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The private sector's role in SA power market
Troye Lund
Posted: Mon, 23 Jun 2008
[miningmx.com] -- WHILE Ekom's monopoly of electricity generation and distribution has come in for strong criticism from consumers, Eskom CEO Jacob Maroga's support of more private players in South Africa's energy supply at the recent World Economic Forum comes with a warning.
"The path to a fully open, competitive market is a very long one. If you open up competition and expect that private power producers are competing with Eskom there'll be a problem," he says.
What Maroga meant was that the conventional competition model that determines the supply and demand of goods and services in an open market doesn't neatly and completely apply to generating energy.
Fact is, Maroga wasn't alone in asserting the government's role in energy provision is indispensable. While world leaders and opinion makers are focused on Africa's energy deficiencies - and how potentially disastrous that
could be for development and, therefore, political stability - power utilities from developed and developing countries used the forum's platform to make key points with regard to competition and pricing.
First, the normal competition models don't apply to electricity generation and supply. Second, electricity isn't a commodity but a basic essential that's expensive to produce and, in the event of utilities not being able to raise the capital to fund expansion, governments are duty bound to come to the party.
Although Maroga argues for a "blended" price that would reflect a single buyer (Eskom) and that would "facilitate" the entry of private players, Gérard Wolf, senior executive vice-president: international operations at Electricité de France, says the theory of opening the power and supply game to competition is arduous, as the cycle of investment is a very long and unattractive one for private investors - up to 100 years.
Wolf adds that introducing competition doesn't always have the desired effect of slashing prices.
For example, in Britain former Conservative Prime Minister Maggie Thatcher ended that country's monopoly of energy supply in 1989. Thereafter, 13 regional, independent companies took over the job of supplying power in Britain. Just 20 years later there are five companies, says Wolf.
"Four of those are owned by
multinationals. The price is regulated and has increased by 24% over the past 15 years. That's not because those companies are making huge profits but because it's a reflection of what it costs to generate power," Wolf says, stressing that nowhere in Europe do consumers pay the true costs of generating power. Governments subsidise it.
However, Absa Capital head of power and energy Anand Naidoo says because Eskom has at least 36,000MW of capacity fully paid off, it makes sense to introduce independent power producers in a manner that blends old and new generating capacity.
That need not mean ceding government control and therefore much-needed subsidies. When it comes to increasing power supply, it's as much about making existing generating efficient as it is about increasing capacity, says Pierre Gadonneix, who chairs and is CEO of Electricité de France.
Gadonneix says Africa loses 30% of the energy that's produced, either through "technical losses" that
occur in the actual transmission process (around 8%) or non-technical losses - stealing - which accounts for the remaining 22%.
Maroga agrees, saying South Africa has to start "hardwiring" efficiency standards and policies into all aspects of life so that all consumers - especially homes - had energy efficiency built in from the design stage.
But the reality that Eskom has to fund a rebuilding programme in excess of R300bn over the next five years (possibly running closer to R1 trillion over 10 years) means there's an elephant in the room few are talking about. Financing that isn't only going to affect tariffs: Eskom also has to be sure to go about maintaining its credit rating.
Says Naidoo: "The costs are a lot higher than they were 20 years ago. The whole world is also building new power stations." So what's the answer? "It's simple. Government has to step in (rather than step out of the game)," he adds.
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