Keeping the lights on at any cost
Eskom is not short of arguments for hiking electricity prices. The state electricity supplier argues that local consumers have benefited from among the lowest rates in the world. They also claim that without massive inflation-plus increases over the next thee years they won’t be able to implement a range of critical infrastructure upgrades. At this stage we expect small businesses and households will shoulder an increasing share of the country’s total electricity bill, while the favourable contracts negotiated with heavy industrial consumers and neighbouring countries remain in place. Why should FAnews Online readers be concerned?
Whether you accept Eskom’s arguments or refute them, your electricity bill is going to swell substantially in the next three to five years. Small businesses and homeowners will be forced to take action to cut electricity consumption. You’re going to have to get smart to keep overheads down! Apart from the direct impact on the cost of living and doing business in South Africa, Eskom’s proposed annual tariff increases of between 45% and 66% over the next three years could seriously dent the country’s GDP!
Knocking investment and job creation for a six!
The African Institute for Economic Modelling (Afrinem) at the University of Pretoria believes increases of this magnitude would fuel inflation and stunt economic growth. Afrinem says a 45% electricity tariff increase will add 0.8% to inflation and knock 1.3% from GDP. If a 66% increase is approved the inflationary impact will be 1.2%, while economic growth could decline by 1.9%. Neither scenario is good for an economy trying to shrug off the ill effects of recession! Households will struggle with affordability while investment, job creation and sectors like mining, manufacturing and construction will be severely impacted. Afrinem commented on each of these areas in turn. They noted that growth in foreign direct investment could decline as much as 15% in 2010 as foreign capital flows to more affordable destinations. Unskilled labour would be particularly hard hit as companies cut jobs in an attempt to bring spiralling overheads in check.
Academic bodies aren’t the only ones making noise about Eskom’s price hike proposals. Trade union Solidarity is vocally opposed to Eskom’s latest request to the National Energy Regulator (Nersa). Quoted in an I-Net Bridge press release, Solidarity alleges that if Eskom is granted a 66% per annum price increase over the next three years, consumers will shoulder a nominal increase in excess of 600% between 2008 and 2012! If they approve hikes of 45% in each of the next three years consumers will end up paying 410% more for their electricity by 2012!
Solidarity is questioning the logic behind continued electricity price increases in the current economic environment. Spokesperson Jaco Kleynhans said Eskom is pushing for increases despite the pressure on the end consumer. “There is a sharp increase in bad debt and consumers will definitely not be able to handle any more above-inflation increases,” said Klyenhans. Eskom is effectively pricing out more and more of its ‘marginal’ consumers!
Mining jobs under threat!
Eskom’s price hikes will wreak havoc in the real economy too. Big business in the mining and manufacturing sectors will cut jobs as they seek to rebalance their input costs. In a recent Sapa article, Solidarity points to further retrenchments in the mining industry. “A large-scale electricity increase above the inflation curve will seriously affect mining and there could be a drastic levelling out,” said Kleynhans. He pointed to the high electricity consumption at most of the country’s deep level gold and platinum mining operations.
We sympathise with the country’s unskilled workforce. We expect the heavy industrial users and miners will use electricity price increases as a negotiating tool to reduce their workforces despite benefiting from long-term discounted price arrangements with Eskom! As for the power utility, its argument for massive consumer price hikes is flawed on many levels. First, these price hikes will hardly make a dent in the approximately R385bn the group needs for its expansion plans… Second, the price increases will reduce demand with an obvious reduction in income. And third, the expansion plan will create extra capacity – a de facto oversupply situation – which should put downward pressure on electricity prices too!
Editor’s thoughts: Electricity price hikes of 40% or more make no sense when core inflation is around 8%. It seems government needs to intervene to make Eskom’s build programme feasible without causing further damage to the economy. Until they do, consumers will have to tighten their belts, and forego other consumption expenditure in favour of keeping the lights on! Are you comfortable with Eskom’s proposed electricity price increases – and what are you doing to reduce your business and private electricity consumption? Add your comments below, or send them to [email protected]
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