Price and capacity restraints cost SA dearly

Severe increases in South African electricity tariffs and the failure to generate sufficient electricity to meet demand are literally putting the country out of business. It is also posing a serious threat to the aims of the government’s New Growth Path (NGP) economic growth strategy -- as illustrated by plans to shift the construction of a ferrochrome smelter from Rustenburg in North-West province to China because Eskom could not provide sufficient power until 2018.

Not only are investors pulling out of South Africa and industrial plants closing down as a result, but major local businesses have resorted to petitioning the national power producer with a desperate plea that they can no longer afford the steep and continuing tariff hikes imposed after the 2007-2008 electricity crisis.

As Eskom prepares its next tariff-increase application under the third multi-year price determination period (MYPD3), for 1 April, 2013 to 31 March, 2016, some of its biggest industrial consumers – especially in the hard-pressed manufacturing sector – are warning that further steep increases could force many companies out of business. As a result manufacturers will be asking the National Energy Regulator of SA (Nersa) for relief on the planned next round of increases.

In recent years, up until 2008 Nersa annually granted Eskom single-digit tariff increases roughly averaging between 5% and 6% per year. In the wake of the 2007-2008 supply-crises with rolling blackouts, Eskom applied for a series of drastic tariff increases to fund capital expansion that has to create sufficient generating capacity to meet both current and projected future demand.

In 2007 Eskom first asked Nersa to hike tariffs for 2007-2008 from 5.9% to 18.7%. Later the same year it applied for a revised increase for 2008-2009 of 60%. Major industrial electricity consumers are expecting a further 50% to 60% increase over the next three years – an increase they say will cripple the country.

According to Eskom the average real cost of electricity produced by other producers around the world is 76c/kWh, while in South Africa it is 52.30c/kWh for 2011-2012 and will increase to 65.85c/kWh in 2012-2013. Eskom says it aims for increases that will reflect “the true cost of producing electricity,” estimated to range between 75c/kWh and 80c/kWh by 2016.

While Eskom says it has improved efficiencies and performance, its improved finances over the past year can be attributed almost solely to tariff hikes. As for its capital expansion programme, its first projects that will come on stream, the coal-fired Medupi and Kusile power stations, have seen costs escalating from R97bn to R150bn to R345bn and still rising.

Household consumers have also been hard hit by the steep price hikes, with increasing energy costs being a major factor behind trade union double-digit pay-increase demands in this year’s strike season – one of the worst ever. This, coupled with the direct energy costs to industry, has created huge pressures on an economy still struggling to emerge from its first recession in 17 years.

Another severe drain on supply and those bearing the costs, is the massive illegal tapping into the national power grid by people living in informal settlements and illegal bypassing of electricity meters to steal power.

But according to recent media reports it is Eskom’s major industrial customers who are now making desperate pleas for a slowdown in increases. Two representative groups, the Energy Intensive Users’ Group (EIUG) and the Manufacturing Circle have both recently raised the alarm over further steep tariff increases.

The EIUG represents Eskom’s customers who account for about 44% of all electricity consumed in South Africa. The group includes the glass, steel and aluminium industries. According to the group a number of refineries and smelters have already shut down.

EIUG fears that unless tariffs are kept as low as possible without endangering new capacity creation, the country will fall behind in international competiveness. It also maintains that more price pressures are forcing manufacturers to simply maintain current production levels. Further price increases will result in more production shutdowns and job losses.

The group was recently quoted in Engineering News as saying that South Africa’s electricity prices have more or less doubled from an average real level of 25c/kWh in 2008 to the current level of 50c/kWh and are approaching what it calls an affordability “tipping point”.

Another appeal for a slowdown in price increases comes from the Manufacturing Circle, representing 56 large companies the likes of Hulamin, Altron, SABMiller, ArcelorMittal, and Pretoria Portland Cement. The group says there is a need for price cuts for industries in distress and reductions in the anticipated 25% annual price hikes over the next few years.

According to the group electricity prices in the manufacturing sector –  South Africa’s second biggest – had increased by 140% in the past four years, making it one of the main factors behind rising costs. Manufacturing has already fallen from contributing around 22% of the country’s overall economic output to 15.6%. In the second quarter of this year manufacturing contracted by 7% and was the major factor in slowing economic growth down to just 1.3%.

It has said it would submit a white paper on its appeal for electricity tariff reductions to Nersa before the end of the year. The group also believes conditions in the manufacturing sector are set to worsen in the second half of the year as a deteriorating global economy is bound to hit demand for exports.

Like the equally troubled mining sector – also at times severely hit by South Africa’s electricity crisis – the manufacturing sector  shed thousands of jobs in the first half of the year, being the main contributor in pushing the official unemployment rate up to 25.7% in the middle of this year, the worst level in seven years.

These developments are bad news for the government’s New Growth Path (NGP) which strongly focuses on adding value through the development of downstream mineral beneficiation projects to create jobs and boost economic growth and development. Already some smelters, such as Exxaro’s Zincor, have shut down some of their operations because of rising costs. Others have said that margins are becoming increasingly negative.

In February Economic Development Minister Ebrahim Patel said South Africa was not benefiting nearly enough from minerals, saying his department was looking at how incentive schemes could work toward greater beneficiation. However, the electricity price pressures and capacity constraints are not likely to make this easy.

Tharisa’s decision to shift its planned ferrochrome smelter to China was the latest blow. South Africa is the world’s biggest ferrochrome supplier for the production of stainless steel with 73% of the globe’s chrome ore reserves. Its market share of global ferrochrome production was more than 50% in 2001.

However, the EIUG believes it will fall to less than 40% in three years if the current trend continues.

Eskom says it does not turn down requests to connect new projects, but admits that it does request that energy-intensive projects be phased in to ensure a match with available capacity.

This is hardly any comfort for manufacturing and other industrial companies who, on top of battling militant strike action, high labour costs, serious skills shortages and other constraints, now also have to cope with crippling electricity bills.