Industry must take a hard look at electricity

THE latest global gas report and price survey by NUS Consulting confirms the days of low-cost power in SA are drawing to a close — something that many already knew.

The NUS survey of world electricity markets ranks SA 11th out of 16 major electricity markets, with Canada replacing SA as the cheapest provider of electricity. With a 23,1% increase this year, SA has the second-highest one-year percentage change, NUS has found. Australia has had the highest increase in prices, at 27,8%.

On its own, this trend should hardly raise any eyebrows, because, after a series of big tariff increases, SA was bound to slide in the rankings of countries with the cheapest power. But it forces consumers — especially large industrial electricity users — to take a hard look at their electricity costs as they must now learn to live with high electricity prices.

Moeketsi Thobela of Energy Solutions Africa says the argument for low-cost power was lost following the disappearance of electricity over-capacity in the early 1990s.

“A key question is what will replace cheap power as a unique selling point from an investment attractiveness perspective? What the Energy Act of 2008 defines as energy security is important as part of this enquiry, as the objective is to balance industry viability, affordability and environmental management,” Mr Thobela says.

Rising electricity prices also bring up the question of SA’s competitiveness. The chairman of the Energy Intensive User Group (EIUG), Mike Rossouw, says it is not possible to judge whether one country’s electricity price is lower than another. To establish if electricity prices are fair and reasonable, one must consider if the electricity is affordable, ascertain if the production and delivery of electricity is efficient and transparent, and whether the price reflects its efficient cost.

“Affordability depends on the ability of the buyer to pay for electricity. Large users in SA must compete against large users in other countries. In many instances today, large users in SA are paying more for electricity than their competitors in other countries. That means SA will have difficulty attracting new factories and even worse protecting existing ones, and this makes it hard to create new jobs,” Mr Rossouw says.

“Domestic and commercial electricity prices are amongst the most expensive, making it hard for businesses to survive and impossible for the poor to buy electricity.”

EIUG members account for about 44% of the electricity consumed in SA.

Mr Rossouw says the production of power from existing generating stations in SA is efficient, but new plants are expensive and in some cases may not even be affordable. “A bigger concern is the efficiency of delivering electricity to homes where today there are municipalities that charge more than double the price they pay Eskom. This is a major constraint on job growth. If we were to judge SA’s electricity today based on (these) criteria, we would be judged even lower in the international rankings,” he says.

Mr Thobela says as the seller’s income is the buyer’s cost, the increased cost base arising from higher electricity prices has an adverse effect on competitiveness. “The compounding effect of the successive massive Eskom price increases is exacerbated by the additional increases faced by the electricity consumers that are supplied by municipalities,” he says.

He also says recent protests by residents in KwaThema, Springs, in a bid to switch from the municipality to Eskom, illustrates the growing frustration with municipalities. At the same time, ” the recent annual increases of about 60% served on customers in a Midrand office park raise questions about the ability of small and medium enterprises to survive.

“While this is tough enough for consumers operating from an office park, it should be clear that it gets progressively tougher for a retail supermarket chain, bakery or smelter. An even greater risk is due to second-round effects — higher increases to remaining consumers to stem revenue losses resulting from dwindling sales volumes and the so-called non-technical losses,” Mr Thobela says.

He says expected tariff increases in the next multiyear-price determination, “coming as they are in the midst of a slump in the global economy”, will spur an intensive debate about the affordability of future price increases.

“A key question will be regarding the extent to which the South African economy can balance the attempt to improve energy security by boosting supply capacity without inadvertently causing energy insecurity due to dwindling demand,” he says.

Eskom will soon submit to the National Energy Regulator of SA an application for the next tariff increase intended to take effect in April next year.

Mr Rossouw says the EIUG advocates an electricity price path for SA that balances a healthy electricity supply industry and promotes economic growth and international competitiveness of local industry. On the other hand, Eskom says an appropriate tariff structure should allow for cost recovery to attract investment in the industry in the long term.

Source: Business Day

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