/ 7 November 2023

Reforms are not a silver bullet for the energy crisis

Eskom Getty
Although many might be eager to see Eskom go away, there are valid reasons for questioning how effective government reforms to the energy sector will actually be. Photo: Waldo Swiegers/Getty Images

What pragmatic and impactful reforms are needed to end load-shedding and solve South Africa’s energy crisis? 

This is a difficult and complicated question that occupies the minds of many South Africans. In the midst of contentious debates surrounding what to do about Eskom, recent changes to legislation demonstrate that the answer from the government is clear. The proposed amendments to the Electricity Regulation Act 2006 (ERA) offer a solution to the country’s energy crisis — end the state’s monopoly in the energy sector, introduce a competitive electricity market and pave a pathway to increase private-sector energy generation. 

This transformation of the country’s energy sector aligns with the government’s ongoing plans to unbundle Eskom, changing it from a vertically integrated energy utility into three separate companies. An independent transmission company — the National Transmission Company of South Africa (NTCSA) — will be the first to see the dawn of a new, competitive energy market. 

In 2023, so far, South Africans have endured 289 days of electrical blackouts. No one can doubt the intense frustration, anxiety and material suffering caused by Eskom’s dysfunction. Although many might be eager to see Eskom go away, there are valid reasons for questioning how effective government reforms to the energy sector will actually be. 

Moreover, the long-term consequences of the ERA, for energy security and energy poverty, need to be thoroughly considered. 

There are several concerns with, and critiques of, the proposed amendments to the ERA that require our close attention. First, there is the concern that the proposed reforms will in fact undermine the state’s capacity to achieve its own declared objectives in the energy sector — specifically its objectives to “achieve the efficient, effective, sustainable and orderly development of electricity supply”. 

Second, there are questions as to whether these reforms will put the state’s finances under increased risk and strain. 

Furthermore, the proposed reforms have not provided clarity on precisely how tariffs will be set in a competitive energy market. And there is reasonable research and historical evidence to demonstrate that such reforms will probably result in rising tariffs, which will only fortify South Africa’s pervasive energy poverty. 

A final concern with the ERA reforms is one that unfolds as the world faces a climate crisis. 

The need to transition to renewable energy cannot be overlooked and, although increased energy privatisation will produce a greater share of renewable energy in the short term, it undermines the possibility of executing a co-ordinated, comprehensive and truly just transition to a low-carbon energy sector and economy in the long term. 

To further unpack and explore urgent concerns floating around the reforms proposed to the ERA, we have to briefly unpack the root of Eskom’s failures. 

The acceleration of the Eskom death spiral 

South Africa’s energy crisis has been produced and is sustained by numerous factors. Primarily, it has been the severe neglect of maintenance and a lack of sufficient new generation capacity that has allowed load-shedding to endure. Simply put, Eskom does not have a large enough, sustainable supply of energy to meet the needs within the population and demand within the economy. 

Compounding the latter is the fact that Eskom is shackled by a colossal amount of debt. Certainly, the corrosive effects of corruption at the utility contribute to its precarious operational and financial position, but they are not the fundamental cause of Eskom’s woes.

 At the heart of Eskom’s dysfunction is a contradiction — it is a public utility mandated to serve the public good and yet, since 2001, the utility also has a mandate to operate as a standard private company. We have been plunged into an energy crisis since 2007 because of Eskom’s corporatisation and its adoption of an unsustainable financing model

Eskom’s corporatisation resulted in two critical changes in its operational and financial policies: the adoption of the full-cost recovery model and the user-pays principle. This meant electricity was no longer a public good, but rather a commodity, and those who were once citizens getting a state service became consumers who had to pay for their basic needs. Eskom had to recover the costs of generation and maintenance through selling electricity to us “end users”. 

Unsurprisingly, a country ravaged by record-breaking inequality, mass poverty and systemic unemployment has resulted in most South Africans not being able to afford the ever-rising tariffs

Eskom’s streams of revenue have significantly narrowed as consumers going off-grid or switching to alternative sources of energy has resulted in declining sales volumes for the utility. 

But how will the unbundling of Eskom and the founding of the NTCSA impact Eskom’s viability in the long-term? And why does it matter? 

Eskom retains responsibility for the vast majority of the country’s electricity supply (approximately 90%), meaning the utility’s full collapse would be profoundly destabilising and destructive. 

ERA reforms will add a great and direct cost to Eskom as a result of its purchasing of energy from private-sector generators. Alongside this increased direct cost, there is the mightier indirect cost of falling sales volumes overall. Combined, the two costs of declining sales volumes and a shrinking of Eskom’s market share will hasten Eskom’s death spiral and drive the utility to collapse. 

The sustainability and social cost of energy marketisation

When considering the reforms required in the energy sector, the price of electricity must be a central concern. According to a 2020 study published by the University of Pretoria, 52% of South African households experience energy poverty. This means the majority of South African households do not have safe, affordable and reliable access to electricity. This heavy burden and high cost of electricity occurs within a decade of stagnant economic growth, low wages and an emergent cost-of-living crisis. 

It is in this context that we must ask, will the amendments to the ERA curtail energy poverty and ease the high cost of electricity? Unfortunately, the pricing policies proposed by the bill will probably lead to even more unsustainable tariff increases for the majority of South Africans and the deepening of energy poverty. 

