Electricity Could Be Cheap
We could have cheap, reliable and plentiful electricity. We only need to stop the interference.
Electricity production and consumption is probably the most important component of an industrialised economy. So much so that access to electricity can almost be used as a proxy for measuring economic growth.
Access to cheap and reliable electricity leads to economic growth, enabling industry to flourish, jobs to be created, and households to raise their levels of comfort and access to time and capital saving technology.
Electrification is so profoundly important; one-study found that providing electricity to parts of rural India increased manufacturing output by 14.7%. Conversely, when electricity is limited, growth suffers.
Many experts have identified that limited access to reliable electricity in South Africa, due to Eskom’s rolling blackouts, and continually growing prices, has faltered South Africa’s economic growth.
During the 1990s, South Africa’s economy boomed due to a combination of the end of sanctions, positivity over the post-1994 miracle, and liberalisation under GEAR. But electrification and the cheap cost of electricity paid no small role in this development.
Right up until 1996, South Africa boasted the cheapest electricity in the world. But this was not without costs.
Since its inception in the 1920s, Eskom was able to keep electricity cheap through subsidies, government backed debt, cheap labour and market manipulation. In the short run, this led to a surplus of cheap electricity. But in the long run, it led to an economy that grew far past the reality of what it should have been able to achieve.
You can only distort the market for so long before it corrects itself. Attempts to keep electricity as cheap as possible meant that Eskom was unable to build a financial buffer under which to construct new generative capacity. And political interference pre- and post-1994 led to Eskom becoming a twisted institution hampered by corruption and scandal.
South Africa needs cheap and plentiful electricity, but this cannot be achieved through the same methods as before. Future electricity generation needs to follow market laws and not be distorted by political interference or manipulation.
Privatise and decentralise
To achieve this, Eskom needs to be abolished as an electricity monopoly. The slow transition to allowing private partners needs to be replaced by a concerted effort to replace Eskom with countless private competitors.
Private competition creates a decentralised industry which can absorb shock. When Eskom suffers from corruption, malaise or crisis, the entire industry suffers. But in a privatised industry, if one company suffers a shock, the others are shielded and can respond to fill the gap.
This maintains a constant supply of electricity, in which competition is constantly driving down the cost of electricity.
Incentivise
Importantly, these new private companies must be incentivised to produce electricity and start new enterprises not through market distorting mechanisms like subsidies, but through removing government intervention through deregulation, cutting red-tape, and even providing tax exemptions.
Tax exempting electricity generation, as opposed to providing subsidies, would shift expenses away from having to tax other industries, and rather help keep electricity cheap, that will then further grow the economy and lead to more tax revenue over time.
The extent of red tape should be ensuring safety standards, and that connections to the grid are up to standard and do not infringe on competitors. Past that, it should be incredibly easy to start an electricity company.
Use any resource
Another reason Eskom was able to maintain cheap electricity throughout the 20th century was because South Africa is sitting on one of the largest coal reserves in the world. We shouldn’t be balking at that fact.
While we obsess over becoming “net zero” and fighting climate change, poor South Africans are unemployed, malnourished and dying. Economic growth directly provides them with jobs, wealth and food. And electricity provides that economic growth.
We must stop this fixation on green energy or even focusing on a source of energy. Let private companies use whatever method of electricity production they would like, only limited by their ability to ensure safety standards.
With new smart-systems in place, consumers could also possibly choose the source of energy they want to purchase. Private companies sell their electricity units on auction, signalling if the source is green or not. Consumers who care can purchase green energy, while other consumers can buy whatever is cheapest.
Who knows? Maybe green energy will become the cheapest. But it should earn that place and not impose itself on a struggling economy.
Stop interference
Finally, these private electricity companies need to be protected from interference from politicians and criminal mafias. Legislation that protects these syndicates and opportunists must be abolished. Notably, Black Economic Empowerment (BEE).
BEE procurement rules led to Eskom spending exorbitantly on incompetent tenders, including spending thousands on mops. A simple change, allowing Eskom to source replacement parts directly from the manufacturer, allowed blackouts to end and costs to decline.
Protecting businesses from crime and corruption is the true job of the state, not making business even harder to conduct.
We could have cheap, reliable and plentiful electricity. We only need to stop the interference. Let the market compete. And then, finally, our economy can grow and benefit millions who currently suffer in poverty.
Nicholas Woode-Smith is the managing editor of the Rational Standard and a senior associate of the Free Market Foundation. He writes in his personal capacity.