Externalities

Patrick Bond pbond at wn.apc.org
Thu Aug 23 05:56:36 PDT 2001



> Date: Thu, 23 Aug 2001 08:42:14 +0100
> From: James Heartfield <Jim at heartfield.demon.co.uk>

Q1)
> isn't the laudable aim of the S.E.C.C. to
> promote a great increase in consumption?

Q2)
> Doesn't that imply increased
> electricity production?

Q3)
>Don't you need more dams/reactors/power stations
> to meet that demand?

Thought you had me in an untenable contradiction, eh.

A1) Yes, for SECC and other urban/rural movements (low-income households consume less than 2% of all electricity, so tripling or quadrupling that level would be the first desirable outcome, so as to achieve all those positive externalities of electricity).

A2) No, not on a net basis for society if we can combine it with a shutdown of the horrid energy-guzzling smelters which -- while consuming more than 50% of all eletricity -- create nearly no jobs and whose forex earnings evaporate to the London Stock Exchange where our main corpos now operate. (The main one under fire is, as mentioned, Coega in Port Elizabeth, where the struggle is documented at http://www.coega.org.)

A3) And no, not if redistribution is the main objective, achieved in part through massive conservation by SA's morally-repugnant elites. Again, on water we've proven that pretty decisively, in relation to Africa's biggest public works project, the corrupt Lesotho mega-dam scheme (http://www.queensuc.ca/msp has an article on the preferred route--"demand side management"--in the form of a protest document we filed against the World Bank in 1998, plus their ineffectual rebuttals, and there's a new Ben Cashdan film -- "White Gold" -- just out on this very issue). On electricity, we debated this point a week ago with the government's main policy heavies. Here are some techie notes, if you're still interested in the gory details:

(Also in today's news: the electricity company Eskom--against whom millions will go on a two day general strike next week--had its security firm kill at least two people yesterday in the Vaal, an hour south of Jo'burg, when the two joined a community group who resisted Eskom's disconnection of electricity due to the residents' inability to pay.)

Notes (by Patrick Bond) from electricity policy panel debate, 16 August 2001

These are my own notes (slightly expanded) about the lines of argument and rebuttal that emerged last Thursday evening.

For the forthcoming Municipal Services Project study on Soweto electricity, which we anticipate releasing in coming days, we would very much like to include some of the points below. Any correction or amendment would therefore be warmly welcomed.

In addition, it is our intention in the Municipal Services Project to continue to engage in friendly, constructive and vigorous debate, and we appreciate the efforts made so far, especially by Sipho and Gillian of hands-on video to call us all together to put our thoughts on record.

Panel from electricity sector:

Nelisiwe Magubane, chief director: electricity,

Department of Minerals and Energy

Xolani Mkhwanazi, chief executive officer,

National Electricity Regulator

Jacob Maroga, manager, distribution

Panel from civil society:

Neva Makgetla, senior researcher, Cosatu

Virginia Setshedi, activist, Soweto Electricity

Crisis Committee

Wiseman Hamilton, Johannesburg Anti-

Privatisation Forum

Patrick Bond, Wits University associate

professor and co-director, Municipal Services

Project

According to officials, South African electricity is characterised by the following four key accomplishments:

1) Eskom has electrified more than two million

households since 1994. Substantial cross-

subsidies exist between industry and households-

-approximately R1,8 billion (including subsidies

to mainly white farmers)--which have allowed

this process to expand as far as it has to date.

2) Eskom offers the world's cheapest electricity

to industrial users. The overall price of Eskom-

supplied electricity fell by 15% from 1994-2001.

One result is the attraction of major industries,

such as aluminum, ferrochrome, and steel

processing.

3) The present process of rationalisation and

restructuring of the electricity sector will

continue, with the objectives of more

streamlined administration, economies of scale in

distribution, adoption of commercial operating

principles, establishment of a level playing field

for Eskom's potential competitors, revenue

collection through taxing Eskom, and imposition

of rational (economic-based) pricing systems

characterised much less by the debilitating

diversity of the present system.

4) As surplus generation capacity winds down,

the Department of Minerals and Energy will

promote nuclear energy as an environmentally-

friendly alternative.

But critics pointed out contradictions within the four alleged accomplishments, which in turn suggest possibilities for dramatic reforms:

1) Eskom's electrification of low-income

households is unsustainable, because the per-unit

price is too high for low-income households.

