The cost of power : externalities in South Africa's energy sector

The long-awaited birth of political democracy in South Africa in 1994 has led to a fundamental re-assessment of policy in most sectors of society. Although the energy sector has witnessed a clrar shift away from the self-sufficiency concerns of the apartheid era, to more universal goals of economic efficiency, social equity and environmental sustainability, there has, as yet, been very little analysis of problems at the energy-environment interface. In this context, this thesis investigates environmental externalities arising in South Africa's energy sector. Two questions are posed: first and foremost, which environmental problems give rise to the most significant social costs? Secondarily, how helpful is an environmental economic analysis in this context? With respect to the first question, it is hypothesised that the external costs arising from two sectors are significant: the electricity generation sector, and the low-income, unelectrified household sector. Of these two, it is suggested that externalities in the latter are most serious. After reviewing the literature on externalities and environmental valuation, the thesis undertakes an empirical investigation of external costs in both energy sub-sectors. A classification system is developed and used to select those externalities in each sector which are potentially serious and regarding which there is sufficient information for quantification purposes. After reviewing a larger number of impacts, data are collected from both published and unpublished sources for four environmental externalities in the electricity sector, and six in the household sector. The results include quantitative estimates of total external costs, average external costs and marginal external costs for each external effect. These empirical results show that the external costs in the household sector are far in excess of those in the electricity sector, especially if damages attributed to greenhouse gas emissions are excluded. With respect to the second question posed, a number of limitations inherent in an analysis of this kind are pointed out. It is suggested that an environmental economic approach can make an important contribution to sound policy in South Africa (and developing countries, more generally), but that limitations of the approach need to be taken explicitly into account. An important conclusion is that strategies which are aimed at mitigating external costs in the household sector may bring about significant improvements, measured against both economic efficiency and social equity objectives. This convergence is especially pertinent in the context of South Africa's new development imperatives.