We need the state to back Eskom

DEAR SIR — I struggled through Gavin Keeton’s piece on how the state should abandon its monopoly in infrastructure strengthening, particularly regarding Eskom (State must abandon infrastructure monopoly, April 15). After realising he is at the economics department of a credible university, I am totally confused.

Economic theory would recommend prices be determined at marginal level. Normally, that would be short-run marginal cost, but due to the very long-term nature of the electricity industry, it is generally accepted that electricity prices should be close to long-run marginal cost. People in the industry know that new private coal-fired power stations require a price of about 65c/kWh to be viable. The Eskom price seems to be at about 61c/kWh after the April 1 increase of 8%, but this price includes the cost of delivery, which is substantial, probably close to a third of the price.

If these high-level deliberations are accurate, the long-run marginal price of coal-generated electricity would be more than 80c/kWh. How do you attract rational private investors to an industry if the industry expects to earn a price of 75% of total cost? How do you construct an economic argument asking for private capital to relieve Eskom from borrowing, and criticise the required price escalation in the same breath? How do you ignore the fact that the Department of Energy already made determinations to give all new power stations required up to 2023 to the private sector, and think long-term investors would rush to SA, where the price is too low to cover full cost for probably the next 15 years?

Eskom will have to borrow money over the next 15 years to cover operational expenses due to an insufficient price level, and too-low price increases, if you ask me. Private investors will invest only if they have a credible hope of earning their money back. Three-quarters of the required income will not do. Unlike Eskom, they are not organs of state; they are not suppliers of last resort; they are not obliged to invest in a bad idea. Eskom, as a state-owned enterprise, might still be forced to do so, and the lights might stay on.

So, Mr Keeton, as appealing as it always appears, you cannot have your cake and eat it. With a too-low electricity price and no real plan to fix it, you are stuck with Eskom to make risky long-term investments. People who already made money before would be able to identify an unsustainable situation if they see it, and would most probably stay away. And the Department of Energy is not helping: its first independent power producer project is now, what, eight years behind schedule?