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Looming menace

Aug 31 2011 09:00 Jan de Lange

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BHP BILLITON PLC [JSE:BIL]

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ARCELORMITTAL SOUTH AFRICA LIMITED [JSE:ACL]

Last traded 37.38
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ANGLO AMERICAN PLC [JSE:AGL]

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THE tariff increases the National Energy Regulator (Nersa) awarded Eskom early last year – 25% in the 2010/11 financial year, and 25% in 2011 and 2012 – caused many people to fear a crippling of the economy.

It was overdone; the country's electricity was too cheap and a dramatic adjustment was required to finance the construction of two new coal-fired power stations.

The January 2008 electricity crisis and the load-shedding that followed brought this point soundly home. But Eskom is now considering asking Nersa for another two 25% hikes – one each in the financial years ending in 2013 and 2014.

There's a good chance this would deliver a mortal blow to the economy's highly significant mining and industrial sectors, especially if accompanied by a carbon tax of R100 per tonne, said the Energy Intensive User Group (EIUG), a body consisting of Eskom's 36 biggest clients.

They include BHP Billiton [JSE:JSE:BIL], Anglo American [JSE:AGL], Impala Platinum Holdings [JSE:IMP], the respective ferrochrome smelters and ArcelorMittal SA [JSE:ACL].

This group, which Eskom naturally consults, regularly communicates with the electricity giant and does not easily criticise it in public.

For instance, this winter the group continually consulted Eskom in times of crisis to prevent a repetition of the January 2008 events.

Eskom has not formally announced that it intends asking for 25% increases, but the EIUG generally knows better than anyone else what is happening in the corridors of Megawatt Park, Eskom's Sandton head office.

The group of influential companies' warning of the effect of further sharp tariff increases following the last of three 25% hikes next year, delivered in a joint press statement on Friday, should not be taken lightly.

The group authorised its chairperson, Xstrata executive director Mike Rossouw, to sketch out the finer details of the dangers of further hikes at an information session for media representatives on Monday.

The increases now being mooted, together with the coming carbon tax, said Rossouw, would result in unprocessed mining products such as platinum-bearing or chrome ores being exported for processing in other countries, probably China or India.

South Africa would then have to import these metals for its own production requirements.

The average price consumers paid for electricity last year was 42c per kilowatt hour, rising to 53c per kilowatt hour this year. But this is an average price, because wholesale consumers pay considerably less and household consumers considerably more, especially after municipalities add their 110% margin to cover the costs of distribution and support services.

"This is the overall average price of electricity, including that generated from old and new power stations," said Rossouw.

Production costs at Eskom's existing fleet of power stations are, however, about 10c per kilowatt hour, while those from new power stations, restored power stations and independent power producers - from whom Eskom is starting to buy electricity this year - range from 60c to 100c per kilowatt hour.

Rossouw has objected to Eskom chief executive Brian Dames' description of the price of 76c per kilowatt hour – which Eskom pays for electricity it buys from the new, independent power producers – as a true reflection of what South Africa's electricity should cost.

"It's an unfair comparison, because he compares the average retail price with the cost of generation in new infrastructure. He should have disclosed Eskom's generation costs from new power stations," Rossouw said.

The rising cost of electricity against the backdrop of South Africa's unemployment problem presents the country with huge challenges that gain complexity as the carbon emission debate increases.

Growth versus carbon emissions

In terms of the Copenhagen Conference, South Africa undertook to reduce its carbon emissions by 34% by 2020.

But it is an economic truth that a nation consumes more energy as its development increases. South Africa therefore has to reshape into a low carbon-emitting country but at the same time create jobs – otherwise it will face the very events now taking place in Egypt, Tunisia and Libya.

South Africa, however, is responsible for only 1.1% of global carbon dioxide emissions, said Rossouw.

Even if we were to reduce this by 100%, it would have very little impact on the global figure.

On the other hand China will, in terms of its commitment, increase its carbon dioxide emissions by 500% by 2020.

The commitments China gave at Copenhagen were relative undertakings, because the relationship between carbon emissions and growth was understood.

India gave its commitment on the same basis - it is to increase its carbon emissions by 350%, said Rossouw.

Brazil, which derives most of its electricity from hydroelectric schemes and therefore produces clean electricity, could cut its carbon emissions by 50% simply by reducing deforestation.

According to Rossouw, South Africa can lower its carbon emissions by no more than 9% without destroying the economy.

"Our undertaking to the Copenhagen Conference clearly explains that the 34% reduction depends on international assistance and global technology transfer," said Rossouw.

About 83% of South Africa's carbon emissions come from energy, which means its dependence on coal has to shift to other means of generating power - a process that will be time-consuming and extremely expensive.

Realistically speaking, a 34% emissions drop is unaffordable, especially against the background of South Africa's developmental demands. The country will have to find a balance.

South Africa's mining industry is at a watershed. The cost of operating a mine has increased at a terrifying pace.

Since 2000 the cost of platinum production has risen 7.1% above the inflation rate. Over these 10 years, ferrochrome production has risen as much as 8.4% a year above the inflation rate.

"We will simply have to find a more affordable price trajectory and maintain it if we want to survive," said Rossouw. He sees no option other than that, after the current increases, electricity prices should increase by no more than the inflation rate. 

nersa  |  eskom  |  electricity tariffs
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