To fix Eskom, we first need to know how it got broken
The technical and economic factors that explain we ended up in such an electrically charged mess, are a good place to start
Common sense suggests that before we rush in to fix Eskom we should work out why things went wrong. For this we need a logically coherent theory to explain how we got here. The basic technical and economic facts are a good place to start.
Thermal power generation at large scale is an efficient, mature technology with very significant returns to scale. This means the unit costs of electricity from large power stations are considerably cheaper than from small ones. Major inputs are coal, fuel oil, and water.
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Transmission and distribution networks are needed to bring electricity to consumers. These are natural monopolies and, for economic and practical reasons, cannot be duplicated.
Next we consider the parties involved. These can be divided into those directly involved and therefore essential to the electricity supply industry; and those that are not essential but obtain some advantage through their involvement.
Among the former we can count:
- Managers who take strategic and operational decisions and run the various processes and procedures of the system.
- Employees who do various tasks involved as directed by the managers.
- Engineers and other professionals who design, build and control the plant and equipment.
- Suppliers of fuel, materials, services, plant and equipment.
- Owners of all or some of the system assets, who have the right to appoint and dismiss managers, receive any economic surplus, and the obligation to make good any deficit produced by the operation.
- Investors in the assets of the system, who receive a return on their capital.
- Electricity consumers who pay all costs involved in exchange for electricity supplied.
Non-essential parties are:
- Governments, which may use the industry to further national policy.
- Labour unions, which benefit via their relationships with the labour force.
- Single-interest groups that wish to use the industry to further particular causes and preoccupations.
Then we introduce some assumptions a reasonable person would accept as being a valid reflection of reality:
- Most individuals are obliged to someone else for their welfare and will normally take instructions from those to whom they are obliged for their employment.
- Individuals and owners of assets generally favour any increase in their incomes, however earned.
- Anyone who attempts to complete a task without the necessary knowledge, skills and experience is likely to fail.
Finally, we specify the institutional context within which the electricity supply industry operates in SA. Eskom, owned by the government under the department of public enterprises, is funded through bank loans and bond issues. Some distribution networks are owned and operated by local authorities. Entry into the industry is controlled by the National Energy Regulator of SA (Nersa), under the department of energy.
When the government took ownership of Eskom it appointed the department of public enterprises as the ultimate decision-making authority, and so reserved all decisions of a strategic nature for itself. It also retained the right to intervene in matters of an operational nature that might have political implications.
Approval of major works, the overall Eskom budget and annual tariff adjustments was delegated to Nersa. The authority of the Eskom management (including the Eskom board) is thus confined to the implementation of government decisions and matters of a routine nature.
The government's priorities with respect to Eskom were, and remain: economic empowerment of the historically disadvantaged; a management structure that reflects the structure of the population; and various social development activities.
The interests of the electricity consumer have been given little consideration. In fact, consumers are expected to finance these initiatives, the calculation being that the natural monopoly enjoyed by Eskom would provide them with no alternative.
Against this background it was predictable that:
- Unit costs paid by Eskom for capital equipment, supplies and services, and salaries and wages would increase until the consumer willingness and ability to pay tariffs at the resulting higher levels was exceeded.
- Attempts by Eskom management to make ends meet with inadequate budgets would result in essential maintenance being neglected.
- Catastrophically bad decisions would be taken to subsidise solar power generation and to use untried technology to build Medupi and Kusile.
There are, ultimately, two causes for this situation: the government has been using Eskom revenues to further its political objectives; and strategic decisions have been taken for the electricity supply industry by people who do not have the experience, knowledge and wisdom necessary to produce successful outcomes. The current fiasco is the result.
Obviously, any viable solution must allow Eskom management the freedom to act in the best interests of consumers without interference from the government or anyone else. The outline of an institutional structure that does just this is left to a future article.
• Joubert is a former corporate economic consultant at Eskom who is now with Econometrix.