Government’s drive to use cheap electricity as a development tool has cost R142-billion, enough to build two giant coal-fired power stations.
Cheap power — government has kept electricity price increases at below the rate of inflation for more than a decade — has also seen industry being given preferential rates.
The Mail & Guardian‘s inquiries show that industrial power rates in countries such as Canada and Australia are set at about a 33% discount to residential rates. In South Africa the discount is 50%.
This suggests that as electricity tariffs are adjusted to conform to economic reality, industrial users should be subject to the greatest percentage increase.
At a meeting held with economists earlier this month, the department of public enterprises disclosed that had electricity prices been allowed to rise along with inflation between 1990 and the 2005/06 financial year, the utility would now have enough money to finance almost two Medupi power stations.
Instead, to recover the cost of building capacity and increasing primary energy costs, the utility is forced to turn to the treasury for loans, along with threatening consumers with a 60% price hike.
A report released by Econometrix following the meeting states that had Eskom been allowed to increase its prices at CPIX plus 2% this amount would have come to R258-billion. This would have made a significant contribution to funding Eskom’s R348-billion, five-year capital expansion programme.
‘This shows the folly of government deciding on the price of goods and services,†says Dr Azar Jammine, director of Econometrix.
Government’s plan to lure foreign investment through cheap electricity has been criticised for resulting in electricity prices that make it financially impossible for co-generation projects to sell power back to the utility or for private energy producers to enter the market. Independent power producers simply cannot compete with Eskom’s low prices. But these low prices have also resulted in a state utility that cannot meet increasing demand or fund new capacity. Government’s developmental electricity pricing programme, designed to attract energy-intensive industry to South Africa’s shores, has so far only attracted investment from Alcan, in the Coega industrial development zone, which is expected to generate R22-billion.
Big industry has benefited vastly from suppressed prices. Although it is common for bulk buyers of power to receive discounted rates, South Africa offers rates at half that of our nearest international rival, Canada. Last week the M&G reported that South Africa charged big industry 3,56USc/kWh for electricity in 2006/07. Meanwhile, Canada provides electricity to industrial users at double our prices — at 6,18USc/kWh. Australia’s prices for industry were 7,11USc/kWh in the same time period.
But just how sweet has industry’s deal been? In Australia residential consumers pay about 14c/kWh (12USc/kWh), while business pays 10c to 11c/kWh (9USc/kWh), says Amy Kean regional manager of Pacific Renewable Energy and Energy Efficiency Partnership’s South East Asia division. Most recent figures for Canada show that in 2004 the price difference between households and industry was 0,06USc/kWh against 4USc/kWh respectively, according to David McDonald, director of global development studies at Queen’s University in Canada.
Industrial consumers in the Johannesburg area pay about 16c/kWh (2USc/kWh). Domestic consumers pay as much as 43c/kWh (5USc/kWh).
South Africa’s top industrial power consumers rank within the top 10 of all Eskom customers. The top 10, according to the Eskom website, citing 2000 data, in order of consumption, are: the eThekwini municipality (Durban), the City of Johannesburg, BHP Billiton’s Hillside aluminium smelter, the City of Tshwane (Pretoria), Sasol Synthetic Fuels, the City of Cape Town, Billiton’s Bayside smelter, Kayalami metro, the Nelson Mandela metropolitan municipality (Port Elizabeth) and Richards Bay Iron and Titanium.
But Eskom’s proposed 60% hike has seen even big industry baulk. Economists have warned that the massive increase could have adverse effects for South Africa’s economy. But the department of public enterprises has come out in support of the price hike.
Eskom says the suggested 60% increase was not arrived at simply as a way to suppress demand.
‘What we’ve done is certainly not punitive,†says Andrew Etzinger, general manager for demand side management at Eskom. ‘It is purely an accounting exercise.â€
‘What we don’t know in South Africa is how much demand would be curtailed if prices went up,†he says. ‘But the implication is that if prices increased there would be a decrease in demand. So it should be seen as an effect of the price increase, not as a cause of the increase.
‘At no stage have we said ‘reduce consumption or there will be an increase in prices’,†he says.
A 60% price hike, argues the department, would allow better chances for co-generation projects, according to the Econometrix report. It could also improve prospects for alternative-power producers to enter the market, increasing Eskom’s competition.
Growth consultancy group Frost & Sullivan has also come out in support of the price hike as a means to encourage private investment in the energy sector. ‘The local market will only be attractive to independent power producers once the prices they can charge reflect the costs of production,†says Frost & Sullivan energy industry manager Cornelius van der Waal. ‘This must, however, be accompanied by a deregulation of the market so that Eskom is not the sole supplier of electricity.â€
The Department of Public Enterprises did not respond to the M&G‘s questions in time for the print deadline.
