The electricity price increases being sought by Eskom would cause serious economic damage at a time when South Africa’s immediate growth outlook was already weak and could bring a number of key foreign-exchange generating sectors to the brink of survival, business representatives warned the National Energy Regulator of South Africa (Nersa) on Thursday.
The utility has applied to Nersa for yearly increases of 16% for the five-year period from April 1, 2013, which would raise its selling price from 61c/kWh to 128c/kWh in nominal terms by 2018.
Business Unity South Africa’s (Busa’s) Professor Raymond Parsons said that its members accepted that inflation-contained increases were probably unrealistic. However, he also warned that further power price shocks could place as many as 13 key sectors at risk.
TIPPING POINT
These sectors had already absorbed a trebling in power prices between 2007 and 2012 and further rises at the rate proposed by Eskom would take them to a “tipping point”, most notably the mining and metals sectors, which accounted for 60% of South Africa’s export earnings.
Busa, with support from consultants Genesis Analytics, argued that a maximum increase of 10.8% should be extended for the period and that should higher increases be granted, these should be restricted to the normal three-year price period instead of the five years outlined in its application.
Genesis Analytics’ research showed that R75-billion could be lopped off Eskom’s R355-billion primary energy revenue request, by limiting yearly coal-related increases to 6%, rather than the 10% assumed. Another R65-billion could be saved through adjustments to some of the utility’s operating cost assumptions.
The Chamber of Mines, meanwhile, criticised the pace at which Eskom was seeking to achieve an independent investment-grade rating, noting that R372-billion of the R1.1-trillion in allowable revenue being sought related to depreciation and a return-on-assets request.
“Some 65% of the overall increase is attributable to return on capital and depreciation charges. This clearly shows that Eskom is primarily focused on achieving a standalone investment grade rating with negative consequences for the national imperative of growth and industrialisation,” senior executive for strategy and economics Roger Baxter said.
He argued that government, as shareholder, should instead be insisting on dividends from Eskom beyond full financial independence.
These dividends should include a shareholder compact stipulation that South Africa’s power prices remain competitive in support of the country’s growth and employment objectives. The compact should also insist on cost efficiency objectives.
POLICIES OUT OF ALIGNMENT
The current application was, therefore, at odds with South Africa’s economic policy objectives, which aimed to rebuild the country’s industrial base, and expand minerals beneficiation and the tradable export sector.
AgriSA deputy executive director Johan Pienaar echoed this, saying that there seemed to be a lack of policy alignment, and arguing that rising agricultural input costs were undermining the viability of a sector that had been earmarked for material growth in the New Growth Path and the National Development Plan.
Together with water price increases and anticipated wage increases, Pienaar warned that the agricultural sector would have to explore serious “structural adjustments” that could negatively affect food security and employment.
Baxter, meanwhile, added that a number of gold and platinum mining operations were already at risk, while projects were being delayed or cancelled, partly as a result of rising electricity prices.
This point was driven home by Sibanye Gold executive VP Peter Turner, who noted that employment at its mines on the West Rand and the Free State would come under pressure should power prices continue to double every five years. The group currently consumes 437 MW and has a yearly power bill of over R2-billion.
Sibanye Gold, which is being unbundled from Gold Fields and will list on the JSE on February 11, warned that as many as 20 000 of its 35 227-strong workforce would be at risk if operations had to adjust to price increases of the type proposed.
MUNICIPAL CONCERNS
Meanwhile, the Chemical and Allied Industries Association’s Dr Laurraine Lotter made a strong appeal for Nersa to intervene to deal with the worrying gap that had emerged between municipal and Eskom tariffs.
She cited an instance where the municipal tariff “premium” over the Eskom tariff had grown from R18-million in 2007 to R85-million in 2011. She also noted that while direct Eskom customers had experienced 296% increases between 2005 and 2011, there were instances where the municipal premium tariff had risen by over 300% during the period.
Lotter called on Nersa to help address the municipal premiums and “excessive” mark-ups ahead of the start of the municipal financial year on July 1, as they had become a major competitive disadvantage for some producers.