Question

Discuss whether energy providers in SA engage in intensive price competition. Provide an explanation for your answer.

Answer 1

Electricity is a major ‘necessity’ to the tune of ‘basic need’, for today’s world especially if it is a discussion on the aspects of technology and growth especially through industrialization. The power generation which is a large scale heavy investment process and has a long gestation period—gap between investment and returns, is required as a base to ‘allow’ for the ‘end user’ to utilise the power –hence these are also called as ‘public utilities’ as they bring satisfaction to a the ‘public’ in general.

South Africa is a country that is naturally endowed with resources that produce energy like fossil fuels—particularly coal, uranium and so on. Keeping this as a base the government is foisted to make the best use of the available resources such that their supply is consistent and continuous especially since it is the basic requirement for various industries. The government through ‘ apt regulations’ is fostering the growth of competitive ‘energy markets’.

Eskom , the State owned energy supplier has been in the field for long catering to the demand of the SA market though it has been criticised on grounds of deficiency in meeting to the needs of the ever growing ng demand, more so in the recent developmental phase where ‘power’ and ‘technology’ go together. There is a need to expand the capacity of the existing power stations and build new stations primarily because of the growing demand for power.

However , there are a few other companies that especially provide ‘renewable’ energy , being of oligopolistic in nature the power generating companies – large but few in number found in Cape Town , Johannesburg and so on tend to display intense competition among themselves.

Since the nature of the market displays that each firm is capable of producing a large and noticeable amount of output—here it is to provide energy—each firm exhibits tendencies to control the market price and share and will lobby to control most of the share. However it is also aware that other firms too have the capacity as almost itself to exert influence on the market The ‘smallness’ or ‘closeness’ of the market in terms of number of firms creates a situation where the firms have a sharp knowledge of the activities of the other firms as well. This creates a ‘stuck in ‘ situation where the firm will not have any incentive to a change its marketing strategy or price because it is aware that the other firms are keenly watching it. This is the situation with every firm. However each firm is on the lookout for the strategies of its rivals and evolves newer plans based on the rivals’ strategies.

The intense price war among the energy companies in SA is mainly due to the fact that there are naturally present resources which generate energy. This has a major impact on the economies of scale –or lower per unit cost of energy provision—each firm is intently trying to provide energy at a reduces coast or at a price that is economically un --viable option for many other firms—this requires that other firms too are focusing on costs.

However, in case the firms cooperate forming ‘cartels’ or trade associations then the market structure could veer towards ‘monopoly’. The degree of price sensitivity of a firm depends upon the reaction of its rival firm. A price rise may or mayn’t be accompanied by other firms and the firm in question any invariably may end up losing its market almost to its other rivals. Similarly a fall in price which is the effect of a price reduction may other firms may follow suit and the firms in question may not benefit by any such policy.

Hence the firm is well aware that it is facing a kinked demand curve where its actions are in an atmosphere where ‘imitation’ is always present and the firm may not therefore have any incentive to change its pricing policy.Energy is very important for its own development as well as global trade .Hence the power providers suitably encourages by the government policies have to maintain that energy is no more a luxury but is needed by many entities.