The Organisation for Economic Cooperation and Development (OECD) has described as “misplaced” the South African government’s fear that higher international coal prices will result in additional exports and leave Eskom unable to secure sufficient coal to maintain electricity production.
The threat, along with increased exports of Eskom-grade coal to India, has already led both the State-owned utility Eskom and government to suggest earmarking the coal sector as a “strategic” industry.
In addition, the African National Congress’s State Intervention in the Minerals Sector document, which was endorsed at its National Conference in Mangaung, in December, recommends that coal be delivered to Eskom on a cost-plus basis, and that limits be placed on exports.
But in its third survey of South Africa since 2008, the OECD has described the concern as “misplaced”, dubbing the suggested policy response as “misguided”.
“National income will be higher if the domestic price of coal is equalised with the export price (adjusting for transport costs),” the survey argues.
It suggests that Eskom should pay the “market price” for coal and that the electricity regulator should allow that to be reflected in higher electricity prices.
“Only in that way will both Eskom and domestic consumers of electricity have the right incentives to use resources efficiently,” the OECD states.
It adds that it would be “wrong-headed” to seek to protect domestic tradables industries with below-market electricity prices.
“If domestic tradable goods producers face higher costs as electricity prices rise, creating an incipient disequilibrium in the balance of payments, that should produce a depreciation of the rand, which would maintain balance by switching expenditure from foreign to domestic tradables.”
The OECD premises its arguments on the basis that South Africa’s economy is energy-intensive and overly reliant on coal, which has been reinforced by a “long period of underpricing of both electricity and coal”.
“Electricity is much less underpriced than it was, after a series of sharp rises since 2008, but South Africa still has among the lowest prices internationally and the current price remains well below the full marginal costs of Eskom, to say nothing of higher-cost renewables,” the report outlines.
It adds that the underpricing of electricity and coal has contributed to positioning South Africa as having among the highest greenhouse-gas emissions per unit of gross domestic product in the world.
The OECD recommends the design of climate change mitigation policies, favouring broad and easy-to-implement instruments, such as a carbon tax, with limited demands on administrative capacity.
It also urges a reduction in implicit and explicit subsidies for energy and coal consumption, and suggests the use of other instruments, such as cash transfers or supply vouchers, to protect poor consumers.
In receiving the report on behalf of government Finance Minister Pravin Gordhan indicated that he disagreed with the organisation’s approach to electricity and coal pricing, arguing that the transition to cost-reflectivity would need to be managed delicately.