Understanding Power Sector Restructuring

In conversation with Edgardo Sepulveda

Edgardo Sepulveda is a regulatory economist who has conducted extensive research on the unbundling process and the restructuring of electricity markets. We recently engaged in a conversation to delve into the nature of the process and explore what South Africa might anticipate if the government decides to proceed.

Edgardo and I discussed the history of electricity markets and how unbundling emerged almost 3 decades ago as a perceived solution to the inefficiencies of vertically integrated markets by various elites. According to Edgardo, unbundling has not lived up to its initial hype. After 25 years since its introduction, the various economists and its proponents can no longer ignore the empirical evidence that questions the claims made by the proponents of power sector restructuring.

During our discussion, an interesting point arose, highlighting that the restructuring process has encountered obstacles not only in the United States of America but also in Canada, where many provinces have not yet implemented it. However, success stories in Alberta and Texas, even with their shortcomings, might provide valuable insights.

An objective observer would carefully evaluate these cases, particularly considering South Africa's unique challenge of lacking a security of supply.

We touched upon the Californian crisis, partly attributed to Enron, which experienced setbacks due to the associated criminality related to that event. Since then, the USA has experienced an effective slowdown in the unbundling process with various bespoked systems across all the US states.

Additionally, we explored how certain technologies thrive in specific regulatory environments. Solar, wind, batteries, and natural gas tend to flourish in restructured markets, while coal and nuclear perform better in traditional vertically integrated markets. It should not be surprising that proponents of various technologies favor a specific regulatory framework aligned with their perceptions of how the economy, political freedom, and other ideological notions should work. Energy is unfortunately not just about an underlying technology or the technological question at hand - it is ultimately political. The various technologies barely differ in terms of full system cost, making them rather a function of policy decisions.

Despite the potential bias accusations, Edgardo and I both agree that South Africa lacks the necessary preconditions to successfully pursue this process. As a developing country, South Africa faces challenges inherent in the developing world, especially within the context of Africa. In my view, it would be reckless to attempt this process in the short period that some people desire, without learning from the failed instances of unbundling observed across the world.

I would prefer Eskom to continue engaging with the private sector, particularly through power purchase agreements. Opposing unbundeling does not imply that one is against the free market. As a priority, South Africa should address the issues within the broken coal fleet and strive to restore Eskom's safety margin. Only after we have achieved stability and resilience in the system should we consider restructuring the power sector.

Those who advocate for this solution, should not say a few years from now that I and a few others didn’t doubt their sales-pitches.

The discussion was enlightening, and I encourage everyone to follow Edgardo's work.