Perils of deregulating energy: Texas blackouts a snapshot of the fraught future of an unbundled Eskom
Jonathan Cannard | DailyMaverick | 26 May, 2021
The so-called developing world – including South Africa – has the advantage of learning from the many mistakes of what calls itself the developed world. Unfortunately, the developing world often reproduces these same mistakes, often at the behest of those who first made them. The South African government’s plans for Eskom threaten to reproduce this pattern, leading the power utility down the well-trodden, fraught path of deregulation.
In February 2021, much of the continental US was hit by an enormous winter storm. The northern regions of the country are well accustomed to such weather, but the southern state of Texas was quickly overwhelmed by the severity of the storm. Among the most disastrous consequences of Texas’ unpreparedness was electricity generation failure, which left millions of homes without power in dangerously cold temperatures and for days at a time. As a result, dozens of people died. Furthermore, consumers who did have power were left with exorbitant bills, some paying well over $10,000 for a few days of service. In many cases, power utilities were able to take these bills directly out of people’s bank accounts, immediately leaving them with nothing.
The state’s governor, and numerous others, erroneously blamed the generation failures on renewable energy, stating that wind turbines froze in the cold weather. The reality, however, is that most of the generation failures stemmed from the inability of natural gas turbines to operate in the cold weather. Renewable energy has its limits, in that the sun does not always shine, and the wind does not always blow. It is known as a “variable energy resource”, meaning that its generation is not entirely under human control, but is contingent on outside variables, namely weather.
Natural gas is used to produce power in Texas only when there is excess supply not used for home heating. The cold temperatures of Texas’ storm meant that no natural gas could be spared for energy generation. In South Africa, natural gas is not used for residential heating, and is therefore more reliable, hence the government’s deal with allegedly corrupt Turkish firm Karpowership.
However, natural gas is in fact a fossil fuel, and although cleaner than coal it still emits enormous amounts of carbon dioxide when burnt, making it unsuitable as an energy supply. In light of this, the variable nature of renewable energy must be a serious consideration in the energy transition, particularly given increasingly unpredictable global weather patterns. But the notion that renewable energy is to blame for Texas’ power failures is blatantly false. In the face of climate change, one of the biggest challenges facing humankind, it is imperative that we justly transition towards renewable energy generation. But moving forward with decarbonisation requires an awareness and consideration for the variable nature of renewable energy generation sources.
So, if renewable energy is not the cause of this disastrous failure of power generation, then what is? The answer lies in Texas’ decades of deregulation. Traditionally, power generation is organised by vertically integrated utilities, in which generation, transmission and distribution are owned by a single entity (often state-owned) which sets electricity prices and plans distribution. Vertically integrated utilities do not necessarily operate for-profit, and many are structured much more like a government department than a commercial enterprise.
They are certainly sometimes commercially driven, such as Eskom following its 2001 reorganisation and corporatisation. But vertically integrated utilities can also produce and distribute electricity as a public good, rather than a profitable commodity. In the past, many national utilities did treat electricity this way, operating at a loss so as to ensure widespread electricity access.
Texas’ power system, however, is deeply deregulated. What this means is that private electricity-generating companies compete with each other in selling power to an independent systems operator, which then handles the distribution to households and businesses. Power is constantly auctioned, and prices to both the systems operator and consumer are highly variable. When demand is high, such as during a winter storm, prices for consumers can skyrocket. Plenty of Texans can now attest to this.
Furthermore, because power generators in a deregulated system are for-profit, they are prone to cutting corners. When the storm hit, Texas’ natural gas power plants and wind turbines had not been adequately winterised. Neglected power plants immediately seized up. Prioritising cost reduction over safety and reliability proved enormously costly for the rest of society.
Due to global climate change, weather is becoming increasingly unpredictable and unstable. Electrical assets must be weatherised and prepared for any contingency, such as winter storms, cyclones or similar extreme weather events. Such maintenance may not be profitable, but Texas’ recent blackouts show the consequences of neglecting it. A vertically integrated utility can plan and implement maintenance and weatherisation regardless of profitability, with the understanding that these expenses are necessary when producing electricity as a public good. A for-profit, deregulated energy system, however, is prone to neglecting such costs in the interests of profit, and to the detriment of the public.
A recent report produced by a consortium of civil society groups and trade unions, Eskom Transformed, argued that Eskom must retain its vertically integrated structure and be rapidly decorporatised, rather than furthering its deregulation. Only through abandoning the sale of electricity for profit, in favour of equitable public spending, will a just transition be ensured.
South Africa has much to learn from Texas’ experience. Eskom is on the path towards being “unbundled”, part of a broader project of deregulating the South African electricity sector. As part of its deregulation, Eskom’s transmission component is going to be turned into the Independent Transmission Systems and Market Operator (Itsmo), the purpose of which would be to organise the purchasing of electricity from myriad private electricity generators. The South African Itsmo would foster competition between private generators through auctions to sell electricity to the public. Prices to consumers would be determined not by a vertical utility’s decision, but by market forces.
Attentive readers will recognise that this system is almost exactly the same as Texas’ system, and is likely to have similar consequences for electricity prices and the durability of the grid in the face of severe weather and other disruptions.
Furthermore, a reliance on auctioning for the provision of electricity prevents any possibility of a just transition to renewable energy. In the face of the global climate crisis it is imperative that the world rapidly decarbonise, including a widespread shift to renewable energy. But if this necessary transition does not include plans for the livelihoods of workers in fossil fuel sectors, the economic and social consequences will be disastrous.
A notable comparison would be the devastation left in the wake of South Africa’s gold mines. As the gold mining industry has declined, companies have left behind toxic dumps, polluting the communities that once served as labour pools for the mines. These communities are left in heavily polluted areas without jobs or livelihoods. In the absence of a just transition, the shift away from coal will have similar consequences for communities around the country.
The rehabilitation of mining-affected environments is enormously expensive, hindering corporate profits. But this environmental rehabilitation is crucial, and corporations must be compelled to rehabilitate the environment regardless of profitability. Deregulating the energy sector, and organising electricity through an Itsmo, will increase the primacy of the profit motive, incentivising corporate power producers to cut corners. The incentive to produce electricity as inexpensively as possible will make it increasingly less likely that mining-affected environments and communities will receive the rehabilitation and social expenditure they need following mine closures.