Question

Case Study

Eskom: our biggest threat

Eskom is by far the largest of South Africa’s many state owned companies. This near monopoly power utility is in crisis. It’s the single largest threat to South Africa’s economy, according to a former minister of finance. The Conversation Africa spoke to Adjunct Professor Rod Crompton about why this is the case and what can be done.

How is power generated and distributed in South Africa?

Electricity markets in most countries consist of three parts: generation, transmission and distribution. Most electricity is generated by using heat to boil water to create steam which in turn spins a turbine that generates electricity.

South Africa’s cheap and abundant coal resources made coal generated electricity an obvious choice for many years. Initially, power stations were owned by municipalities and large mining and industrial concerns. But as the costs of recapitalisation emerged, government was persuaded to take over responsibility for power.

Eskom is among the biggest power utilities in the world, famous for its ability to handle vast tonnages of low grade coal. Eskom accounts for over 90% of power generating capacity. Its power plants are mostly coal with one nuclear station and some pumped storage (water). Only a few minor power generators have remained outside Eskom’s fold.

More recently, international climate change pressure caused government to introduce renewable power generation through bidding rounds. These private investors were given 20 year price guarantees underwritten by government – some at exorbitant prices. Nevertheless, as these technologies became more globally popular, some of them – solar (photo voltaic) and wind power – emerged as the lowest cost generators.

All power generation is tied into Eskom’s national transmission grid that moves electricity from generation stations to demand areas. Transmission is a natural monopoly. If you want to use the transmission grid you need Eskom’s permission. Transmission lines end where high voltage power is stepped down to distribution networks until it reaches residential customers – at 220 volts. In many areas Eskom sells to municipal distributors.

So, Eskom is a vertically integrated near monopoly responsible for generation, transmission and distribution. In many countries competition between power generators has been encouraged to drive down prices. Transmission, being a natural monopoly, remains just that; but like toll roads they are open to all who obey the "road rules" and pay the toll. The same goes for distribution to a lesser extent.

Source: https://www.wits.ac.za/news/latest-news/opinion/2019/2019-02/eskom-our-biggest-threat.html SS

QUESTION 1

Apply the information in the article provided above, together with your knowledge of various market structures, to explain the market structure of Eskom in South Africa.

Answer 1

Eskom is a South African electricity public utility, established in 1923 as the Electricity Supply Commission (ESCOM) and also known by its Afrikaans name Elektrisiteitsvoorsieningskommissie (EVKOM), by the South African Government and people of the Republic of South Africa in terms of the Electricity Act (1922). South Africa became a Republic in the 1960s.

Eskom represents South Africa in the Southern African Power Pool. The utility is the largest producer of electricity in Africa, is among the top seven utilities in the world in terms of generation capacity and among the top nine in terms of sales. It is the largest of South Africa's state owned enterprises. Eskom operates a number of notable power stations, including Medupi Power Station in Lephalale, Kusile Power Station in Witbank, Kendal Power Station, and Koeberg nuclear power station in the Western Cape Province, the only nuclear power plant in Africa. The company is divided into Generation, Transmission and Distribution divisions and together Eskom generates approximately 95% of electricity used in South Africa, amounting to ~45% used in Africa, and emits 42% of South Africa's total greenhouse gas emissions.

Eskom operate is a monopoly since it is the sole supplier of electricity to residential, mining and industrial premises in South Africa. A monopoly market structure is a market where there is only one supplier who controls significant resources limiting the chances for the entry of new firms. Furthermore, a monopolistic firm is the price-maker indicating the lack of price competition, therefore increasing the chances for the firm to make supernormal profit.

Eskom Holdings is a public (state-owned) utility that has interests in generation, transportation and distribution of electricity (Public Enterprise, 2019). Based on this, Eskom is able to supply 95% of the electricity used in South Africa due to its ability to access significant resources limiting the chances for entry of other companies into the sector (Public Enterprise, 2019). As a monopoly, Eskom can independently determine the pricing and this has led to the formation of National Energy Regulator of South Africa (NERSA) to help in regulation of prices and other operations to protect consumers from oppression.

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