LUNGILE MASHELE: Liberalised electricity markets have ups, but also some downs

SA has a vertically integrated electricity market, one in which a single company controls the generation, transmission and distribution of electricity  — Eskom.

The 1998 white paper on energy called for the liberalisation of the electricity market, and after 25 years this is finally being implemented. It started with the unbundling of the transmission business from Eskom, and more recently an announcement of the unbundling of distribution. 

Liberalisation simply means many companies can generate, transmit and distribute electricity, rather than just one. There are numerous benefits to this. First, it can lead to lower electricity tariffs because competition between different generators may drive down the cost.

Second, liberalised markets can improve efficiency, because competing companies are more likely to invest in new technologies and infrastructure. Third, in liberalised markets consumers can choose their electricity supplier, which can lead to better customer service. 

The proviso is that the above applies in a market equilibrium where demand matches supply, and at prices acceptable to buyers and sellers. However, there are challenges associated with liberalised markets. They can be more complex to manage because there are more players involved, thus requiring a strong regulator.

Liberalised markets also mean electricity trading in various markets, which may lead to pricing volatility. Another challenge is that liberalised markets are more vulnerable to market manipulation as they provide more opportunities for companies to game the system.  

Enron is an example of the downside of liberalisation combined with deregulation. It managed to create an artificial supply shortfall in the market by incentivising generators to reduce output, to drive up the price during peak periods. This permitted Enron to enter complex transactions that allowed it to collude for its own financial benefit. This led to electricity prices soaring from $30/MWh to more than $1,000/MWh, and rolling blackouts despite installed capacity far in excess of electricity demand.

The Russia-Ukraine conflict has changed the global energy landscape forever. The closure of the Nord Stream 1 pipeline and soaring oil and gas prices, together with the high marginal price for electricity, led to a 7% increase in coal consumption in the EU in 2022, on top of a 14% increase in 2021. This resulted in the renationalisation of EDF and Uniper, French and German utilities respectively, as they were facing bankruptcy.   

As electricity prices grew exponentially liberalised markets such as the Australian Energy Market Operator suspended spot trading. In several European countries, where the wholesale price of electricity increased fourfold, their governments introduced price caps to curb the effect on consumers. 

Recently a combination of reduced renewable output and a heatwave led to a 6,000% spike in electricity prices in Texas — going from $75/MWh on August 16 to $4,750/MWh on the following afternoon. 

As SA hurtles towards a liberalised market difficult questions need to be asked. We already have an energy imbalance, so will generators game the evening peak? Will generators eventually merge and increase prices? Germany’s electricity market is liberalised, but it is dominated by four main players that account for 73% of generation. Germany has among the highest electricity tariffs in the world. 

What does liberalisation mean for the distribution model, since electricity distribution is a constitutionally contested space subject to political demarcations? How do municipalities provide services when 30%-50% of their revenue is derived from electricity sales? 

Liberalised markets need mature electricity markets, a history of excess and consistent supply, robust regulators and money to absorb price shocks. I don’t see the SA government stepping in to save the public from high electricity prices. It could barely manage the fuel levy shortfall when it was suspended briefly in 2022. We don’t have the financial buffer required for market failure. 

As exciting as the prospect of liberalised markets may be, we must ensure we leave no-one behind, otherwise we risk increasing energy poverty and creating billionaires at the expense of the poorest.  

• Mashele is an independent energy economist.