How Electricity Price affects the South African Economy

on Tuesday, 30 April 2013. Posted in Current Publications

How Electricity Price affects the South African Economy

The cost of electrical power is increasing and we expect it to keep increasing in the foreseeable future.  This does a lot more than just affecting your pocket as a consumer.  It affects the entire economy.  On the other hand, a power utility needs revenue, maintain or replace assets and to expand to cover its growing market.  One way to secure the additional revenue is to increase the tariff.

One of the most important parts of the economy that are most influenced by the price of power is the mining, manufacturing, and industrial sectors.  Changes to the economic activity in these sectors is a big contributor to overall growth of an economy.

As the price of energy increases, mining and manufacturing industries can no longer ignore the impact on their business.  We talk of energy-intensive and energy-dependent industries. These are industries that use a lot of power and where the cost of power is a significant part of the cost of their product.

For energy-intensive industries this strong link between the cost of power and production is greatly magnified by the large amount of power consumed.

Electricity as an essential input to production and to economic activity in general.  Changes in electricity prices impact each and every individual in South Africa, as well as industry.  The cost of electricity will change the demand as people become more energy efficient or in the worst case where a company becomes non-competitive and closes its doors.

This directly affects a power utility’s core business. Less power being bought removes revenue even though the unit cost increases. In the extreme increasing in unit cost of power can result in lower total revenue for a utility.

The work was completed in 2011/2012. We considered the MYPD price increases that were expected at the time, specifically annual average price increase modelled at 25.8% [2011], 30% [2012], 16% [2013], 16% thereafter for the customers.  The forecast ran from 2012 to 2017.

 

What did we see?

Overall 13 sectors would see tipping point effects based on the price trajectory.

These sectors contributed to approximately 25% of Eskom revenue at the time.  The industry segments expected to me most affected are

  • Manufacturing of basic and fabricated metals (containing e.g.Ferro manganese processing and Silicon metals processing).

  • Manufacturing of coke, refined petroleum products, nuclear, chemicals, rubber, and plastic.

Six customers were flagged as potentially be in jeopardy due to the price trajectory.  These customers would account for 4.1% of the utility’s revenue and 3,623 GWh energy (4.0% in 2011 terms).

We modelled the economy-wide impact of a scenario where we assumed 3 major customers identified stop operations as a result of the price increases. The effects on GDP and employment results was a 0.73 per cent lower real GDP growth and a 1.03 percent reduction in overall employment when compared to the base case.

These effects are significant.  So the only question is, in 2016 how close was the forecast to reality?

pdfModelling the Economic Impact of Electricity Tariff Increases on Eskom’s Top Customer Segment.