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To contain prices competition is essential in electricity markets

To contain prices competition is essential in electricity markets

A market for electricity has a salutary effect on the behaviour of all the participants in the generation and supply of electricity. Generating plants, transmission grids, distribution grids, wholesalers and retailers, all behave differently when they compete for business with alternative suppliers.

Eskom, as a state-owned monopoly, with centrally controlled oversight and direction, is not the best structure for the supply of electricity, a critical energy source without which no nation can grow and prosper. Much better structures are those that have evolved under competitive circumstances in the EU, US and small forward-looking countries such as New Zealand.

South Africa will have a robust electric power supply system only once its electricity generation, transmission, distribution and control functions are separated out and independently operated. Security of short-term and long-term supplies demand that government change the current faulty structure.

The world’s best electricity supply systems have several characteristics in common. Retail customers have a choice of buying from numerous competing electricity retailers. If they are not happy with the service or prices charged by one supplier, they can easily and rapidly (in New Zealand within 24 hours) switch to another. Consumers switching with ease from one electricity retailer to another is the best indicator consumers can have that the price they are paying is competitive.

In a well-functioning market, competing generating plants supply electricity directly to large users and into a wholesale market from which large electricity users and retailers buy their supplies.

Whatever the circumstances other than if the end user has solar panels or some other form of on-site electricity generating system, an independently owned and operated high voltage transmission grid is a necessity. Independent ownership and management of the grid removes the problem of conflicts of interest, which inescapably exists when competing generating companies wish to gain access, for instance, to Eskom’s grid to transmit electricity across the grid to customers who want to buy their electricity.

Not surprisingly, Eskom, given its dominant position as grid-owner, demands to be the sole purchaser of any electricity that is to be wheeled across their grid, generally at a sub-economic price, which means that no independent power producers have managed to conclude agreements with Eskom to generate the electricity needed to cover the country’s electricity supply requirements.

Eskom seems to be of the view that new suppliers should be prepared to provide power at a price equivalent to its own average cost. This is impossible for a newly-constructed plant to achieve. For Eskom, any electricity purchased at a price lower than the hugely excessive cost of its open-cycle gas turbines is a cost saving. A privately-owned grid company would not stubbornly refuse to conclude cost-saving agreements with outside power producers under such circumstances. Only a state-owned monopoly can afford to indulge in such behaviour.

In the case of renewables, the Department of Energy stepped in to broker agreements for the purchase of the electricity produced by renewables. Unless a monopoly generation and grid-owning company is forced to bow to political pressure, as occurred in the EU, it will not easily agree to allow grid connections for the transmission (wheeling) of competitor electricity across its grid.

National Grid is one of the largest investor-owned energy companies in the world. It owns the high voltage grids in England and Wales and covers Massachusetts, New York, and Rhode Island in the US. Being a private profit-making entity, National Grid welcomes all generating companies that wish to connect to its grid, conditional on new entrants meeting operational standards that will not harm grid reliability. The reason is that more generating companies connected to the grid translates into more income from transmission charges. Eskom’s view of such connections is different. To them a new transmission customer simultaneously becomes an unwelcome competitor in the sale of electricity.

Removing the South African conflict of interest over the transmission of electricity is a matter of critical importance. If the ownership and control of the high-voltage transmission grid were to be separated from Eskom but continued to remain in government hands, there would be a proliferation of electricity generators queuing to gain access. Openness would naturally increase even more if, as occurred in the UK, it was sold to a private company. The new owner would be even more active in canvassing increased generation business.

Government could resolve many problems if it were to allow Eskom to sell the grid to an experienced international grid management company and use the proceeds to pay down some of its debts. This would take a great deal of pressure off Eskom and the government and open the electricity industry for much-needed transformation, without which electricity security will remain elusive. An independent high-voltage transmission grid is an essential component of a competitive electricity market in which consumers have a choice of suppliers.

Having an independent transmission grid would provide the first crucial step towards a market in electricity. To be added would be independent generators, distribution grids, retailers, and an electricity market as they have in New Zealand. The beneficiaries would be government, taxpayers and electricity customers. Government, because running businesses is not what they are elected to do; taxpayers, because they would no longer have to carry the related risks, and customers, because they will be able to choose to buy from competing retailers of electricity to obtain the best service at the lowest prices.

By Eustace Davie, a Director at the Free Market Foundation

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