| By Gavin Chait,
on 09 April 2008
|
 And in the darkness grind them In 1998 the US state of California partially deregulated electricity production and sales. The "partially" bit is where things came ungummed. The private companies that purchased the right to sell electricity to Californians were constrained in a very unusual way. Their retail price was capped at 6.7 US cents per kilowatt hour, but – should any shortfall arise – they would have to purchase additional electricity at whatever price was demanded. Since this period coincided with tremendous US economic growth, electricity was scarce and prices for bulk electricity reached upwards of 50 US cents per kilowatt hour. By mid-2000 the companies had accumulated debt of $ 20 billion and were struggling to maintain power levels. Between May 2000 and September 2001 a series of large electricity black-outs devastated the region.
It was a failure of the market, all right. But not of a free one. Since companies couldn't pass on the real cost of electricity to consumers they were forced to run at a loss. Instead of having to bear higher electricity prices, consumers had to deal with no electricity at all. Now we have Eskom. Almost 4 million homes and businesses depend on Eskom for electricity. Eskom is largely state-owned and their pricing and investment strategy are controlled by the government. Plenty has already been discussed in the press regarding President Thabo Mbeki's decision in 2001 to stop Eskom from building additional capacity. There was a decision that was made. In 2001 the state decided to provide 50kw/h of electricity per month to qualifying homes. 30% of electricity subscribers receive this subsidy. Price provides feedback. If the petrol price rises then we try to drive less. If there are water shortages then higher prices punish those of us who waste. Eskom, despite terrible electricity shortages, must continue to provide free electricity to the market, and the government must pay. In order to cover the additional cost of free electricity after Eskom's price increase of 14.2% will require that the state spend less money elsewhere, decreasing services to the poor, or raise taxes, making business a less efficient job-creator. It's going to be hard to get people to use less electricity if it doesn't cost them anything. Like the Californians, we are finding out rather late in the day that you cannot sell something below its real price and expect to go unpunished. The current suggestion to limit electricity consumption is to issue people with quotas. Quotas have been tried before. For the textiles industry, where importers could apply for credits to import the fabric they needed for their products. Some manufacturers didn't have the right political connections, didn't get quotas, had to stop manufacturing and retrench employees. Quotas lead to opportunities for corruption as insiders trade contacts and cash for larger allocations. Money supply and loans are not controlled by quotas. You pay interest. When the Reserve Bank feels that people are borrowing too much money and not repaying it, they raise interest rates. The simplest way to reduce consumption of any scarce good is to dramatically raise its price. Not run expensive advertising campaigns asking people to use less. If government is really serious about reducing electricity consumption there are two additional things they could do: drop "free" electricity, and ban incandescent light bulbs. The only way to promote responsible use of electricity, as well as creative innovation, is to make it expensive. As a side-effect it'll help the environment as well. If the state continues to put the emotive needs of the poor first and insists on subsidising electricity, we will continue to suffer power failures, company closures and job losses. If the price rises to realistic availability then companies can at least continue to function and maintain some form of economic stability. Hopes of 5% growth will have to wait until there is spare electricity available to support it. |
