Eskom Monopoly in South African Electricity Market

This article discusses the monopoly of Eskom in the South African electricity market and its impact on consumers, environment, and economy. It highlights the need for a competitive market and product differentiation in the electricity market. The article also covers the reasons for the need of a competitive market in electricity, the benefits of a competitive market, and the concept of product differentiation in the South African electricity market.

ECONOMICS
ESKOM
STUDENT ID:
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Question 3
3.1) Eskom is the only supplier of electricity in South Africa. Considering that it is the only
seller present in the South African electricity market, hence the buyers have no choice but to
buy electricity from Eskom at an increasingly higher rate. This is an example of monopoly.
The reason why this monopoly has sustained over the years is on account of the legislation as
per which no private player can enter into the electricity supply. Even though National
Energy Regulator of South Africa (NERSA) allows for the independent power producers to
produce 30% of the total electricity, the remaining 70% production is in the hands of Eskom
only. Further, these IPP’s have to sell their electricity to Eskom only which charges
whimsical prices that, hurt the economic viability of these producers. Thus, this legislation
serves as an entry barrier for other companies that might be interested in setting power plants.
As a result, the monopoly position of Eskom is safeguarded in the electricity market in South
Africa (Axford, 2017).
There are many reasons for the need of a competitive market in electricity. To begin with,
presence of other private suppliers in the market would increase the competition and hence
make it beneficial for consumers who can choose the supplier that offers better quality
services and at a lower price. Currently, Eskom charges way too high prices from the
consumers since there is a shortage of electricity in South Africa. Secondly, competitive
market would serve the cause of climate change as well. This is because currently 95% of the
power produced in South Africa is based on coal and hence greenhouse emissions are high.
There is a need to diversify the electricity production using various renewable sources of
energy especially hydropower so that the dependence on coal can be brought down and also
the greenhouse emissions can be lowered (Hattingh, 2017).
Further, a competitive market would provide a boost to the South African economy which is
suffering due to severe electricity shortages and hence even foreign investment in South
Africa remains low. In an increased competitive market, there would be higher reliability of
electricity supply which would result in greater industrialisation and FDI into the country.
Lastly, the competitive market would lead to saving of taxpayers money which currently is
being wasted on account of inefficiencies and financial irregularities that are rampant in the
state run Eskom. In a competitive market devoid of any state support, Eskom would need to
be efficient and there would not be any scope of these financial irregularities (Vanzyl, 2017).

3.2) Keeping in mind the current socio-economic environment, the competitive market would
be comparatively better than the current structure which is highly inefficient. Under the
current monopoly market structure, there is shortage of electricity production and supply
since it is in the interest of Eskom to maintain a shortage so that the profitability can be
maximised. However, electricity is a basic good and not a luxury good and therefore it is a
public utility which must be available to all citizens at a affordable price (Nicholson and
Snyder, 2011). This can be made possible only when the competition in the market increases
as the supply of electricity would increase leading to lower prices and hence more
affordability. The higher per capita consumption of electricity would lead to socio-economic
development for the South African people.
Also, under the current market structure, the operations of Eskom are highly inefficient due to
absence of any competition. Considering that the entity is state run, hence this leads to
awastage of public money collected as taxation. In addition, there are constant financial
irregularities which tend to plague Eskom now and then. This results in embezzlement of
public money. Increasing the competition in the market would result in higher competition
and hence Eskom would have to become more efficient in order to successfully compete.
Also, with the state support withdrawn, the organisation would have to be more professional
in its conduct thus leading to absence of financial irregularities (Hattingh, 2017). As a result,
the taxpayers’ money can be used by the nation for building infrastructure and improving
social security. This would lead to national development.
Question 4
The product differentiation concept refers to the offering of the same product with minor
variations often at different prices. This differentiation is possible in the South African
electricity market since there is only one supplier (Eskom) and hence it can potentially offer
various variation in product based on the paying capacity of the underlying customer. And
their specific needs (Mankiw, 2014).
With regards to electricity, one of the ways in which the product is differentiated is through
the voltage. Electricity may be supplied at different voltage based on the specific needs of the
consumers. Also, another factor which differentiates the electricity supply is based on source
of generation. In South Africa, even though the mainstay of electricity generation is coal but

about 5-6% of the total electricity is also generated from the two nuclear reactors. Hence, the
electricity supplied could originate from coal based power plant or nuclear power plant. This
also acts a product differentiator (Staatskorant, 2008).
Besides, considering the unreliability of electricity supply in South Africa, there is product
differentiation based on the underlying reliability. There are certain commercial
establishments that require continuous and uninterrupted power supply and are willing to pay
a price premium for the same. Hence, the quality of service also acts as a differentiator.
Further, price based product differentiation is also practised in South Africa. This is because
the price of electricity is not the same in different geographical areas which may arise due to
differential subsidy framework. Also, customer based product differentiation is also
prevalent in South Africa owing to the difference in the purchasing power and the essential
requirements. This is primarily related to the quality of service along with hours of electricity
supply (Staatskorant, 2008).

References
Axford, H. (2017), ‘Should Eskom Still Hold Monopoly Over South Africa’s Electricity
Supply ?’, viewed 12 April 2018, http://www.clickncompare.co.za/latest-news-269/should-
eskom-still-hold-monopoly-over-south-africa%E2%80%99s-electricity-supply
Hattingh, C. (2017), ‘Time to end the Eskom monopoly’, viewed 12 April 2018,
https://www.news24.com/SouthAfrica/Local/Hillcrest-Fever/time-to-end-the-eskom-
monopoly-20170815-3
Mankiw, G. (2014) Microeconomics 6th ed. London: Worth Publishers.
Nicholson, W. and Snyder, C. (2011) Fundamentals of Microeconomics 11th ed. New York:
Cengage Learning.
Staatskorant (2008), ‘ELECTRICITY PRICING POLICY (EPP) OF THE SOUTH
AFRICAN ELECTRICITY SUPPLY INDUSTRY’,DEPARTMENT OF MINEALS AND
ENERGY, viewed 12 April 2018,
http://www.eskom.co.za/CustomerCare/TariffsAndCharges/Documents/18671_not13981.pdf
Vanzyl, G. (2017), ‘Its time to free South Africans of the Eskom monopoly –FME’, viewed
12 April 2018, https://www.biznews.com/energy/2017/08/10/sa-electricity-eskom-monopoly-
fmf/