UNIVERSITY OF KWA ZULU NATAL
FACULTY OF SOCIAL SCIENCES
DEPARTMENT OF INDUSTRIAL LABOUR STUDIES
COURSE NAME: NEW ECONOMY
MODULE: RESEARCH PAPER

TITLE:

 THE CONSEQUENCES OF RESTRUCTURING THE SOUTH
AFRICAN ENERGY MARKET – THE DILEMMA OF
SUSTAINABLE DEVELOPMENT OR SUSTAINABLE
ENVIRONMENTAL PROTECTION

PRESENTER: SEBASTIAN VEIT

DATE: 18th OCTOBER 2004

Contents

Introduction 2

The Particularities of Energy Producers  3

Company Profile of ESKOM  5

Facts of Generating Electricity in South Africa  6

ESKOM’s Research and Development  7

The Nation State and Energy Production  9

Further Observations and Suggestions  12

Conclusions  15

References  17

Appendix A, South African Ministry of Energy, Chard  i′
Appendix B, ESKOM′s Tariff Proposal, Excutive Summery  ii′
Appendix C, ESKOM′s Annual Report, Facts and Figures   iv′

Introduction

Energy is a key issue for the African continent due to the higher consumption of power in the developing countries. Rapid growth in the economies of developing countries in recent years has led to an increase in incomes which is reflected in higher living standards. This goes hand in hand with an increase in consumption of electricity, petrol, coal, natural gas and other fuels.

The dilemma of maintaining competitive energy prices in order to encourage economic growth on one hand, and on the other hand of generating energy in an environmentally friendly way is a global concern. This dilemma plays a key role in South Africa especially.¹ The major energy producer, ESKOM Holdings, privatized 30% of its generating capacety in 2002 and is now caught in the triangle of providing its customers cheap electricity, in an environmentally responsible way and at the same time creating profits for its investors as well as the government. The above mentioned three interests are often in conflic with each other.

The aim of this research paper is to investigate how ESKOM will address pressing issues of satisfying the described conflicts. First, I will give a general introduction into the particularities of the energy sector, which is followed by a brief description of ESKOM. This includes an overview how electricity is currently generated in South Africa. Additionally I will critically assess ESKOM’s research projects. In the second part, I will give examples for environmentally sustainable energy production. In the concluding part I will give my outlook as to how the triangle of conflicts can possibly be addressed.

Right at the onset I would like to pint out that a further assessment on the effects of ESKOMs additional stake holders cannot be undertaken in this paper, since this should be addressed with the focus on private households which probably have to face higher energy costs due to an increase of profitability demands. As the Business Day analyzes regarding the para statal ownership dilemma: “It has become apparent since Alee Erwin was appointed Public Enterprises Minister in April that the state′s biggest assets are in crisis….The issue of whether state-owned entities are privatized or not is really irrelevant. But those which operate in a business environment need to operate as tough, smart businesses.” (Klein, Marcia: 2004).

The primary focus therefore will be on the conflict between the costs of generating electricity and environmental protection. Because of the highly complex nature of the issue at hand, I will not be able to discuss all facets of it. For instance, the amount of water used to generate electricity or the condition of technical equipment can not be studied. Furthermore, this paper focuses on qualitative analysis since the time constraints were too high to enter a statistical quantitative research.

The Particularities of Energy Producers

The term ‘energy’ in this paper refers to the production of electricity. The energy industry has two significant phenomena which distinguish it from any other industrial sector like automobile, textile, machinery etc. Firstly, the product needs relatively little marketing, it cannot be stored or the quality improved. With this, I exclude mal-service, such as frequent power failures etc. Consequently energy producers have very little scope of improving their revenues by using any management strategy. An increase of revenues can usually only be achieved through additional investments, like electrifying households or if new industrial production plants are build. Since in the South African energy market almost no competition exists, we can disregard this aspect as well. I want to stress that in contrast to South Africa, the European energy market is liberalized since 1998. Although most of the private households in Europe remained with their local energy supplier, mass users in the heavy industry switched their suppliers in many cases. This indicates that a liberalized energy market is highly price driven, since the product is homogenous. 

The second particularity is the inverse relation between electricity and the macro economic frame work. For instance, the inverse relationship between the amount of electricity used and the macro economy is noticed when the GDP decreases, it results in a lowering in production and lesser usage of power. An increase of GDP results in higher use of electricity. However, it is important to note that electricity costs are generally accounted as fixed costs, for example computers run the whole day, independent of the order volume a company receives.

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1 “In 2001, 75.4% of South Africa’s total energy consumption was from coal consumption. This reliance on coal, a highly carbon-intensive fossil fuel, has negative environmental impacts. For example, electricity generation from coal combustion in the industrial sector is the prime contributor to air pollution. Mining, itself, adversely effects the environment through the disruption of ecosystems and the pollution of groundwater.” (www.eia.doe.gov)