The price to consumers via pre-paid meters is in

excess of R0,30 per kiloWatt hour, which has

had the effect of reducing demand for electricity

far below what Eskom anticipated. In turn,

relatively high electricity prices--compared to

disposable income--have led to a dramatic

reduction in the speed and scope of rural

electrification, and to an unprecedented

campaign of electricity cut-offs both by Eskom

and by its municipal government clients.

The vast majority of Eskom's white

customers are able to pay on the basis of a

metered system, while the vast majority of

Eskom's black clients must pay on the basis of

a pre-paid meter, which gives Eskom a generous

source of credit from low-income people.

Electricity cut-offs are being handled in a

most incompetent manner, and blatant

inaccuracies and vastly overinflated estimates

characterise the bills received by Soweto

customers. In addition, Eskom customers in

Soweto are paying higher per-unit prices (by a

few cents) than are households in Sandton who

are on a different tariff system also operated by

Eskom. (The break-even point at which the

Sandton tariff makes sense is roughly 500 kWh

per month, and the average Sowetan household

usage is 600 kWh per month, so more than half

the Soweto households should be billed

according to Sandton's tariff.) Sowetans who

consume more than the average have not been

informed by local Eskom staff about their ability

to change tariffs so as to have the lower rates

enjoyed by Eskom's Sandton residents.

While the cross-subsidy from industry to

households is acknowledged, it should be clear

that it remains insufficient to assure that low-

income people gain access to sufficient

electricity. Worse, reports discussed in labour-

government meetings suggest that a cost-plus

pricing strategy that may be adopted as Eskom

commercialises could raise the electricity costs

to households by 20-50% (this was not denied

by officials present).

One important reason that the high prices and

anticipated increases may be adopted by Eskom

and the government is that the full set of

benefits (positive externalities) associated with

electricity access are not being factored in.

(These include a net improvement in the

environment, many fewer respiratory disease and

other public health problems, fewer hazards

associated with fire, greatly increased gender

equity, improved productivity on the part of

workers, improved capacity to learn on the part

of youth, greater chances for class desegregation,

and many economic spinoffs from those who can

use electricity for income-generating purposes.)

2) While Eskom offers the cheapest electricity to

industrial users in the world, this has several

negative implications. Firstly, the cost of

environmental damage associated with the

extreme C02 emissions associated with coal-fired

electricity generation is not taken into account in

the pricing. The distortions caused, in the

process of generating electricity for huge mega-

consumers (Alusaf, Columbus, other Highveld

projects, Saldanha, Mozal, etc) have been part of

the case against South Africa in international

trade, aid and investment projects (most recently

in a threat to end further International Finance

Corporation investment in the Mozal smelter

complex). In addition, the environment is

harmed by the increase in S02 and other

emissions, which would not take place were it

not for the excessively cheap electricity. (Part of

the rationale for large consumption was the

overcapacity experienced during the 1980s-90s

due to the ill-considered excess construction of

coal-fired and nuclear plants by Eskom.)

Secondly, the benefits of the large industrial

projects are elusive. There are typically fewer

than 1 000 permanent jobs per mega-project.

There are typically very few, if any, backward

and forward linkages. And a large share of the

hard currency acquired through exports of

electricity-intensive products (aluminum,

stainless steel, etc) is typically siphoned off to

the site of ownership. In many cases, majority

ownership in the mega-industrial projects is held

by companies domiciled for investor purposes in

Britain or Australia.

If the mega-industrial users and the mining

houses are consuming the vast bulk of the

electricity in South Africa, then they are also

driving up the long-run marginal cost of

electricity, since when the current excess

capacity runs out, much more expensive energy

generation sources will have to be constructed.

3) Aside from conforming to international

ideological trends associated with "neoliberal"

electricity sector restructuring (which are widely

recognised as contributing to extreme inequality

and deprivations in state service provision in

most countries), and aside from anticipated job

losses invariably associated with market-driven

parastatal commercialisation (which have

sometimes dramatic social costs), there are

objective consumer-related problems that can be

identified with the electricity sector's

restructuring. The institutional restructuring

proposed by the officials will result in three

negative developments. Firstly, permission will

be granted for private firms to engage in

generation of up to 30% of the national market,

which will in turn lead to those firms cherry-

picking the market so as to seek highest-profit

large customers, hence reducing the scope for

cross-subsidisation from industry to low-income

consumers.

