South African Chamber of Mines (CoM) chief economist Roger Baxter on Thursday stated that a smoothed approach of increasing electricity prices, as well as a phased approach of providing proper incentives for people to start becoming energy efficient, was the best way for South Africa to proceed.
"There are many ways of doing this [increasing the electricity price] effectively without either damaging Eskom's credibility, or causing economic dislocation," he stated.
The CoM was scheduled to give a presentation to the National Energy Regulator of South Africa (Nersa) on Friday afternoon, and would reiterate that the mining industry, and in fact the entire business community in South Africa, "does not believe that it is in the interests of this country to have a massive, upfront, front loaded increase in the electricity price, because it takes time for businesses to adjust", Baxter said in a telephone interview.
Nersa was holding public hearings into a request by Eskom for a 60% upward revision in its tariff for the 2008/9 financial year - earlier Nersa had approved a 14,2% increase for the period.
Baxter argued that business understood that electricity prices had to rise and did not dispute that, "but it has to be done in a way that minimises economic damage to the economy, and if you have a big price increase upfront, you end up with a big production shock up front, which ends up adding to inflation too quickly - the calculations that we have been seeing, show that around two, to 2,5 percentage points could be added to inflation, by a 60% nominal increase in electricity prices. It reduces GDP growth and it has a number of other negative effects," Baxter added.
"You have to look at this in the national context -what is in the interests of South Africa Incorporated, not just necessarily in the interests of one company, like Eskom," said Baxter. He added that the previous week's National Economic Development and Labour Council energy summit gave indication that stakeholders were more focused on a nationally integrated approach, and wanted to "get things right so that we don't have any problems going forward".
"If you look at the financials of Eskom itself, with appropriate capital injections, and we are just looking at the moment at the R60-billion that Treasury has already agreed to put into Eskom, that it actually keeps their balance sheet and their income statement robust enough for them not to have to suddenly rush in and have a big increase in prices upfront. It is manageable," Baxter said.
On the issue of sustaining Eskom's credit rating, Baxter pointed out that Eskom is a 100% government-owned business, and in the past, the South African government had given sovereign guarantees to other State enterprises, notably Transnet. He questioned why the same could not be done for Eskom.
"This R60-billion from Treasury is not a loan, it is a capital injection. It is not that Eskom is short of the cash in the short-term, that will simply boost them, and I don't see any valid reason why they should lose their rating if the Treasury provides that kind of support," Baxter commented.
For the mining industry in particular, electricity is an important component of the cost of production, especially for the deep-level mines. "So if you have a big increase upfront suddenly you might find that some shafts become very uneconomic very quickly, and those shafts will simply be closed. They [mining houses] don't keep shafts open if they are uneconomic to mine, and that is not going to be in anyone's interest," Baxter remarked.
It was largely felt that Eskom's 138 large industrial customers were the people that had done most of the savings of electricity that had enabled the utility to stabilise the network.
Baxter said that the commercial sector had probably saved about 5%, and the residential sector has done about 2% or 3%.
He also called for demand-reducing incentives, such as tax rebates to install solar geysers and other energy-efficiency innovations to be introduced.
"The price alone is only one component of changing peoples behaviour, and that is why a phased approach of higher prices, a phased approach of proper incentives for people to start becoming energy efficient is the way to deal with the matter," he said.
The chamber did not think that Eskom's demand side-management programmes should be included in the electricity price application and felt that those should be funded separately.