CAPITALISM, SOCIALISM & ENERGY
As energy calamity looms over South Africa, angry voices from competing ideologies and interests – from capitalists, socialists, trade unions and greens – are hurling abuse and blame at each other. They are mainly wrong.
The disaster of Eskom does not lie with any inherent fault in state-owned electricity supply, and the disaster of REIPPPP (Renewable Energy Independent Power Producers’ Procurement Program) does not lie with any inherent fault in private enterprise. The reasons for both lie with the policy makers.
Let me admit my own ideology. I believe in the free market, which I am happy to call “capitalism”, because it almost always produces the best and cheapest goods and services, improving the lot of everyone, especially the poor. But not always. There are a few examples where a well-run state enterprise will outperform a well-run private enterprise. Electricity generation is one of them. The reason is the cost of capital. Electricity generation is capital intensive. Power stations cost a lot of money to build. For nuclear power the capital costs are the biggest of its costs (its fuel is very cheap). The state can always raise capital more cheaply than the private sector, and is content with a low return and a long payback period. Eskom’s debt typically costs 3% real (after inflation). No private company can get close to that and no private company could bear such low returns.
Furthermore, electric generation is a steady, unchanging, rather boring process. The electricity we use now is exactly the same as the electricity we used over a hundred years ago. All a power station has to do is keep a generator shaft turning at 50 revolutions a second. Power stations last a long time – a modern nuclear station will last 60 years or more – and at the end of its long life the product it produces is exactly the same as at its beginning. Generation does not require the invention, quick adaption and flexibility in which the private sector excels. In power supply the invention comes from the equipment manufacturers, which are usually in the private sector. All the station itself requires in its operation and maintenance are care and discipline, which a well-run state enterprise can provide.
During the days of apartheid (a sort of socialism, since socialism is just state control), Eskom produced the cheapest electricity in the world, very reliably. It built a succession of large coal stations, financed with cheap debt, on budget and on time. With some exceptions they ran very well. They used our bad but plentiful and cheap coal from large coalfields run by our big mining majors. The coal was delivered by conveyor belt to the power station built right next to the field. Eskom was a huge success, outperforming private owned utilities around the world.
The British state owned CEGB (Central Energy Generating Board) was also successful. When Margaret Thatcher privatized British telecommunications, it was a spectacular improvement, bringing cheap and reliable telecommunications to everyone. When British electricity generation was privatised, there was no noticeable improvement.
Since democracy in 1994, Eskom has been systematically ruined by politicians. The National Party Government managed to leave Eskom alone, with no instruction except to produce good electricity. The ANC Government turned Eskom into an instrument of patronage and political engineering, with electricity supply of secondary importance. A program of affirmative action (often called “space creation”) kicked out skilled and experienced white engineers and replaced them with unskilled blacks. Eskom became a factory of “job creation” so that it now employs twice as many people, at high salaries, as other utilities producing the same amount of electricity. The cheap, reliable coal supply was wrecked by BEE coal procurement, where bad, expensive coal of varying quality was brought to the stations from far away by rail or, much worse, road, wrecking the roads and the environment. Wholly incompetent senior managers were appointed because of their skin colour and political connections. Eskom, with Government help, failed to build stations in the 1990s when it was obvious we needed them, and we ran out of electricity in 2007, with devastating, permanent damage to the economy. The existing stations had to run flat out even to meet the sluggish demand; maintenance was neglected; and the result was increasing plant failures. Panicking, Eskom built Medupi and Kusile in a rush with bad designs, bad contracting, bad workmanship and much corruption.
This is why Eskom failed, not because it was a state owned company. The idea that the Eskom structure has become outdated is wrong. It worked well in the past and properly managed would work well again. Having a separate system operator (running transmission) is a good idea but I cannot see any advantage in breaking Eskom up further.
But here I must tell of something profoundly disturbing. There is a very worrying sentiment expressed in a low mumble, barely audible but widely heard. It says, “You can have a well-run state enterprise under the white minority government but not a black majority government.” In private people say the reason for this is “African culture”, which sees the primary purpose of state enterprises as enriching black political leaders and their friends and families. It this is true we are doomed to economic stagnation but I don’t believe it is true.