Secondly, the establishment of six Regional

Electricity Distributors (REDs) will excessively

centralise electricity so as to disempower

municipalities from using surplus revenues to

subsidise other vital municipal services (e.g., fire

protection, against regular household paraffin

spills).

Thirdly, although it may appear

contradictory, the six REDS are insufficiently

centralised to take advantage of national usage

by mega-consumers, leading to a smaller pool

from which to gain cross-subsidies for local low-

income users. Given the extreme inequality

between regions in South Africa, the difficulty

of a national-local cross-subsidy due to regional

REDs boundaries will make the electricity

sector's developmental mandate much harder to

achieve.

4) The use of nuclear energy--especially pebble-

bed reactors--as an alternative is highly dubious,

given decades of information about nuclear

accidents and hazards, about waste disposal

problems, and about the economic inefficiencies

associated with nuclear power when such risks

are factored in to the national insurance system

as a whole. The amount of South African

taxpayer money and Eskom surpluses spent on

nuclear R&D is shocking, compared to the tiny

amounts of money available for vitally-needed

research on solar, wind, geothermal and other

potential renewable sources.

The officials generously replied to these arguments. Of greatest importance, perhaps, was the National Electricity Regulator's concession that so-called "cost-reflective" electricity pricing--which he is mandated by government to pursue--could be interpreted beyond mere financial inputs/outputs, to incorporate the many social, economic and environmental costs (and benefits) of electricity. The main policy-making official from government confirmed that the various positive benefits of electricity are highly valued. This would appear to give some scope for technical discussions.

Yet it was pointed out that if this openness to broader cost-benefit analysis was serious, the following problems would not be so obvious in 21st century South Africa:

1) the overall price of electricity to low-income

people would not be beyond their means;

2) cutoffs of electricity supply, including cables

and including entire geographical areas, would

not be happening (instead a lifeline supply

would continue to be provided);

3) the practice of self-cutoff of electricity,

through inadequate income to afford pre-paid

cards, would not be so common;

4) the denial of electricity to thousands of

schools and clinics would not be so common;

5) the rural electrification programme would not

be slowing down, given the many millions of

people still unserved;

6) the possibility of local-local electricity cross-

subsidisation (from excessive consumers to those

with basic-supply needs still unmet) would be

firmly encouraged by the Regulator through

mandatory implementation of progressive block

tariffs (whereby accounts with high consumption

per resident are charged higher marginal costs,

as is common in the water sector);

7) the national-local cross-subsidy from industry

to domestic consumers would be larger, and the

high levels of subsidies (hundreds of millions of

rands per year) for commercial farmers would be

more critically examined to determine whether

farmworkers share the benefits adequately;

8) officials at national level would not be tardy

in implementing the free basic electricity supply

to all South Africans promised by the African

National Congress in election manifesto last

October: "ANC-led local government will

provide all residents with a free basic amount of

water, electricity and other municipal services,

so as to help the poor. Those who use more than

the basic amounts will pay for the extra they

use" (the tardiness by Eskom, for example, has

been the basis for even Johannesburg refusing to

provide the free basic amount to its own

electricity customers);

9) the Regulator would not shy away from

endorsing the key component of the ANC

promise, namely "all residents," which implies

that there may be means-testing rather than a

dramatic restructuring of the consumption tariff

along progressive block-tariff lines;

10) the unit of analysis in discussions about

future implementation of the ANC free basic

electricity promise would be an individual

person, not a "household" (given that low-

income families are often disproportionately

large in number, especially given the impact of

AIDS);

11) the cheap appliance strategy of Eskom

would be made part of a broader industrial

strategy to ensure that with some free electricity

there will be a switch from use of wood/coal for

cooking/heating to hotplates, stoves and geysers;

and

12) a sufficiently large free supply--e.g., 1 kWh

per *person* per day as suggested by Soweto

leaders (instead of, e.g., Cape Town's 20 kWh

per *household* per month)--would be offered

to all South Africans as the "basic" amount, so

as to ensure that the benefits of free electricity

(public health, hazard abatement, environmental

improvements, gender equity, desegregation,

economic spin-offs) are genuinely within reach

of low-income people.

The Municipal Services Project is often asked, "If you are so critical, what is your alternative?!" The short-hand reply to this question, is "The RDP, the Bill of Rights of the Constitution, the Grootboom judgement, and the ANC Free Basic Electricity promise." The long-hand elaboration continues to be developed. But it is likely that some or all of the dozen points above would be part of whatever alternative strategy and programme emerges from progressive organisations in South African civil society.



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