Engineering News Online
written by Terence Creamer

South Africa’s electricity prices, which have more or less doubled from an average real level of 25c/kWh in 2008 to the current level of 50 c/kWh, were approaching an affordability “tipping point”, the Energy Intensive User Group (EIUG) cautioned again on Monday.

Chairperson Mike Rossouw said that coordinated regulatory, policy and investment efforts were required to moderate the price path to mitigate further deindustrialisation and to ensure that the policy aspiration of extracting further value from the country’s minerals ahead of export could be achieved.

Some smelters had already closed partly as a result of rising administrative prices, including Exxaro’s Zincor, while the margins at others were becoming increasingly unattractive. The EIUG was currently conducting a survey of industrial and mining firms to improve visibility of the level of vulnerability.

Current and possible future tariff increases could lead prices to rise beyond 110c/kWh level by 2020, which the EIUG warned would result in disinvestments by firms dependent on competitively priced power.

Rossouw estimated that an average real price of below 80c/kWh would be required to ensure a balance between tariffs that were “just sufficient” to support the funding of new generating capacity and price affordability. In the absence of such equilibrium, a ‘worst-case-scenario’ could emerge, whereby demand actually decreased and prices increased as Eskom sought to recover the revenue allowed to it under South Africa’s price-setting methodology.

The EIUG had, therefore, decided to begin openly voicing its concerns over the future sustainability of energy-heavy intensive industrial activity generally, as well as the sustainability of its members, which together consume about 44% of the country’s electrical energy. The organisation draws its members for the country’s leading mining and industrial organisations, including large resources groups such as Anglo American, BHP Billiton and Xstrata, steelmakers, as well as chemicals and paper and pulp producers.

NEXT TARIFF ROUND

It was also airing it price-path concerns ahead of Eskom’s next tariff application under the third multiyear price determination period (MYPD3), for the period April 1, 2013, to March 31, 2016.

The EIUG was particularly keen for the regulatory return on Eskom’s assets to be lowered in the MYPD3. But it accepts that the ratios should be sufficient to sustain the State-owned utility’s credit rating.

The National Energy Regulator of South Africa (Nersa) stipulated previously that the MYPD3 application should be submitted within six months of the 2013 implementation date. But regulatory member Thembani Bukula told Engineering News Online that it had indicated to Eskom that it would like “at least nine months” to adjudicate the MYPD3 application – a process that would include public submissions and hearings.

He also stressed that Nersa’s methodology was “flexible” enough to cater for new circumstances, which he acknowledged had changed since the approval of the MYPD2 application. That determination allowed for three increases of around 25% a year for the period 2010 to 2013 and Eskom was on record as stating that it intended seeking at least two more years of similar-sized increases.

At the MYPD2 stage, Nersa’s focus was on ensuring that sufficient capital was available to support Eskom’s massive investments into new generation capacity.

The MYPD3 focus, however, was likely to be different, given under investment by the utility, the introduction of renewable energy projects, as well as current price-path concerns.

The process, Bukula said, would also interrogate why Eskom’s primary energy costs had surged as they had over the last few years – a point also raised by the EIUG. Eskom’s primary energy costs rose 19.8% for its financial year to March 31, 2011, and the utility said these costs had risen to 16c/kWh and were likely to rise at rates well ahead of inflation in 2011/12.

Eskom’s Hilary Joffe told Engineering News Online that Eskom was aware of Nersa’s nine-month requirement and that it was also taking account of the need to consult with the National Treasury and the South African Local Government Association ahead of the submission to the regulator. Therefore, the submission should be made early next year.

The utility was still conducting its own research and modelling exercises and had not arrived at any conclusions as to the percentage increases for which it might apply, notwithstanding the indicative price path of an additional two years of 25%-type increases.

Joffe said that Eskom’s modelling would take full account of the effect of higher tariffs on demand and on the economy as a whole, and would seek to strike a balance between affordability and ensuring that Eskom remained financially robust. She also noted that Eskom’s current return on assets remained well below the 8% indicated as acceptable by the regulator.

CLIMATE CHANGE & CARBON TAXES

But Rossouw indicated that the EIUG’s intervention had also been designed to set the tone for fact-based analysis of the implication of South Africa’s climate change abatement commitments, as well as the proposed carbon tax, which was currently being considered by the National Treasury. From the EIUG’s perspective, an acceptable electricity price path should be determined ahead of the design of policy remedies expected to transition South Africa towards a lower-carbon economy.

Should a carbon tax be pursued on top of an as-yet uncosted plan to lower South Africa’s carbon emissions by 34% as against a ‘business as usual’ trajectory by 2020, it could prove to be the “last straw” for large-scale, energy-heavy investors.

The climate change abatement challenge for South Africa was likely to be particularly difficult given the structure of the domestic economy and would “take a long time”, particularly assuming that the country was not prepared to put economic and job growth at risk.

The EIUG did not dispute the desirability of such a transition and the fact that the energy sector – which accounted for 83% of South Africa’s 461-million tons of emissions measured as carbon-dioxide equivalents – would be central to that transition. But it said a range of options were needed to reduce emissions, and that the options did not have to include a tax.

Instead, South Africa should pursue a detailed analysis of the abatement opportunities and costs, as well as the investments required.

Rossouw also cautioned against a fixation on South Africa’s relative emmissions, which were high. “South Africa should do its share. But when 60% of emissions are produced by five countries, we also have to accept that, in absolute terms, our contribution to the collective effort will be small.”

Further, international experience had shown that it was unlikely that South Africa could to buck the international trend, whereby any increase in per capita wealth was associated with a rise in emissions. A reality demonstrated by the fact that, despite its climate commitments, China was still expecting its emissions to rise substantially by 2020.