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WITH many months of anticipation surrounding the announcement of Eskom’s tariff hike finally over, South Africans can heave a sigh of - well, we’re not quite sure what to sigh about.
The increase wasn’t a multi-year 16% annual increase as requested by Eskom, which everyone was worried about, but it was an 8% increase which sounds half as bad, right?
This article will attempt to convince you that assuming you fall into the broad demographic range of readership for financial media, the net impact of the increases will be no worse than the alternatives.
Introducing Eskom’s dilemma: as you can clearly see from the schematic below, demand is growing and supply is static.
The dilemma is clear, how does Eskom meet rising demand?
The answer is also clear: it needs to increase supply.
With the fundamentals now clear, we can turn to the tricky business of how - or what I like to refer to as - Eskom's other dilemma.
Before blazing a trail into discussing how to increase demand, for the sake of completeness let’s entertain the possibility of reducing demand because in theory, that too would solve the problem.
Three options
There are essentially three options:
Energy saving
This entails consumers reducing wasteful energy use by doing things like turning the lights off at the office at night and frying your eggs on the bonnet of your car instead of the stove.
Energy efficiency
This entails adoption of technologies which consume less energy such as those twirly light bulbs and wrapping your geyser in a blanket.
Remove heavy consumers
This entails identifying the highest energy consumers and removing them from the market and would include mines, smelters, heavy industry and the like.
The first two options are noble and should be adopted regardless, in an effort to boost sustainable living; they will not however, make any significant impact given the magnitude of the rising demand.
Option three seems comical, but by exploring the counterfactual it actually reveals much.
The pros are clear; closing heavy industry would indeed reduce demand significantly.
The cons however are not so simple:
Higher inflation leads to more financial pressure on poor people - you may notice the cyclical effect described above.
This domino effect is well understood, probably even by the nation's leadership.
I marshal these cons above to highlight just how crucial it is that government look after the interests of major industries, since despite it being hard to win popular votes by saying nice things about big business, without big business the government would be unable to provide anything to its loyal minions.
Which brings me to the fundamental assumption of my argument: government will be forced to cushion the electricity hike on major industries, and as such will utilise taxpayer’s money to ensure cheap energy supply.
Additionally, government will provide cushions for poor households to reduce the impact of higher electricity - as explained above, either government pays Eskom’s bills or it pays social grants to the same people; it’s a lose-lose situation.
These funds are going to have to come from somewhere and it’s going to be a bad combination of more debt and more taxes. You may think that government debt doesn’t affect you much, but in fact higher debt acts almost like a stealth tax where you are unaware that your cash buys less for more by devaluing the currency, which is effectively a tax.
As shown below, the options available are that either a larger percentage of your earnings will go to Eskom or to the South African Revenue Service, so the net impact is essentially: you’re paying more or you’re paying more - the only difference is how.
The above happens to be a pretty rosy scenario, since in the short to medium term government subsidies would provide energy security going forward and will encourage and sustain foreign and domestic investment.
This in all optimism will allow the energy infrastructure to reach desired levels, enabling sustainable long-term economic growth.
This will combat what The Economist highlighted this week in its Emerging Africa special report, saying “The South African economy is growing and welfare spending has brought down absolute poverty levels, yet the gap between rich and poor is now wider than under apartheid.
"There are many reasons for this, but the main one is the country’s failure to move up the economic-development ladder. Industrialisation has stalled.”
Industrialisation has indeed stalled, as depicted in the green line in the Eskom’s dilemma graph above showing static demand.
This needs to change; the alternative is that whereas in the past sub-Saharan African economic indicators often excluded South Africa since it skewed the results in positive ways, South Africa may well find itself excluded from these indicators in the future for less sanguine reasons.
- Fin24
*Jarred Myers is a resources strategist and can be followed on Twitter on @JarredMyers. Opinions expressed are his own.
The increase wasn’t a multi-year 16% annual increase as requested by Eskom, which everyone was worried about, but it was an 8% increase which sounds half as bad, right?
