Founder: Turnaround Talk
South Africans were greeted with good news on 14 March when News24 reported that the days of Eskom’s monopoly over power generation and distribution in South Africa are ending as the country is likely to welcome competitors into the market.
This news is encouraging as it will make significant strides into addressing the country’s current economic crisis, which is being significantly compounded by Eskom’s inability to provide the only product in its stable. However, change is only sometimes 110% positive.
Paving the way
The News24 article points out that new legislation that will effectively end Eskom’s monopoly on the production of electricity and establish a competitive electricity supply market was passed by the National Assembly on 14 March.
The reform, one of President Cyril Ramaphosa’s most important economic reforms, is viewed as crucial to opening up the electricity market and solving load shedding.
The article add tat The Electricity Regulation Amendment (ERA) Bill makes provision for the establishment of a state-owned Transmission System Operator (TSO) that will:
- operate the national transmission grid;
- perform the role of system operator managing supply and demand; and
- create an open-market platform to enable competitive trading of electricity.
The creation of the TSO, which will sit inside the Eskom’s unbundled National Transmission Company of SA (NTCSA), is the key rationale for unbundling. It will buy electricity from all producers, including Eskom’s own power plants, on an equal and independent basis.
Image By: American Public Power Association via Unsplash
Minister of Mineral Resources and Energy Gwede Mantashe said he was of the firm view that the changes to the regulatory framework will radically transform the structure for the electricity sector for future generations.
The article points out that Mantashe, who in the past has been ambivalent about the role of the private sector in providing electricity, said he believed it to be a significant milestone of the sixth administration. The minister said: “we are convinced that the adoption of the bill will not only give effect to Eskom’s unbundling reforms, but it will also encourage private sector participation in the electricity industry and thus introduce competition.”
But although the bill was passed by the National Assembly, it will not be completed before the end of the sixth administration, as there is not enough time for the National Council of Provinces to process it. This means it could only be signed into law several months after the election of a new Parliament.
This last part is crucial and could be problematic. It may be a crucial ace in the hole that the ANC is playing to ensure that they win another four year term as the country’s ruling party. How can it be problematic? While opening up the country to competitors, Government is still holding onto significant power when it comes to the distribution of increased electricity production. This can be very tempting for corrupt politicians.
Admin bungle
The News24 article points out that one of the reasons for this has been apparent foot-dragging by Mantashe who, due to an administrative bungle, only introduced the bill into Parliament at the end of August.
The DA also supported the passage of the bill despite some concerns over the amendments introduced by the ANC in the Portfolio Committee on Mineral Resources and Energy. Speaking in the debate, DA spokesperson on energy Kevin Mileham said: Despite our misgivings, it is vital that the system operator be established and the electricity sector opened up to private sector participation. The Democratic Alliance supports the bill.
The article adds that Mileham said among the concerns were the central role given to the National Energy Regulator of SA (Nersa) in setting prices and the powerful role accorded to the minister of energy, both changes introduced by the ANC in the committee stages of the bill.
Mileham says too much discretion is given to the minister of energy to make decisions about the procurement of new energy as it makes allowance for the minister to deviate from the Integrated Resource Plan, which is government’s long-term energy planning tool.
A second problem, says the DA, is the role of the National energy Regualtor of South Africa (Nersa) in setting prices of electricity, which Mileham says undermines the primary objective of the bill to introduce competitive pricing. “This had been removed from the bill initially,” says Mileham, and later restored after concerns by the committee that similar customers could end up paying very different prices.
In terms of the bill, the price of electricity sold by Eskom to consumers will be regulated through tariff-setting, as it is now. But the pricing of contracts between a willing buyer and willing seller – for example, a municipality and an independent power producer – will be set competitively. This, some analysts argue, takes care of the DA’s concern about pricing, although in terms of the bill, Nersa’s role is not absolutely clear.
Image By: Karsten Würth via Unsplash
The News24 article points out that, in his remarks, Mantashe appeared to endorse the DA interpretation of Nersa’s role, saying: “we are in full support of the committee’s view that end-users need to be protected from possible price manipulation by market participants and therefore Nersa needs to retain the powers to intervene when necessary.”
In a briefing note, UCT’s Power Futures Lab said the bill was at a point of no return:
“The passage of the ERA will launch the power system transition process embedded in the 2022 Energy Action plan.
“In joining 110 nations that have already unbundled transmission from generation, South Africa will have finally equipped itself to achieve energy security, affordability, and environmental sustainability.”
What will come out in the wash
I often refer to my time as a financial journalist covering the insurance and investment sector. During this time, I frequently heard stories about the West Rand Cowboys, a group of insurance brokers and financial advisers who worked for a handful of companies that dominated the market. As competition increasingly entered the market, regulation increased, which stopped some of the more Wild West behaviour that gave these brokers and advisers their moniker (which they wore like a badge of honour).
What does this have to do with Eskom? As more competitors enter the power supply arena, more regulation will be needed to prevent a proverbial free-for-all. What form this will take is still to be determined. Until now, with one player in the market, Nersa has approached its role from a particular standpoint. However, increased competition will require the regulator to change tack. Will it be moderate in its changed approach, or will it be aggressive? It may be a case of South Africa being careful what it wishes for, as was the case when Wyatt Earp stamped his authority in Tombstone, Arizona.
On a positive note, increased competition will force a level of accountability into the market. If Eskom strays, even just a bit, consumers will vote with their feet and move towards competitors. Just ask Multichoice about its dominance before and after the launch of Netflix in 2016.
While the days of accepting mediocre service/product delivery because you have a monopoly are coming to an end, competitors may take a long time to build an infrastructure backbone to pose a significant threat to Eskom. However, from the day that competition is welcomed, a countdown clock is set for Eskom to get its house in order or face the consequences.
