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The Impact of Electricity Tariff Hikes on the Manufacturing Sector?

Explore the implications of electricity tariff increases on manufacturing, supply-side bias, and distribution network inequality, along with recommendations to mitigate the challenges faced. Context on the severe impact, multiple shocks, and recommendations for a national tariff strategy.

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The Impact of Electricity Tariff Hikes on the Manufacturing Sector?

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  1. The Impact of Electricity Tariff Hikes on the Manufacturing Sector? Department of Trade and Industry Parliamentary Portfolio Committee on Trade and Industry 31ST October 2012

  2. Content • Context • Supply-side bias • Distribution network inequality & municipal tariff regime • Prohibitive tariff regime • Impact on the manufacturing sector • Recommendations

  3. Context • Electricity neither function nor core competency of the Department of Trade and Industry. • Provide a DTI perspective mindful that the PPC has invited key institutions to provide perspective of service provider, regulator and line function departments. • DTI informed by its perspective that sharply escalating and ‘bunched-up’ electricity prices constitute a serious danger to viability of manufacturing sector • Data is difficult to obtain in a complex regulatory and institutional environment

  4. Context - Multiple shocks on the manufacturing sector: • Protracted global recession impacting heavily on manufacturing sector – jobs/exports/capacity utilisation/investment • Sharply escalating administered prices include: • Sharply escalating electricity prices (especially where municipal premiums are added) • Amongst highest port charges in the world • Together with port and logistics inefficiencies

  5. Context • DTI recognises that the ‘structure’ of the economy needs to “shift” towards energy efficiency & greater competitiveness. • But grave danger this will be done at the expense of losing significant, possibly irreplaceable capacity, as a result of “bunched-up” sharply escalating electricity charges, combined with other external and domestic economic shocks. • Loss of capacity in key sectors such as foundries has potential for significant negative ‘knock-on’ effects. • Possible adoption of a carbon tax under consideration by National Treasury has potential to add significantly to the problem.

  6. Focus Bias on the Supply-Side - