Tough to find balance between affordability and the need to expand {writer: Staff reporter}

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. Furthermore, it is posing a serious threat to the aims of the government’s New Growth Path economic growth strategy, as illustrated by plans to shift the construction of a ferrochrome smelter from Rustenburg in the 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 largest industrial consumers – particularly 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 South Africa (Nersa) for relief on the planned next round of increases.

Pattern of recent years

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, which 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 that, they say, will cripple the country.

According to Eskom, the average real cost of electricity produced by other producers around the world is 76 cents per kilowatt-hour, while in South Africa it is 52.30c/kWh for 2011–2012 and will increase to 65.85c/kWh in 2012–2013.

The state power utility 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 it 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 R97 billion to R150bn to R345bn, and still rising.

Household consumers

Household consumers have 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 as well as illegal bypassing of electricity meters to steal power.

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

The EIUG represents Eskom’s customers that 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.

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

The group was recently quoted on 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 the EUIG calls an affordability “tipping point”.

Manufacturing Circle

Another appeal for a slowdown in price increases comes from the Manufacturing Circle, representing 56 large companies such as 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 Manufacturing Circle, electricity prices in the manufacturing sector – South Africa’s second largest – have increased by 140% over 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, the sector contracted by 7%, and was the major factor in slowing down economic growth to a mere 1.3%.

The group said it would submit to Nersa a white paper on its appeal for electricity tariff reductions before the end of 2011. It 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.

Similar to the equally troubled mining sector (also at times severely hit by South Africa’s electricity crisis) manufacturing shed thousands of jobs in the first half of the year, being the main contributor in pushing up the official unemployment rate 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, which strongly focuses on adding value through the development of downstream mineral beneficiation projects to create jobs and boost economic growth and development.

Already, a number of 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.

Beneficiation

In February, Minister of Economic Development 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 simple.

Tharisa’s decision to shift its planned ferrochrome smelter to China was the latest blow.

South Africa is the world’s largest 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.

The EIUG believes, however, that 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 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 that – in addition to battling militant strike action, high labour costs, serious skills shortages and other constraints – now have to cope with crippling electricity bills as well.