The bill aims to establish the Transmission System Operator to provide non-discriminatory access to the transmission power system. The operator will be the central purchasing agency as the wholesale buyer in the transition to a competitive electricity market. And powers provided to it will allow the entity to provide an open market platform for competitive electricity trading. 

It is vital to highlight that licensing conditions within this new market allow for tariffs underpinned by the principle of full-cost recovery, which includes “a reasonable margin or return” — that is, profit. 

Although the amendments do not toss out pricing regulation in its entirety, they reveal that the ultimate intention is to allow for end-user tariffs to be dictated by the flow and function of market forces. A subsection of the bill makes this intention clear, stating that “a licensee may charge a customer a tariff which has not been set or approved by the regulator where such a tariff is charged pursuant to a direct supply agreement or arises as an outcome of a competitive market”. 

Upon closer examination, a series of structural issues that are a consequence of market-related tariffs reveal themselves. A dominant assumption holds that competition would place significant downward pressure on electricity prices in a marketised energy sector. However, electricity is often accurately described as a natural monopoly and, considering this reality, increased market concentration is very likely to unfold — a process already seen in the Renewable Independent Power Producer Programme

For decades, the wallets of South African citizens have been drained by price fixing in numerous industries, such as food retail, telecommunications and insurance. And in an energy sector potentially dominated by a handful of corporations, price fixing is just as likely as competition. 

Compounding the high likelihood of price fixing is the reality that corporations in an energy sector must also determine prices and budget costs to ensure a rate of return that will be satisfactory for return-hungry shareholders, regardless of what is financially feasible for consumers or what will be beneficial to the public good overall. 

A sincere commitment to resolving the energy crisis will require the country’s transmission network to be substantially re-developed in order to accommodate additional capacity, particularly wind and solar capacity. The tremendous costs (estimated at at least R178 billion) of expanding and reconfiguring the transmission network will mostly be the problem of the National Transmission Company.

But the pricing policies laid out in the ERA (a shift to full cost recovery) will result in these development costs being passed through to end users in the form of rising tariffs. Unless the government effectively uses the instrument of cross-subsidisation, the proposed pricing policies will have a potent upward impact on the price of electricity. Sadly, the reforms proposed in the ERA signify a decisive departure from such interventions. 

At this juncture it is also useful to ask ourselves: “What have been the consequences of the kinds of reforms proposed by the bill in other countries? The California electricity crisis stands as evidence of how energy marketisation can leave citizens at the mercy of corporate interests and imperatives. Due to drought and market manipulation, from 2000 to 2001, the price of electricity in the US state of California increased by an average of 33% for residential customers and 48% for commercial customers.

There is other international experience which demonstrates how marketised energy sectors leave end users incredibly vulnerable to external shocks, while allowing for reckless profiteering by energy suppliers. Countries such as the US, Germany, Australia and the UK have witnessed cases where ordinary residential energy bills have increased fivefold or even more, as for-profit energy companies passed on the costs of unexpected climate events or supply shortages related to the war in Ukraine. 

Most concerning is that the sharp rises in electricity prices are not purely cost-driven; European energy company profits have soared alongside costs over the past year. 

Alternatives beyond markets and privatisation 

Now, more than ever, it is clear that electricity is a fundamental need and vital public good. If we are serious about solving the energy crisis, stimulating economic growth, decarbonising the economy at large and drastically reducing energy poverty, then Eskom must not only be fixed but it must be transformed. Fixing Eskom entails boosting its generative capacity, conducting thorough maintenance and preparing the utility for a planned transition to renewable energy. 

In terms of concrete policy steps, this first means halting the process of unbundling and maintaining Eskom as a vertically integrated public utility with a regulated pricing model. A crucial piece of such reform would be exploring the potential of de-corporatising Eskom and abandoning the full-cost recovery model. A financing model which has proven to be unsustainable in the context of mass destitution and the need for South Africa to pursue socio-economic development. 

Realising the country’s commitment to curb its greenhouse gas emissions necessitates bolstering Eskom with new generative capacity in low-carbon technologies. To ensure this is financially sustainable and effectively executed, the law must change to drive a public-led expansion of renewable energy — specifically an expansion that is not dependent on profit maximisation but driven by developmental priorities and the need to confront climate change. 

Making such an effort feasible could mean using diplomacy to secure technology-transfer agreements which will enable a domestic renewable energy industry at the lowest cost, thereby creating jobs and stimulating economic growth. 

Breaking Eskom’s corrosive dependence on tariffs and debt denominated in foreign exchange is key to its reformation. Financing such an effort will require raising additional revenue through progressive forms of tax. This would include measures such as higher effective tax rates on high net-worth individuals, curbing illicit financial flows, halting base erosion and profit shifting, alongside moving towards establishing a progressive net wealth tax

Beyond these fiscal strategies, exploring domestic sources of financing – such as using the surpluses of state-managed investment funds — cannot be overlooked or immediately disregarded. 

South Africa cannot confront and resolve its multiple crisis if the production and cost of electricity is dictated by shareholder concerns, volatile market forces and the profit incentive. 

The policy recommendations briefly sketched above would not only rejuvenate Eskom’s operational and financial capacities but would inject vitality into the value of electricity as a public good that can be used to make life better for all of us. 

Andile Zulu is with the Alternative Information and Development Centre in Cape Town. He writes in his personal capacity.