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Eskom hike will drive away business

Feb 04 2013 08:37 Yolandi Groenewald, City Press
eskom

Electricity pylons in Beaufort West. Nersa is holding public hearings on Eskom's proposed revenue price determination. (Picture: Chris Kirchhoff/MCSA)

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IMPALA PLATINUM HOLDINGS LIMITED [JSE:IMP]

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ARCELORMITTAL SOUTH AFRICA LIMITED [JSE:ACL]

Last traded 38.09
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Johannesburg - Rising electricity prices have pushed South Africa well above other developed and developing nations, and have made the nation one of the most expensive to do business in.

In his presentation, Mike Rossouw from Energy Intensive Users Group said South Africa was on a trajectory to become one of the most expensive nations to do business in if the increase is granted.

Rossouw made his presentation at the National Energy Regulator of SA’s (Nersa) public hearings in Johannesburg.

The Energy Intensive Users Group represents 32 high-intensive energy users, including Arcelormittal [JSE:ACL], BHP Billiton [JSE:BIL], Anglo Platinum [JSE:AMS], Impala Platinum Holdings [JSE:IMP], and other big mining houses.

“In 2011 we were cheaper than America. In 2014 we will be more expensive than them in every point on the scale,” he said.

Power utility Eskom is asking for a 16%-a-year increase for the next five years, a figure that businesses, unions, industry and consumers say is not sustainable and could be a tipping point for South Africa’s economy.

The 16% hike is against a baseline of earlier hikes that Eskom was granted.

South African wholesale electricity prices have shown the fastest increase of any of the nations for which the International Energy Agency currently has data for, research done for Sasbo showed.

Sasbo, the finance union, represents about 20 financial institutions, ranging from banks to insurance companies to pension fund administrators.

The report, commissioned specifically to counter Eskom’s 16% request, indicates that South African industrial and commercial electricity prices are now on the high side of the world as industrial nations often have the highest electricity prices.

Shaun Oelschig, Sasbo general secretary, said about the report: “South Africa can no longer draw major industrial projects that require lots of energy as many countries are cheaper, offer lower tax rates, more skilled workforces and better certainties.”

From 2005 to 2011, electricity prices in the country rose by 109%.

In the same period, prices rose only by 27.2% in Greece, 16.3% in New Zealand, 52.9% in Australia, 68.7% in the UK and 30.3% in the US.

Increases in South Africa have nearly been twice as fast as those in Turkey, which saw the second-highest increase – and they were more than four times the simple average increase of all the featured countries, the report showed.

Oelschig said: “No economy can remain competitive when there is this scale of price increase for electricity for both commercial and industrial purposes.”

This proved beyond doubt that South Africa has radically changed its economic cost structure over the past seven years, he said, also cautioning that: “We must warn that further huge increases will ensure that no beneficiation of minerals can take place in South Africa despite government insistence that this happen.”

Sasbo’s calculations show electricity expenditure would account for about 5.3% of gross domestic product.

Eskom will reap R142bn in electricity income while the local governments will receive R83bn.

This adds up to R225bn or more (minus about R50bn in electricity purchased by local governments), which will mean about R175bn in net electricity expenditure.

Sasbo said a 16%-a-year price increase would equal 110% over five years.

“No other country in the OECD (Organisation for Economic Cooperation and Development) database has increased at this rate over a seven-year period, never mind in a five-year period.”

As labour costs account for about 47% of the gross domestic product, this means that electricity costs account for 11.2% of the cost of labour. This level seems to be one of the highest in the world, Sasbo said.

Economist Mike Schüssler told Nersa this week that South Africa should have lower electricity prices than the US and Europe because this nation has lower coal and personnel costs.

“Also, US and European electricity has higher taxes and a bigger component of more expensive renewables, which inflates the price,” Schüssler said.

He said local electricity prices were fast approaching the US prices and if municipalities’ surcharges were taken into account, the prices would probably be higher than in the US.

The costs were too high, and it was too easy for Eskom to raise prices.

SA Chamber of Commerce and Industry chief executive Neren Rau said the increases would lead to a loss of about 2.56% in gross domestic product and a reduction of 4.5% in employment over the five years.

Almost all industry players that presented to Nersa had the same warnings: high electricity prices were making it difficult for them to do business and a 16% hike would make it close to impossible.

And this was putting jobs on the line.

The Chamber of Mines said the nation’s platinum and gold mining electricity costs were up $780m (R7bn) yearly between 2007 and last year.

The chamber’s Roger Baxter told Nersa that electricity costs forced mining companies to restructure.

Rossouw said: “Some intensive energy users in South Africa are the most efficient in the world. But some have already made plans to exit because they can’t sustain their business.”

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