/ 28 July 2022

OPINION| Ramaphosa’s welcome electricity reforms short on liberalisation

Generation: South Africans have had to work through rolling blackouts, particularly this year. (Dwayne Senior/Bloomberg/Getty Images)


President Cyril Ramaphosa’s electricity liberalisation announcement is  welcome but does not go far enough. 

South Africa needs real freedom of enterprise in the choice of sources of energy and in competition for consumer favour, before rolling blackouts can be defeated.

The country’s economy has not grown in any meaningful sense in recent years, especially after the Covid-19 lockdowns imposed since March 2020. Demand for electricity has not skyrocketed because of more economic activity but the frequency rolling blackouts have increased.

There is an institutional, not ad hoc, problem with electricity generation in South Africa.

The Free Market Foundation has identified section 8(1) of the Electricity Regulation Act as the source of this institutional problem. The Act provides that “nobody” may generate, transmit, distribute or trade in electricity without a licence. The Act ought to be amended and the word “nobody” be replaced with “anybody”. This would be the beginning of a free market in electricity.

There are necessary technical adjustments to make such a regime safe and efficient.

Ramaphosa refers to the reforms that will be introduced by the new Electricity Regulation Amendment Bill as “radical”. Although the bill does have redeeming qualities, it falls short of the Free Market Foundation’s radically transformative proposal.

The bill does not depart in any significant way from the regulatory mindset that landed South Africa in this powerless situation in the first place. In fact, some provisions double down on overregulation.

Ramaphosa has overhastily declared the limited reforms from 2020 and 2021 to be a “success”. Allowing municipalities to procure power independently and allowing 100 megawatt private generation has “fundamentally changed the generation landscape”, he says, because new generation projects might in the future have a combined capacity of more than 6 000MW. None of this has translated into reality yet, so the president is getting ahead of himself. 

Nonetheless, the announcement that the 100MW cap on private generation (that does not require a licence) will be removed is a welcome reform, because it will allow private power producers to generate at scale.

Wholesale liberalisation of electricity, encompassing demonopolisation, deregulation, and privatisation, is how South Africa gets out of this mess. But even partial liberalisation, as is evident in Ramaphosa’s speech, is better than no liberalisation.

It was refreshing for the president to acknowledge the spectre of overregulation; that it takes a power generation project years to be approved “due to lengthy regulatory processes and red tape” is unacceptable.

As a result, legislation that liberalises electricity regulation will be introduced.

President Cyril Ramaphosa has announced a host of measures that will help provide a reliable supply of electricity. (Delwyn Verasamy/M&G)

Regulatory uncertainty 

The partiality of the liberalisation is manifest but in the president’s proposal the legislation will be of a “special” character, which implies it will only apply temporarily. This should be resisted. “Temporary” legislation creates regulatory uncertainty and does not allow investors and firms to plan into the future.

The president stopped short of announcing an end to local content requirements, instead skirting the issue by announcing a “pragmatic approach”. Any such extraneous requirements must be repealed. Only market-related considerations, not political imperatives, must guide new electricity providers.

That households with excess power from their solar panels will now be able to sell that electricity to the grid, through a feed-in tariff, is also a good move. According to the Solidarity Research Institute, in its recent report on load-shedding, this is how Vietnam solved its 2007 electricity crisis. In other words, there is international precedent that this is the correct decision.

The renewed commitment to splitting Eskom into three state-owned enterprises (generating, transmission and distribution) was the anticlimax of Ramaphosa’s announcement. Having new state-owned enterprises should send shudders down any South African’s spine.

The non-market incentive structures built into Eskom’s bones cannot change while it remains state-owned, and this means it will operate inefficiently and according to the dictates of political expediency.

The problem with Eskom has never been that it is vertically integrated. The statist incentive structure, coupled with South Africa’s disappointing public service ethics, are the causes of Eskom’s failure. Splitting Eskom into three solves neither of these problems and may exacerbate them. If the state wants a power utility, it should have only one, which at the same time must not be afforded any monopolies or privileges.

Privatisation, although a less important aspect of liberalisation, remains important. We do not strictly need Eskom to be privatised to escape the electricity crisis. Eskom can remain unchanged, except for its monopoly, which must be withdrawn. That being said, we would be in a better position, quicker, if the private sector were placed in charge of this utility without having to answer or listen to unethical or incompetent politicians.

That Eskom would not be privatised was not the only problem with Ramaphosa’s plans for the utility, as indeed the president did not relieve Eskom of its coal and nuclear monopoly. As the only utility allowed to generate electricity from those sources, Eskom will always be the main source of South Africa’s power and that is an intolerable reality. Any firm must be allowed to generate power from those sources.

Eskom chief executive André de Ruyter has said such private power producers who seek to generate power from coal or nuclear sources  would not receive funding or insurance. If that is what economic forces dictate, so be it. But De Ruyter or an economic analyst cannot decide that.

It might well be that some consortium of maverick investors is willing to buck the international trend and fund several nuclear power stations in South Africa. Only they can make that decision, and no government policy should stand in their way. This includes the environmental impact assessments that are required for such projects to be approved.

Ramaphosa goes out of his way to emphasise the urgency of adding new capacity to the grid, while remaining committed to limited sources of electricity. The president reminds us that South Africa has a “great abundance of sun” but seems to ignore the great abundance of coal and uranium that we also possess.

It is socially detached for Eskom, the National Energy Regulator of South Africa, the government and many in civil society to still be debating what South Africa’s energy mix should look like. We are having a candle-lit debate, surrounded by darkness, about whether South Africa should use green energy or fossil fuels.

Surely the time for a debate is over — temporarily, at least. All engines must be running at full power to end the electricity crisis. We must burn every lump of coal, use every vein of uranium, frack every gas reserve and cover every available inch with solar panels.

Once the lights are on, and South Africa has surplus generating capacity again, we can comfortably discuss what the future of energy here should look like.

Ramaphosa ends his announcement by calling on households to use electricity sparingly. This is bad advice for a developing economy. Electricity should be used as necessary. After all, our powerless situation is of our making, and the right policy framework — one of freedom of enterprise — can end the crisis in very short order. We ought not to hamstring the economy because the government does not have the political will to liberalise comprehensively.

The president admits “the actions we have taken and continue to take are not enough”. These are prescient words. Many of the announced reforms are welcome but much more is required.

Martin van Staden is a member of the Rule of Law board of advisers and executive committee of the Free Market Foundation.

The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.