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The Eskom effect and what we can do.

The economic crisis fades but new danger lurk on the horizon for SA – Mike Schussler Economists.co.za. The Eskom effect and what we can do. Eskom effect. Background to electricity. Why we should have cheap electricity and why we do not. A few selected solutions.

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The Eskom effect and what we can do.

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  1. The economic crisis fades but new danger lurk on the horizon for SA – Mike Schussler Economists.co.za The Eskom effect and what we can do. www.economists.co.za

  2. Eskom effect. • Background to electricity. • Why we should have cheap electricity and why we do not. • A few selected solutions www.Economists.co.za

  3. Some facts about electricity in South Africa. • The income from residential and businesses from electricity is not only Eskom. • Eskom had a revenue of over R53,6 billion in the year to March 2009 while municipalities revenue from electricity was about R32,9 billion for the same period. • That is a total R86,5 billion or around 3,7% of GDP. • That means Electricity is bigger than agriculture. www.Economists.co.za

  4. Facts about residential electricity • The average municipality household paid around R365 pm in 2008 while Eskom customers paid an average of R124 pm. • There are now over 12,3 million electricity accounts in South Africa (Some small businesses included here) • By comparison there are only 1,839 million mortgage accounts in SA. • This means that the effect of an electricity price hike is felt by 6,7 times more by consumers www.Economists.co.za

  5. Select SA cities: Electricity price per kwh. www.Economists.co.za

  6. Cents per Kilowatt hour for Eskom Residential sales www.Economists.co.za

  7. Electricity prices and inflation • Eskom electricity prices have increased with 91% since 2005 while inflation has only increased with about 35% over the same period. • Electricity prices are set to increase around 200% over the next five years. • This means that over a 10 year period between 2005 and 2014 Electricity prices on the current proposal would have increased 633%! www.Economists.co.za

  8. How we worked out an SA average household electricity price • We took a household using 800 kwh per month on a 60 Amp connection • (This is an international standard used by Eurostat.) • We collected the actual prices for 51 municipalities and 8 different Eskom price rates. • From this we got a simple average which was just over 88 SA cents per kwh. www.Economists.co.za

  9. Household electricity prices in 53 selected countries 08/09. www.Economists.co.za

  10. Projected household electricity prices 2010. SA increase @ 35% rest of the world at 6,5% www.Economists.co.za

  11. Projected household electricity prices 2012. SA increase @ 35% rest of the world at 6,5% www.Economists.co.za

  12. Current SA household electricity prices in a broader sense. • Household electricity prices in SA, are near the middle of these countries. • Currently the average household price is 14 US cent per kwh. SA is at 11,6 US cents per kwh. • Taking out developed countries however paints a different picture as the average rate for 29 developing countries is 10,4 US cents per kwh www.Economists.co.za

  13. Households vs. Industry. • In SA Industry pays about 37,5% of the average household price. Only four countries give more of a discount. • The average price that bigger industrial users pay around the world is about 74% or about twice the SA rate. • This means that households in a sense subsidies industry. This is not sustainable. www.Economists.co.za

  14. Household electricity prices on PPP basis using the Big Mac Index. www.Economists.co.za

  15. Household electricity in PPP terms. • Out of 31 countries or areas SA household electricity price are already in the top third of countries. • All other things being equal if the proposed electricity rate hike come though we will have the most expensive electricity in this group within two years on a PPP basis. • Within four years our PPP electricity rate could be double that of the second most expensive area. www.Economists.co.za

  16. Why we should have cheaper electricity prices. South Africa uses coal the most and has one of the cheapest sources of coal in the world. www.Economists.co.za

  17. Steam coal prices in US dollars a ton – 2008/09 www.Economists.co.za

  18. Coal contract prices in Rand.Downward spiral. www.Economists.co.za

  19. Why we don’t have cheap electricity prices. www.Economists.co.za

  20. Product market regulation in energy, transport and communication.Scale of the indicator is 0 - 6 from least to most restrictive of competition www.Economists.co.za

  21. Municipal gross profit margin on electricity and water services. www.Economists.co.za

  22. Was it a “real” R9,7 billion loss in 09? Just the derivative and financial instrument losses were R11,88 billion. www.Economists.co.za

  23. Some other Annual statement facts. • Personal costs rose 33,6% in one year. • According to labour data Electricity sector averages wages rose with 26,1% in year to March. • Energy costs rose by 38,4% but actual energy costs only rose about 25% while the rest was rebuilding the stockpiles. • Other operating expenses rose 30,8%! • Clearly Eskom does not have expenses under control. www.Economists.co.za

  24. Some mitigating facts. • Financing expenses will have to increase as the build program commences. • Higher maintenance for older power station are a fact. www.Economists.co.za

  25. Another look at income projection without build costs or financial instruments. Table in millions of Rand. At the end of the period Eskom would have earned R548 billion enough to pay off all new power stations in five year period. Excludes government R60 billion. Includes current proposal at 45%. www.Economists.co.za

  26. Our thinking on Eskom. • No way is energy sector in South Africa efficient. • We cannot burden the country for the “few” and need to relook everything. • We need better regulation and a better regulator in this sector. • We are governed by short-term thinking and not longer term thinking. • It has been a fact for quite a while that SA does not have the cheapest electricity in the world. • Get that false “fact” out of your heads! www.Economists.co.za

  27. What we can do. www.Economists.co.za

  28. What we can do. • Break Eskom up into producers (about four) and combine reseller and Eskom before breaking them up into say 6 or 8 that must compete to sell to customers. Keep distribution separate from both producers and sellers. • Producers (sell and list four with all proceeds going into new power supply) • Resellers who sell onto end users (Sell and use money to fund poorer households) www.Economists.co.za

  29. More of what we can do • Buy electricity producers in neighbouring countries and fix them to provide electricity for us. • Get many longer-term international loans. • WB, ADB, DBSA, and other government agency finance. • Implement two time zones in SA as this could reduce electricity peak with up to 2,5% www.Economists.co.za

  30. Solutions in pricing. • Sell at the right price. Industrial and International electricity are sold below average cost. (Some years mining too) • 32% of our electricity is sold below cost. (Or if mining included then 47%) • Much electricity is lost due to theft. • According to BBC about 6% of total but certain areas up to 60%! Charge people with illegal connections for theft in court and fine. www.Economists.co.za

  31. Transparency and taxes. • Electricity is also free for poor households and subsidised by other users. • We need to fund this from taxes and give vouchers so that poor can survive but also they can see what they are getting for free. • Municipalities need to have maximum gross profit margins set at say 50% and not up to 140%! • Municipalities use this as a form of tax and not service delivery. www.Economists.co.za

  32. Demand side management • Solar Geysers are expensive to most. • We set too high standards and now one can get a solar geyser for about R7000 from China but same Geyser on ESKOM website costs around R20 000 or more. • We must implement the buying of electricity from bigger users ASAP. • It may pay them to more to produce electricity at peak times and this would help. www.Economists.co.za

  33. Management. • Better management at ESKOM and Local government level needed urgently. • One cannot let costs get out of control, so much of the economy depends on it. • More transparent management. • Why big price increases at first then a little later others? • Local government must also publish figures of their costs more regularly. • Compare more aspects of electricity and not just cheap industrial rates in annual reports. www.Economists.co.za

  34. Questions. Thank you www.Economists.co.za

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