It’s time for Eskom to surrender power

Eskom is currently seeking further potentially crippling electricity price increases. Trade union Solidarity argues that new power provider entrants should be allowed to deal directly with consumers and have the opportunity to offer more competitive pricing.

It’s time for Eskom to surrender power
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Eskom, South Africa’s sole power provider, has a legislated monopoly on electricity generation and transmission. The country’s electricity consumers therefore have no choice but to buy their power from Eskom, unless they wish to generate their own. Additionally, any mistakes that Eskom and the National Energy Regulator of South Africa (Nersa) make are of necessity eventually visited on consumers.

Solidarity maintains that whatever Nersa’s final decision on Eskom’s Multi-Year Price Determination 3 application may be, it will be an offer that consumers are in no position to refuse. Therein, and not in the specifics of the MYPD3 application, lies the fundamental problem: the monopolistic structure of electricity generation and transmission, and the fact that these two aspects operate as a single entity.

The structure of this market means that it is impossible to know whether the prices Eskom and Nersa decide upon are realistic, because the market’s ability to find the ‘correct’ prices is stifled. This situation can be corrected only if other electricity suppliers are permitted to sell their power directly to consumers, and consumers in turn are allowed to choose a supplier.

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Needed: reliable forecasts
Eskom and Nersa are currently attempting to determine what an ‘appropriate’ increase in electricity tariffs over the next five years should be. This process is informed, at least partly, by Eskom’s plans for expansion over the following decade, possibly even the following two or three decades. Forecasting a myriad variables over such a long period with any degree of accuracy is extremely difficult, if not impossible.

Of course, such forecasts are necessarily a part of doing business, especially when it comes to capital-intensive undertakings such as electricity generation. The difference in a free market with many competing businesses, however, is that those companies with the worst forecasting skills, or the worst luck, tend to lose their market share to competitors. In this way, those businesses that forecast more accurately gain the upper hand. And in the meantime, the ongoing competition benefits the consumer, whether through lower prices, better service or both.

In the case of the electricity market in South Africa, consumers can derive no such benefit. As mentioned, consumers’ only alternative to buying electricity from Eskom, whether directly or indirectly through a local distributor, is to generate it themselves. In some cases, this is feasible for large companies, but for smaller businesses or private individuals, it is simply too expensive an option.

Eskom – the middleman
Although Eskom buys some electricity from independent generators, it does so at its discretion, according to its own prices (approved by Nersa) and on its own terms. It then resells this electricity, once again at its own prices and on its own terms. It is not possible for an independent electricity producer and a consumer to conclude a mutually beneficial agreement to trade electricity between themselves without Eskom being in the middle.

If Eskom or Nersa’s economic forecasting were more accurate, Eskom’s monopoly on generation and transmission might not be so contentious. However, as the table opposite shows, it is clear that, with only a handful of exceptions, both Eskom and Nersa were widely off the mark with their two-year forecasts of economic variables. And these forecasts were for relatively short periods; predicting these figures over five or 10 years, or decades, would prove even more problematic.

This does not mean that Eskom and Nersa are necessarily inept at forecasting economic and financial variables. It simply shows how difficult the science of such forecasting is. By limiting the freedom of other possible investors in the electricity generation market to attempt to beat these and other forecasts and possibly profiting, Eskom, Nersa and the government are acting to the detriment of South African consumers.

While some arguments in favour of having a monopoly on long-distance transmission of electricity do exist, there are no good reasons why electricity generation should be monopolised, or why both generation and transmission should be under a single entity. Solidarity therefore submits that electricity generation should be opened up to independent generators to conclude agreements with consumers or local distributors of electricity, with Eskom’s only role in such transactions being to facilitate the transmission of power over the network for a nominal fee.

This should be done with a view to separating the utility’s generation and transmission divisions into separate entities as soon as is practically possible. Such a process would create a transmission authority that is closer to being impartial on whether the power on the network is generated by Eskom or by an independent producer.

To summarise, South African electricity consumers, both householders and business owners, should be allowed to express their satisfaction or dissatisfaction with tariffs by voting with their feet – and this can happen only if they deal directly with the electricity producer of their choice. – Lloyd Philips

For more information, contact Solidarity on 012 644 4300 or visit
The views expressed in our weekly opinion piece do not necessarily reflect those of Farmer’s Weekly.