Eskom's Electricity Pricing Juggernaut

By Ebrahim-Khalil Hassen · 16 Oct 2009

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Picture: Axel Buhrmann
Picture: Axel Buhrmann

"Give us massive price increases or the lights will once again go out," is the nub of the message from Eskom to the National Energy Regulator of South Africa (NERSA). This simple and powerful posture by Eskom however hides the emergence of what might be called a "policy juggernaut." The term "policy juggernaut" has been coined by South African sociologist Karl von Holdt who defines it as a dense cluster of institutional, personal and economic interests, which coalesces around particular policy decisions, has an overwhelming momentum of its own, and is relatively impervious to rational dialogue or debate over alternative policy options.

Of interest, is that the description of policy juggernaut was developed in an analysis of Spoornet, which similar to Eskom is a state-owned enterprise. Are we then witnessing the emergence of a policy juggernaut on electricity pricing and probably electricity restructuring that will exclude alternative policy options? Whilst a definitive answer is still too early to determine, there are a set of worrying factors that point towards a narrowing of space for policy debate and the presentation of alternative propositions.

First, South Africa continues to behave as if it has spare generation capacity through supporting energy hungry aluminium smelters. The details of pricing between Eskom and smelters remain shrouded in secrecy, however it is widely established that the smelters receive tariffs based on the market price of aluminium. Consequently, not only will the multinationals behind the smelters continue to receive preferential pricing, it remains uncertain whether they will share in the increased costs in the future. 

The situation becomes incredulous when one considers that the smelters are capital intensive in a country that is job hungry and requires labour intensive investments. But wait, there is more. South Africa does not have the raw materials for the production of aluminium, which needs to be shipped to our shores, thus rendering the development of strong labour generating value chains difficult to achieve.

The impact of smelters on the Eskom balance sheet is significant, with some estimates suggesting that as much as 80% of Eskom's debt could be attributed to pricing deals it has struck with the smelters. In turn, the debt levels have an impact on South African pockets as they motivate price increases -- but in addition Eskom has been allocated R3 billion through the 2009 budget. Despite this massive impact, the details of pricing agreements between Eskom and smelters have not been made public. Arguably, NERSA cannot fulfil its duty as a regulator without careful evaluation of the agreements. Such is their importance to understanding the reasons behind price increases.

Second, government inaction or the proverbial "go slow" on renewable sources of energy reveals how embedded South Africa is in energy mix primarily driven by coal-fired power stations. The available evidence on climate change should be enough to spur on policy support and political leadership in this area. So, while at a great cost to the people of South Africa, Eskom has been virtually giving away our energy to multinationals producing aluminium, South Africa has not yet explored the strong possibilities that renewable energy can provide. 

The Department of Science and Technology's focus on the 'hydrogen economy' is a good example of what might be achieved in research and development. The importance of the programme is that it aims to create a clean industry that has links to platinum mining, especially in producing catalytic converters. Moreover, according to research by Earthlife Africa, renewable energy on a larger scale could be labour intensive while being environmentally friendly.

Third, there remains a clamour for the privatisation of Eskom. Indeed, ultimately our government must be blamed for taking poor decisions. In particular, under investment in new generation capacity was premised on 30% of distribution capacity coming from Independent Power Producers (IPPs). However, soon after this policy decision, it was abundantly clear to all policy actors that due to a mix of unsuitable market conditions on the one hand, and political protest on the other, the introduction of greater private participation in the electricity generation market would be almost impossible.

But, government did not review its strategy, suggesting a commitment to a policy that could not be implemented in a particular context. Today the question is less ideological, as it is unlikely that any private company would be able to raise the capital needed to finance the expansion of generation capacity. Indeed, most private companies would not be willing to wait out the long periods between constructing a plant and seeing actual profits.

There is, thus, a strong likelihood that the impact of increased pricing on electricity will not be equally shared with multinationals in the resource sectors that are likely to already have pricing agreements in place, which favour them. These arrangements are further buttressed with policies for the distribution sector that make larger customers, like mines, 'contestable customers', which means they can shop around for cheaper prices, while residents and smaller businesses are locked into high price increases. Moreover, the price increases Eskom has asked for inadvertently keeps South Africa on a growth path that continues to be capital intensive, does not factor jobs into the export equation and fails to meet the challenges of sustainable development.

Yet, as Eskom argues, without the increases the "lights will go out." Whilst there is some truth in the need for price increases, it needs to be on terms that advance a strong employment agenda and furthers the public good. Key to achieving this would be through NERSA requiring Eskom to undertake whatever legal processes it needs to in order to unwind agreements with aluminium smelters.

To put this in perspective, it is estimated that a single smelter uses about the same electricity as a small city. The corridor chatter suggests that the deals are watertight in favour of the multinationals, but this proposition needs to be tested in court. The central reason is that it provides us with clarity on the rules of the game as we finance future electricity expansion. At present, the current agreements are like a sword hanging over our energy future.

Von Holdt's analysis of Spoornet points out important lessons on how social pressure from trade unions can be brought to bear to change a seemingly unstoppable process. In the case of electricity, unions are, of course, central to moving a progressive agenda. But, it may require a set of short-term tactical platforms between traditionally opposed sections in our society.

On the one hand, those arguing that electricity markets should be privatised argue that prices and access would become cheaper, while generation capacity improved.

On the other hand, those arguing for a developmental role for Eskom would argue that more state support is needed to support industrialisation and that cross-subsidies for the poor are needed.

For all the differences between these two arguments, there is an important agreement: the current arrangements support multinationals, rather than 'starts-ups' in the energy sector and moving to a labour intensive growth path requires substantive changes in energy policy. The unity is, of course, neither ideological nor long term, but has as a core concern, economic inclusion. 

The unthinkable might happen because the loudest critics of electricity reform are being drowned out, regardless of ideological position.  Critics thus need to do the unthinkable and focus on the common denominator, which is that we need a credible and open policy discussion about our energy future. Unless we shift the debate, the lights will continue to burn more brightly for some and not for all.

Hassen is the founder of Zapreneur and Proposal Desk, both websites aimed at answering the question, "Can the Internet help South African small business?"

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Frank Spencer
18 Oct

Energy Efficiency

Of course, the cheapest way forward is to actually REDUCE demand through energy efficiency (and closing the smelters). This could create enough spare capacity for us to take a Renewable Energy strategy forward.

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Dan the energy man
19 Oct

Eskom Should be Working in the Citizen's Interest

Eskom is a parastatal as such it should be operating as a service provider in the interests of South African citizens. Unreasonable increases are not in the interest of citizens. These increases are a step back for socioeconomic rights and the improvement of livelihoods. Eskom prepare for mass action!...civil society will shout.

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Ebrahim-Khalil Hassen
20 Oct

Response to Comments

@ dan the energy man - I certainly hope we can get some action going.

@ frank - good point. We should be using less. Eskom's demand side management projects seem a little scattered.

* wonderful to get comments*

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