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Load Shedding and the Energy Market: as little state as possible, as much as necessary?

Author: Oliver Heim
Date: 15 September 2022

The energy problems of South Africa offer an opportunity to consider state intervention in the economy. ESKOM’s woes illustrate the well-known dilemma between political and economic interests; between regulatory (political) state intervention on the one side and the free forces of the market on the other. Load Shedding is not the actual problem – it is only symptom of a variety of structural shortcomings that result in more electricity being demanded than supplied.

In a liberalized market, the price mechanism generates a dynamic equilibrium in which supply and demand are closely matched. However, in South Africa, state intervention in the energy market distorts this self-regulating price system. A state-led monopoly approach as seen in ESKOM, rooted in the development state model of the late 20th century, has some advantages in the initial phase of industrialization but often becomes unproductive and creates a heavy burden for the state in the long run. Founded in 1923, ESKOM was once a leading supplier in the global energy market but lack of capital and entrenched, distorting political and administrative interests led to a constant decline and recurring energy crises.

South Africa’s political leaders missed the right time to introduce market dynamics to the energy sector given its benefits, and created a dependency on outdated structures. The state is and has not been willing to commit financial resources to fix the infrastructural deficiencies with tax money and there are serious questions about its ability to do so even with money in hand: Eskom had closed down its central engineering group, which had led the build programme in the 1970s onwards, in 1992. Eskom had slimmed down from over 65,000 employees in the mid-1980s to below 30,000 by the 2000s. Eskom’s tariff was, by 2004, essentially just covering the operating, maintenance, and fuel costs.”

So, what must be done?

An ad-hoc and complete liberalization of the market would generate enormous economic hardship to parts of society which already struggle under the socio-economic effects of the Covid crisis, as electricity prices would rise significantly to cover the true costs of the energy system, generating unbearable political pressure.

The only sustainable route forward includes a combination of market liberalization and social policy according to the principle ‘as much market as possible and as little state intervention as necessary”. A public combined with a private sector energy approach in a more liberalized market would drive the necessary production and price adjustments, leading to a better allocation of resources and a more sustainable market structure in the long-term.

Foreign Direct Investment (FDI) would accelerate innovation and modernization toward a sustainable market, but only the liberalization of the market with prices compensating for the real cost of production provides the necessary economic incentives for investors. Undoubtedly meaningful from the economic perspective, these measures needed to be supported by a comprehensive welfare policy to address the socio-economic effects (e.g. increasing prices). Seeking the “midpoint” by balancing social and economic interests, the mix of liberalization and redistribution creates an escape pathway from the “energy dilemma”. Higher prices are necessary, but so is a mitigating social policy that makes the adjustment period politically possible.

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