Case Study

Eskom: our biggest threat

Eskom is by far the largest of South Africas many state owned companies. This near monopoly power utility is in crisis. Its the single largest threat to South Africas 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 Africas 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 Eskoms 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 Eskoms 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 Eskoms 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.

QUESTION 1 (20 Marks)

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.

QUESTION 2 (20 Marks)

Economic growth requires reliable electricity supply. President Cyril Ramaphosa has been on a campaign to bring investment into the country meaning there is bound to be an increase in the demand of electricity".

Explain what will happen to the equilibrium price and quantity of a product if:

2.1 The demand for the product increases (6 marks)

2.2 The supply of the product increases. (6 marks)

2.3 Identify FOUR (4) factors that can cause an increase in demand and FOUR (4) factors that can cause

an increase in supply