This article will attempt to convince you that assuming you fall into the broad demographic range of readership for financial media, the net impact of the increases will be no worse than the alternatives.
Introducing Eskom’s dilemma: as you can clearly see from the schematic below, demand is growing and supply is static.
The dilemma is clear, how does Eskom meet rising demand?
The answer is also clear: it needs to increase supply.
With the fundamentals now clear, we can turn to the tricky business of how - or what I like to refer to as - Eskom's other dilemma.
Three options
There are essentially three options:
Energy saving
This entails consumers reducing wasteful energy use by doing things like turning the lights off at the office at night and frying your eggs on the bonnet of your car instead of the stove.
Energy efficiency
This entails adoption of technologies which consume less energy such as those twirly light bulbs and wrapping your geyser in a blanket.
Remove heavy consumers
This entails identifying the highest energy consumers and removing them from the market and would include mines, smelters, heavy industry and the like.
The first two options are noble and should be adopted regardless, in an effort to boost sustainable living; they will not however, make any significant impact given the magnitude of the rising demand.
Option three seems comical, but by exploring the counterfactual it actually reveals much.
The pros are clear; closing heavy industry would indeed reduce demand significantly.
The cons however are not so simple:
- Closure of major industries leads to fewer jobs and decreased tax revenues from both workers and companies.
- Fewer jobs lead to higher unemployment and more poor people.
- Higher unemployment leads to higher government spending on social services.
- Higher government spend leads to increased taxation on a diminishing tax base.
- A diminished tax base leads to increased national debt to fund the tax gap.
- Increased national debt leads to reduced sovereign credit ratings.
- Reduced sovereign credit ratings lead to an increase in the cost of debt.
- Increased cost of debt leads to printing more cash.
- Printing more cash leads to higher inflation.
Higher inflation leads to more financial pressure on poor people - you may notice the cyclical effect described above.
This domino effect is well understood, probably even by the nation's leadership.
I marshal these cons above to highlight just how crucial it is that government look after the interests of major industries, since despite it being hard to win popular votes by saying nice things about big business, without big business the government would be unable to provide anything to its loyal minions.
Which brings me to the fundamental assumption of my argument: government will be forced to cushion the electricity hike on major industries, and as such will utilise taxpayer’s money to ensure cheap energy supply.
Additionally, government will provide cushions for poor households to reduce the impact of higher electricity - as explained above, either government pays Eskom’s bills or it pays social grants to the same people; it’s a lose-lose situation.
These funds are going to have to come from somewhere and it’s going to be a bad combination of more debt and more taxes. You may think that government debt doesn’t affect you much, but in fact higher debt acts almost like a stealth tax where you are unaware that your cash buys less for more by devaluing the currency, which is effectively a tax.
As shown below, the options available are that either a larger percentage of your earnings will go to Eskom or to the South African Revenue Service, so the net impact is essentially: you’re paying more or you’re paying more - the only difference is how.
The above happens to be a pretty rosy scenario, since in the short to medium term government subsidies would provide energy security going forward and will encourage and sustain foreign and domestic investment.
This in all optimism will allow the energy infrastructure to reach desired levels, enabling sustainable long-term economic growth.
This will combat what The Economist highlighted this week in its Emerging Africa special report, saying “The South African economy is growing and welfare spending has brought down absolute poverty levels, yet the gap between rich and poor is now wider than under apartheid.
"There are many reasons for this, but the main one is the country’s failure to move up the economic-development ladder. Industrialisation has stalled.”
Industrialisation has indeed stalled, as depicted in the green line in the Eskom’s dilemma graph above showing static demand.
This needs to change; the alternative is that whereas in the past sub-Saharan African economic indicators often excluded South Africa since it skewed the results in positive ways, South Africa may well find itself excluded from these indicators in the future for less sanguine reasons.
- Fin24
*Jarred Myers is a resources strategist and can be followed on Twitter on @JarredMyers. Opinions expressed are his own.
