Deloitte leader for sustainability Paul Ben-Israel says South Africa’s move from being a low cost electricity producer because of excess capacity built up in the 1970s, towards a more cost reflective tariff since 1998, means that electricity pricing has a bigger impact on costs and ultimately company profits.
Deloitte executive lead for infrastructure and power solutions Daryl Elliott says that the first step towards managing the cost of electricity is to measure the cost of consumption. “If you can’t measure it, you cannot manage it” he says.
Ben-Israel notes that when a company faces a price rise in any key production factor, it faces two choices. The first is to pass it on to the customer, but that might make a company less price competitive. “The other option is to absorb the cost, which then erodes profit margin, which will invariably impact shareholder investment decisions” he says. Companies thus face the challenge of how to improve their energy intensity by either producing more from the same amount of electricity or producing at current levels with less electricity. The overall aim is to reduce the electricity to production ratio.
“For individuals and corporates, the certainty and quality of cash flows is critical” says Ben-Israel. He notes that without certainty, long term planning becomes difficult and significantly more unpredicatble. Thus if a mining company for example faces volatile commodity prices, a fluctuating exchange rate and, in the wake of recent events in the platinum mining industry rising labour costs, now also has to deal with spiraling cost of electricity, it may have to shelve or even scrap new projects. Mining and manufacturing are two of the sectors that come to mind as being most affected by electricity as a proportion of its input costs, but all sectors should be looking at managing their costs. ‘“Whether you consume R 1000 or R 100 000 a month, you have to improve
your energy intensity,” he says.
The question of competitiveness is not just faced by companies but by the South African economy as a whole. South Africa’s economy remains energy intensive, with higher energy consumed per unit of Gross Domestic Product (GDP) than developed nations such as Canada, the United Kingdom and Germany, however this is expected for developing or emerging economies. Companies can take a few steps to proactively reduce their cost of electricity or energy consumption in general. Ben-Israel says companies can start by appointing a Sustainability Officer, preferably at board level, to look at overall energy use and the strategic implications of rising costs.
Elliott says companies should also begin to search for an energy efficiency solution. A long term view towards energy efficiency allows for innovative combinations of technology and funding options to be considered. Part of the solution can be a collective one. For example, companies in close proximity can plan together to create certain off-grid energy solutions or share lessons learnt with each other. Ben-Israel says the solution to sustainable reductions in energy consumption requires a “culture change” not only from corporates, but also from individuals and households.
He says he expects that after the current round of tariff increases for Eskom, where two consecutive 25% increase were followed by 16%, South African households and businesses will have to contend with another three years of increases that are twice or even three times the inflation rate, if all electricity consumers do not come to the party. “We cannot expect Eskom to continue providing for increasing electricity demand without there being a price tag attached”. Elliott notes that the current increases granted to Eskom are “too low”. That is because while they may help cover Eskom’s current build programme of R 300 billion, the tariff increases do not cover the country’s future needs to invest in additional generation capacity. The price tag associated with a nuclear plant is substantial. Thus the R 13,2 billion profit that Eskom recently declared may seem high, but is actually a very small percentage of its future investment needs.
Government is playing its part to help towards encouraging electricity saving, but according to Ben-Israel, policy may need to be refined and more creative solutions sought. The use of tax incentives and tools such as accelerated depreciation for equipment that improves energy efficiency have helped change behaviour, but it seems more needs to be done. Ben-Israel points to the implementation of regulation 773 of the Electricity Regulation Act as an example of where implementation can be tightened. The regulation was meant to be implemented at the beginning of this year and required that all users who consume more than 1000 kwh per month must install a smart meter. There are currently no enforcement mechanisms for regulation 773. Government also has measures, such as the Demand Side Management Tariff, in place as well as the environmental levy, but there needs to be a national strategy on how these funds should be used for optimal investment in the electricity sector .
Elliott points out that instead of direct rebates or subsidies for example, individual households for installing solar geysers, an option could be to fund a mass installation programme run by accredited companies and have a small repayment built into the electricity bill over a lengthly period. Smart funding solutions will provide consumers with long term protection against rising tariffs. It is believed that through this mechanism, government can enable a more sustainable long term energy efficiency sector, and stand to use funding available for subsidies in a more efficient manner. An added benefit to this is the overall positive contribution to the environment
The current limitation with the policy framework to implement this idea is that Eskom is not a funding institution, and may either have to apply for exemption for the Public Finance Management Act or collaborate with a funder like the Development Bank of Southern Africa (DBSA) or the Industrial Development Corporation (IDC) to realise this dream. But any policy option that is pursued will only succeed if individuals and companies make a conscious effort to change their current paradigms and elect to work together.
Contact Paul Ben-Israel at email@example.com and Daryl Elliott at firstname.lastname@example.org