On the renewable side, you cannot blame capitalism for its failures, as some of the trade unions are doing. REIPPPP has indeed been a disaster, imposing upon us the most expensive electricity in South African history and the worst. It has cost Eskom a fortune. Renewable energy has two costs for the grid operator: (i) the price it has to pay for the electricity; (ii) the system cost. The latter is more important. Eskom is forced to pay 222 cents/kWh for renewable electricity compared with its own selling price of 89 cents/kWh. But the system costs will be higher. These are the huge costs of accommodating the violent, unpredictable, intermittent ups and downs of the renewable power. Eskom gets paid nothing for this, even though it puts its stations under strain and perhaps has caused some recent shut-downs. The people of South Africa will have to pay more and more for electricity as more and more renewables are forced on us. You can see this all around the world, including Germany, Denmark, the UK and Australia.
This is the fault of the policy makers, not private enterprise. Capitalists are always the captives of policy makers and try to lobby them to make their captivity happy. In a free energy market there would not be a kWh (kilowatt-hour) of renewable electricity on the grid. Nature has made solar photovoltaic (making electricity directly from sunlight) and wind power inherently useless for grid electricity (although good off-grid). One kWh of nuclear, coal, hydro or gas fired electricity has high value, because it is reliable. One kWh of solar electricity has very low value because the Sun doesn’t shine strongly most of the time, and not at all when it is most needed, in winter evenings. One kWh of wind electricity has no value at all, or even negative value because it is so unreliable and unpredictable. I cannot make this point strongly enough: to compare a kWh of wind or solar electricity with a kWh of coal or nuclear electricity is like comparing a litre of salt water with a litre of fresh water. Wind and solar can only exist on the grid if the state commands the system operator to buy their wretched electricity. Green policy makers persuade the state to do so. The renewable energy companies, in pursuit of higher profits, will fund the green policy makers in their campaigns of persuasion. (The pursuit of higher profits usually brings benevolent consequences but not in this case.) The dream of the greens is to see the lovely landscape of South Africa dominated by thousands of gigantic wind turbines and solar arrays, sending their bad electricity to customers hundreds of km away, all linked into an immense, highly centralised power system. The greens are happy that a group of rich, powerful energy companies are forcing us to buy their awful, expensive electricity, and the renewable energy companies are happy to makes lot of money out of it.
The remedy is simple, although its implementation is not. Let the market choose the best, cheapest, most reliable electricity with the lowest environmental costs. This will be nuclear, followed by coal, which is dirty now but can be made cleaner. Natural gas and imported hydro might options in future. Wind and solar are hopelessly expensive and unreliable. Establish an independent operator and let it buy electricity on a strictly market basis. Let Eskom remain as a state owned generator and allow private generators to compete against it on a fair basis. I doubt if many will be able to do so but some might in niche markets. Make Eskom clean and efficient, as it was in olden times.
Is this possible under black majority rule? Of course. Inefficiency and corruption are the result of bad politics not black skins. We just need to get the politics right – although that’s a big “just”.
Andrew Kenny. 11 Mar 2018
Andrew Kenny is a contracted columnist to the Institute of Race Relations (IRR, a think tank that promotes political and economic freedom. Readers are invited to take a stand with the IRR by clicking here or sending an SMS with your name to 32823. Each SMS costs R1. Ts and Cs apply.
1. Trade unions, namely NUMSA, are rightly saying that the renewable IPPs are horribly expensive but are wrong on blaming private enterprise for this.
2. Those suggesting that privatisation of Eskom will bring improvements are mainly wrong. For the reasons I give above. But the one argument in favour of privatisation is that it should reduce the political interference that has wrecked Eskom.
3. Green apologists say that Eskom should be “de-centralised” and then go on to promote renewable energy, which is even more centralised and which sees solar and wind generators sending power to consumers hundreds of km away
4. Eskom’s latest annual report says it has to pay 222 cents/kWh for REIPPPP electricity. But this is only the price they have to pay. The system cost they have to pay is more important. What is the total cost to Eskom of a kWh of renewable energy: 500 cents/kWh? 1000 cents/kWh? Nobody will answer the question or indeed even discuss it. Radebe was talking nonsense when he said REIPPPP was cost neutral for Eskom
5. I was in England from 1972 to 1982. In my view privatization of telecoms was a spectacular success and of electricity generation no obvious success at all. I think privatization has improved the railways although some Brits disagree. I don’t think they remember how bloody awful British Rail was. I do.
6. Solar CSP with storage does cover its own system costs, and is the only solar or wind technology that does provide honest, valuable electricity. Unfortunately its prices are sky high.