Simple solution for power crisis

No plan to fix the power catastrophe in South Africa will work overnight. The crisis is deep and wide and will have a grave impact on economic growth, inflation and poverty alleviation for many years to come. (I’m usually reluctant to bandy about terms such as “catastrophe” and “crisis”, but they’re justified in this case.)

This proposal, relatively simple in principle, is from advocate Hendrik Schmidt, a parliamentarian for the main opposition party, the Democratic Alliance. He makes a good, concise case, of which the essence is this:

Eskom’s monopoly over electricity supply is one of the main causes of South Africa’s electricity crisis. The permanent solution to our energy future lies in dismantling this monopoly. Until independent power producers are allowed to enter the market to expand and diversify the sources of power we have access to, and until we are relieved of the burden of having to rely on Eskom’s outdated and dilapidated processes and infrastructure, local demand for electricity will continue to exceed supply.

This should have happened 10 years ago. Even at this late stage, however, combined with short-term, market-based efficiency measures, it offers the best hope for as rapid and complete a recovery as possible.

A return to state-controlled insularity and an “emergency plan”, funded by billions of public money, could work too, of course. But it would be expensive, it would be far more risky, it would be wide open to corruption and it would be implemented by people with a disproven track record. And even if it does work, it will likely leave the country worse off in the end (albeit without an alternative future with which to compare it).

Usually, pricing electricity for the poor is raised as the core objection to permitting the free market to prove its mettle. Capitalists will simply raise prices, they say, and profiteer from the crisis. For a while, that is probably true. FA Hayek wasn’t wrong when he noted that the cure for high prices is high prices. They attract competition by signalling that supply must rise to meet demand. In a free market, in which legislated monopolies do not control supply, this results in downward pressure on prices.

But those who think that the concern of high prices is justified should lobby for a simple subsidy for the first X kWH of electricity metered. Or call for a “progressive electricity pricing scale” that works just as progressive taxation does. I’m not saying those are great solutions. My fear would be that price regulation for poor consumers would discourage companies from serving markets that are expensive to serve. But to satisfy those in government and elsewhere who fail to grasp this logic, such policies would overcome the most common populist objections to liberating the market. And at least they won’t break the market mechanism entirely. At least they won’t leave us all critically dependent on a dysfunctional and inefficient state-run industry.

(This post was first published on my own blog.)