(Ed) 2006. Energy policies for sustainable development in South Africa

18 ENERGY POLICIES FOR SUSTAINABLE DEVELOPMENT IN SOUTH AFRICA
2.3.5.1 Real costs and externality costs
An externality cost can be defined as the change in utility or welfare of an agent when
brought about by another, when this change in welfare is not compensated for, or
appropriated (Van Horen 1996) by the second agent. When we add externality costs to the
supply cost of energy, we get the real cost of this energy to society. Externality costs,
whether positive or negative, give us a basis for penalising or reimbursing energy users for
their impact on the environment or society. Due to the somewhat subjective nature of
evaluating actual or potential impact costs, methodologies used for externality derivation
must be transparent and related to the context of economic growth in the short, medium
and longer terms. Externality data, if derived correctly, can provide important elements for
constructing an optimised energy system.
Information dissemination is vital for the establishment of a national, sustainable energy
system, and the most effective driver for the system should be the free market. However,
this is only possible if those involved can base their decisions on clear authoritative data.
For example, it is often said that energy savings are possible for South African industry and
commerce with significant medium-term financial gains. Such options are not being
pursued primarily because of a lack of accessible authoritative data.
The lower the real cost of energy, the more competitive the economy becomes – an
essential prerequisite for economic growth. This is why energy efficiency information and
externality costs, including the potential impacts of CO 2 emissions restrictions on
production, must be made known. Meaningful databases should be built up for fuel use for
all energy cycles, from generation to efficient demand-side consumption, and this
information should be made accessible. It should include, for example, all feasible options
for rural electrification and energy supply. Such information would encourage optimal
energy development and form the basis for sound policy. With the right information and
market forces, South Africa’s energy system will evolve.
In the short term, government encouragement of a sustainable energy development is
essential, with a clear analysis of the most socially economic development paths. Possible
means of encouraging integrated energy planning include:
• physical controls such as short-term supply rationing;
• investment policies;
• education policies;
• taxes or subsidies;
• market controls such as regulating residential coal prices;
• establishing energy efficiency agencies.
In implementing regulation, careful consideration must be given to ensuring that externality
costs are borne by the parties responsible, and that controls do not restrict free market
activity (Spalding-Fecher & Matibe 2003). Control measures should be seen as temporary
and, in time, diminish. In the case of externalities, as the parties affected become
empowered, a laissez-faire situation would ideally evolve – so that, for example, a polluter
and the parties affected by the pollution would bargain to establish an optimum pollution
level and an associated cost compensation. Thus energy supplied will be at the lowest real
cost to society.
2.4 Outlook for the future – technologies and policies
The South African energy sector faces a twofold challenge – to address the unacceptable
lot of the poor, and to employ technologies and practices that will provide inexpensive
energy for a competitive economy without straining resources of the national, regional and