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EDITORIAL EDITORIAL State control, free markets and electricity Experiments in state control, such as South Africa’s attempt at a so-called developmental state, usually lead to inefficiency and limited progress. In South Africa, one sees it in a landfill gas project that had to flare gas for years instead of being able to supply power to someone, while there is an electricity shortage. One sees it in the dearth of small projects where willing buyers and sellers exist, but that have massive hurdles to overcome to generate and transmit power, so that only a few obstinate exceptions persevere. One sees larger independent power producers that would take some of the burden of power generation in South Africa stalled because they are private sector initiatives and government permission is withheld. Indeed, there are grid stability and technical issues to consider, particularly with numerous distributed power producers, but engineering solutions are possible provided the freedom exists. So, there is South Africa, the fading continental powerhouse, a country whose government prefers to mandate ministerial permission to develop any power project to supply the grid, and which wants every little biogas digester to be registered with the national energy regulator. In contrast, there is the far less developed Nigeria which has gone a long way towards privatising generation and distribution of electricity. If both countries stick to their current paths, demographics aside, it takes little insight to guess how different the two will look relative to each other in two decades. Yet, even taking into account the well-worn crudeness of such an old debate, free markets versus state control, electricity is an interesting test of ideology. Energy provision is too important to get wrong. The prosperity of societies is closely correlated to the amount of electricity they have available. Dudley Baylis, director Bridge Capital Refco, at a South African National Energy Association (Sanea) presentation provided data that a population needs some 150 W per capita simply to survive and produce no economic benefit. Such scenarios exist in large parts of Africa. At a threshold of about 500 W per capita there is a step change, where people have greater freedom and self-sufficiency and have moved beyond a subsistence existence. There is another step change at about 1,650 W per capita when societies make a major leap forward in prosperity. It is not fully proven which, electricity or prosperity, is the cause and which the effect. Baylis says that if you empower 100,000 households with standalone electricity systems, the cost will come to some R15 billion, but it will enable those users to generate some R1 trillion worth of economic activity. Policy direction in undertaking such loss-leader developments is important. Even in so-called liberalised electricity markets such as Europe very strong interventions are in place. Consumers are free to choose which reseller they can buy electricity from but the European Union dictates that all renewables produced must be taken up. The market distortions due to this approach are being seen, and many failures attributed to the freeing of electricity markets are in fact due to regulated distortions of that freedom. Electricity prices in Europe are high. Much of the developed world’s electricity infrastructure was built by states and it has been questioned whether this would have happened to the same extent if left to free markets. In fact the advent of the smart grid concept globally, with its holistic viewpoint, is more amenable to vertically connected single owner electricity sectors than an array of differently owned parties focused on their own narrow interests. Though still early in its evolution, a smart grid global impact report produced in late 2013 showed that Europe with its vertically fragmented electricity market and particular ideological focus did not produce projects of this nature as financially successful as the best examples in other parts of the world. Ethiopia’s big hydroelectric schemes would not materialise without state intervention. Nuclear power has little support from the private sector and if such is to materialise in developing countries it requires strong state support. In fact the biggest weakness of nuclear power is that it is tends to be subject to government deals, with a lack of transparency. At the same time a dangerous concept emerging out of the developed world, particularly dangerous for Africa and the developing world, is that thanks to renewables and energy efficiency progress one can have too much baseload capacity. In Europe utility companies, once seen as conservative reliable investments, are struggling, as their baseload stations see reduced continuous demand for their power. Should the incentive for the private sector to build such projects diminish sufficiently, ultimately the states will have to pick up the pieces and guarantee power. For a number of reasons, such as lack of feasibility of storage, natural transmission monopolies, and importance of this sector to economic and social development, the question of free markets or state control in the electricity sector is not quite as clear cut as in other areas. More important for Africa, including South Africa, than any ideology, however, is that the capacity gets built, as much as can be built, using Antonio Ruffini Editor whatever models work. 2 Managing Director David Ashdown Editor Antonio Ruffini Publishing Director Philip Vander Gucht Assistant Publisher Bernice Bredenkamp Sales Director Gerald Schreiner Sales Executives Adrian Barklie Carl Chothia Layout & Design Virgil Jacobs Head Office Spintelligent House, 31 Bell Crescent, Tokai, 7945 PO Box 321, Steenberg, 7947 South Africa Tel: +27-21-700-3500 Fax: +27-21-700-3501 USA Tel: +1-888-559-8017 USA Fax: +1-413-487-6276 Contributions: The editors welcome news items, press releases, articles and photographs relating to the energy supply industry. These will be considered and, if accepted, published. No responsibility will be accepted should contributions be lost, damaged or incorrectly printed. Disclaimer: The views expressed in this publication are not necessarily those of the publishers and/or association partners. Whilst every effort is made to ensure accuracy the publisher and editors cannot be held responsible for any inaccurate information supplied and/or published. Reproduction & Printing: Reproduction and printing by Tandym Print Subscription: R345 (1 year) – South Africa US$150 (1 year) – International Copyright: The copyright for all material published in this magazine is strictly reserved. ISSN 1028-1703 Spintelligent is an Affiliate Member of the Association of Municipal Electricity Undertakings (Southern Africa) (AMEU). ESI AFRICA ISSUE 4 2013