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In its detailed submission to the National Energy Regulator of South Africa (NERSA) last week on ESKOM’s application for the third Multi-Year Price Determination (MYPD3), BUSA believes that the requested average tariff could be lower – at least as low as 10.8% instead of 16% - and still be cost-reflective. If more detailed information had been provided it might have been possible to find further savings. According to research commissioned by BUSA, an accelerative price path, at a lower rate, can be achieved without negatively impacting on supply security. These electricity price shocks now have significant adverse economy-wide impacts.

BUSA therefore sees the NERSA consultative process as an essential step in arriving at the right decisions about future electricity tariffs.
A number of key sectors in the SA economy – such as mining, minerals, and chemicals – are heavily reliant on electricity as an input into their production processes. These sectors often are highly trade-exposed and would seem to have limited ability to absorb the substantial increases in real electricity tariff. As a result, the proposed electricity tariff increases can be expected to adversely impact these sectors’ output, employment and investment decisions. This will have ripple effects throughout the economy due to the significance of these sectors. Other less electricity-intensive sectors can also be expected to be adversely impacted through the so called “second round” effects of the proposed electricity tariff hikes due reduced consumption on pass-on of increased electricity costs.
The current economic climate, apparent lack of mitigating options and additional price pressure from municipality mark-ups and potential carbon tax

all serve to accentuate the vulnerability of firms to the proposed tariff increases. Therefore, the BUSA analysis suggests that the tariff increases contained in ESKOM’S MYPD3 application will have significant negative long term implications for households, industries and the economy at large. This makes NERSA’s interrogation of the MYPD3 cost estimates all the more crucial, especially given that significant savings are available when performing a detailed cost assessment of ESKOM’s MYPD3 application. This suggests that much of the negative economic impact associated with the prices proposed in the MYPD3 application can be mitigated without compromising the electricity supply.
Other than the economic impact there are four principal reasons meriting critical interrogation of ESKOM’s proposals:

•  the proposal for real increases follow a period of large tariff increases during MYPD1 and 2, during which nominal electricity tariffs tripled within five years.
•  Other drivers of power costs such as the additional premiums charged by municipalities and the potential introduction of the carbon tax will add further upward pressure on power costs in SA.
•  In the absence of effective incentive based regulation, a monopoly provider like ESKOM faces little pressure to reduce costs to competitive levels. This point is borne out by ESKOM’s uncertain record in achieving operating cost efficiencies over both the MYPD1 and MYPD2 periods.
•  The record of the previous MYPD periods demonstrates that ESKOM’s applications are not always accurate predictors of what eventually happens. It is important to ensure ESKOM’s revenue allocation -- with its massive impact on cost structures in the economy – does not include significant over-recoveries of the true economic costs of generating, transmitting and distributing electricity.

In the last few years, South Africa has therefore witnessed unprecedented increases – in both quantum and pace – in electricity prices. In the submission to NERSA during the consideration of the previous MYPD2 application, BUSA cautioned on the negative impact of significant and rapid price increases on businesses – particularly those within the energy intensive industries and small businesses.
Since then, BUSA has been assessing the impact of present electricity price increases on the cost of doing business. South African businesses, including those in the prior job-creating sectors, have become increasingly exposed to increased unit costs of production. Our consultation with members and industry stakeholders has revealed considerably knock-on effects on the viability of businesses, and the ability of industries to create jobs. When taken in the context of global demand conditions, and the profile and competitiveness of similarly placed trading partners, further excessive increases in the cost of electricity will have a real impact on the competitiveness and output of many South African firms.
The in-depth research done by Genesis Analysis, including inputs from BUSA members which formed the basis of the BUSA submission to NERSA last week, will be released at a later stage.