Electricity Prices Must Be Market Driven

South Africa’s electricity crisis is not just about corruption or incompetence. It is about the fundamental failure of central planning.

Photo by Matthew Henry on Unsplash

The government is not equipped to determine the true cost of electricity. Any attempts it makes to do so only serves to distort market signals and drive Eskom and other electricity parastatals further down the path to ruin.

Last year, electricity minister Kgosientsho Ramokgopa stated that high electricity prices are “untenable” and “disproportionately affect the poor”. Both these things may be true, but as a politician, Ramokgopa is not equipped to make these statements. He is motivated by political expediency and ideology, not market realities.

Despite the minister’s condemnation of high prices, Eskom and NERSA have continued to hike electricity tariffs. Often above inflation. But it wasn’t always this way. Prior to the start of loadshedding in 2007 and onwards, South Africa had some of the cheapest electricity in the world.

But this wasn’t because of efficiency or good governance. Eskom was politically mandated to maintain cheap electricity – damn the costs. This was its purpose since its inception in 1923. And in its quest to deliver unsustainably cheap electricity to drive industrialisation based on false pretence, Eskom failed to achieve even the most Kindergarten of economic rules. It failed to cover its costs.

Eskom was never allowed to behave like a real business. Even when energy demand surged, it could not raise prices or reinvest profits to build new power plants. By the time blackouts hit in 2007, the cracks were decades old.

Government backed loans and subsidies kept Eskom alive, but the parastatal increasingly had to cut costs to keep prices low. It fired key experts, mothballed power stations, and delayed maintenance and expansion. Sanctions and turmoil became a blessing in disguise during the Apartheid era, as the economy shrunk, allowing Eskom’s decreased ability to produce electricity to go unnoticed.

But post-1994, the ANC added other mandates to Eskom. On top of providing cheap, plentiful electricity, Eskom also had to engage in racialised politics and expand electrification across the country. The racialised politics resulted in mismanagement and corruption, as the utility lost sight of its key purpose. And the expanded electrification, while necessary, was done unsustainably fast – resulting in escalating demand without providing decent supply.

If the electricity prices were market driven, the laws of supply and demand would have warned Eskom that it was expanding demand far faster than its supply. It could have cautioned demand growth with higher prices, using the increased profits to build reserves and expand production. But Eskom is not a rational economic actor - it’s a political one. It only cared about obeying orders from politicians who only care about votes and graft. When pricing is dictated politically, there's no incentive for efficiency, innovation, or even sustainability. Eskom had no reason to operate leanly or plan for long-term capacity, because it wasn't rewarded for doing so.

On top of corruption and mismanagement, all key features of a state-run enterprise, this unsustainably low prices meant that Eskom couldn’t build cash reserves, hire the engineers it needed, or build new power plants on time. So, when economic and population growth finally caught up with electricity production, we experienced rolling blackouts.

If prices had been market driven, this wouldn’t have happened. A power utility would be able to raise prices when electricity is scarce and lower them when electricity is plentiful. But for this to be possible, Eskom needs to be privatised, and its monopoly removed.

Private competition between businesses drives innovation and holds businesses accountable. We cannot know the true price of a good when there is only one seller. A multitude of private electricity companies competing to sell as sustainably cheap electricity as possible would result in not only a decent price of electricity that reflects reality but also give correct signals to the economy so that economic growth doesn’t hinge on a lie.

South Africa’s electricity crisis is not just about corruption or incompetence. It is about the fundamental failure of central planning. By removing Eskom’s pricing power and monopolising generation, the government cut the lifeline of basic economics: profit, reinvestment, and price signals. If we want a sustainable, affordable energy future, we must return to first principles: let markets determine prices, let private companies compete, and let Eskom finally face the real cost of doing business or get out of the way.

Nicholas Woode-Smith is a political analyst and author. He is the Managing Editor of the Rational Standard, and a Senior Associate of the Free Market Foundation.