There is a “dire need” for  electricity sector reform in South Africa, where the current power deficit stood at over 5 000 MW, Free Market Foundation director Eustace Davie said on Tuesday.

“Right now, we are paying firms not to use electricity, while preventing new development, curtailing industrial development and stalling property development. This all leads to loss of gross domestic product and loss of foreign direct investment.

“This is a serious situation, and many businesses will have to close their doors on account of not being able to pay for the electricity increases. This calls for potential alternative sources of energy,” he said.

Davie pointed out that the first step would be to open up the transmission grid for wheeling from independent power producers (IPPs) to customers.

The second step would be to make the transmission grid independently owned and managed. “We must immediately resolve that all additional electricity generation should be financed, built, owned and operated by private firms.

“It should also be resolved that Eskom should concentrate on refurbishing, maintaining and replacing, where necessary, its existing plants,” he said.

Davie also said there were some fundamental problems with State-owned electricity utility Eskom’s third multiyear price determination period (MYPD3), including the fact that prices were set by a regulatory committee and not by competition; and that applications for administered prices tend to be excessive and based on inflated expenses.

“From an economic point of view, no committee can determine the ‘right price’ to ensure efficient generation, transmission and distribution of electricity,” he said.

Davie noted that electricity price increases of 16% a year over the coming five years could be reduced by cutting back on expenses such as the integrated demand management programme, which would be about R13-billion.

He felt that the Eskom structure had a number of flaws, including the fact that it was a vertical monopoly.

“This lack of competition creates the problem of potential excessive charges and difficulties with obtaining access to the grid, while vertically integrated electrical structures is not the best way to organise the supply of electricity,” Davie noted.

He concluded that independent experts were needed to interrogate the figures contained in the MYPD3, as the matter was too important to be decided upon without thorough investigation.

The Department of Energy recently received “concurrence” from the National Energy Regulator of South Africa for a Ministerial determination opening the way for the procurement of 7 761 MW of baseload capacity from IPPs between now and 2025.

The baseload determination included the prospect of increased power imports, primarily from hydropower schemes in the Southern Africa region.

It was one of three determinations, with the second dealing with the procurement of 3 200 MW of additional renewable-energy capacity by 2020 and the third opening the way for cogeneration projects and near-term gas developments.