the slowdown in growth and fears the crisis will blight the 2010 Soccer World Cup, there are calls for President Thabo Mbeki’s government to take a fresh look at electricity generation and the nation’s dependence on Eskom.

The state-owned utility currently provides 95% of South Africa’s electricity.

”Clearly we must make way for the private sector,” Jerry Vilakazi, chief executive officer of Business Unity South Africa, said at an energy summit in Johannesburg.

”The private sector is willing, it wants to invest in electricity generation and distribution, but it will only do so if the environment is conducive,” Vilakazi said.

Critics accuse the government of keeping electricity prices artificially low for nearly a decade as part of an effort to make power affordable for the poor, one of the cornerstones of the ruling ANC’s political support.

Private companies argued they were unlikely to make the returns required to justify the cost of entering the electricity business. But their interest peaked after the government acknowledged tariffs must rise, though private firms still say the sector remains too regulated and subject to government whim.

Tarrif backlash
Eskom asked regulators to approve doubling electricity tariffs over two years, provoking a backlash from the ANC and its labour allies, who said it would hurt the poor and stoke inflation. The utility has since backed off, agreeing in principle to raise tariffs gradually over five years.

The National Energy Regulator of South Africa is due to announce a decision on the tariff structure next week.

Chris Hart, an economist with Investment Solutions in Johannesburg, told the summit that regulators should stop focusing on pricing and embrace a role that encouraged a level playing field for competitors.

”The regulator should not set the price. The market should set the price,” he said. ”The sector needs to be opened up to all players. We cannot have only one player in electricity.”

Eskom is embarking on a R350-billion ($44,23-billion) infrastructure expansion to boost electricity supply and has signalled that it is open to co-investment in power projects.

But the government, which is in a formal coalition with the Congress of South African Trade Unions (Cosatu) and the South African Communist Party (SACP), has stopped short of supporting the idea of a large private sector role in electricity.

Cosatu and the SACP oppose privatisation of state companies and are suspicious of private sector involvement in key areas of the economy, including electricity generation.

They have accused the government of failing to invest in power generating plants despite signs almost a decade ago that demand in the fast-growing economy would outstrip supply.

The resulting shortages have dented South Africa’s growth, which fell to a six-and-a-half year low of 2,1%, quarter-on-quarter, in the first three months of 2008. – Reuters 2008

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Paul Simao
Guest Author

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