Mumbling in the dark

Are you outraged at the proposed increase in electricity prices from Eskom?

Creative Commons License photo credit: Näystin

If you are, you’re not alone. 88% of readers polled in a News24 poll were “outraged” at the increase. The problem is that all this outrage is irrelevant at best, and dangerously distracting at worst.

Why price is the wrong thing to worry about

Eskom produces electricity for the country and makes a profit or a loss doing so. This profit or loss goes back into treasury, which, inefficiencies aside, belongs collectively to the citizens of South Africa.

If prices are too low and Eskom makes a loss, this shortfall must be made up through higher taxes or lower government spending. If Eskom is not given additional capital, it will have to stop buying coal and stop investing in new infrastructure.

Those who complain about the inflationary effects of electricity prices are considering the issue too narrowly. Electricity prices may be easier to see than broader macro-economic issues about budget deficits, growth-disincentives from higher taxes and other implications of funding electricity generation from general taxes, but that doesn’t mean it is the right way to look at the problem.

Expensive electricity is better than no electricity. Complaining about higher electricity prices, while understandable, is not useful since the money must come from somewhere.

The real 5 issues we should be discussing

  1. Is Eskom generating electricity efficiently, and at an appropriate cost (compared  to international benchmarks, adjusted for our local fuel costs and other differences)? If Eskom is not producing power as cheaply as they should, let’s focus on fixing the operational and industrial design problems to fundamentally lower the costs of production. More efficiency benefits entire country.
  2. Are Eskom’s medium- and long-term plans appropriate for our needs, and are they funded through the optimal mix of government support (out of general tax base), retail and industrial electricity prices, debt financing, partial/full privatisation, supplier credit, IMF money etc. Long-term projects such as building power stations should be financed over 25+ years if the credit is available, so that the generations that benefit from the infrastructure pay for it through paying off the loan over time. This doesn’t change the overall cost, just who pays for it.
  3. Should public or private enterprise generate and transmit electricity? Which combination is most effective from a cost, security and reliability perspective? If private enterprises can produce power cost effectively, while promoting economic growth, employment and without undermining the stability of our infrastructure, why shouldn’t they be included?
  4. Are we, as citizens and as a country, happy with the mix of fossil-fuel, nuclear, wind, solar and hydroelectric mix of our planned infrastructure? Who pays for pollution? For that matter, who pays for damage to roads from coal transport?
  5. How should the cost of electricity be distributed amongst all users? What minimum electricity consumption should be free or subsidised? Basic electricity to light a room or two is required if students are to be able to study at home. Some level of progressive charging (where bigger consumers pay more per kWh than small consumers) is appropriate. Should labour-intensive industries get cheap electricity to promote employment? Should important growth industries for the future success of the economy get a helping hand? These are much broader policy issues than pure electricity pricing and should arguably be addressed outside of the primary electricity tariff debate.

These are five critical issues that should be analysed and debated. The more time that is spent on superficial pricing, the less time and energy is spent on the real issues.

Where low prices are the problem

One last point – when our electricity prices are too low, the only parties who benefit are international companies who use our below-cost electricity and take the benefits with them. As a country, we don’t benefit from underpriced electricity, it harms us.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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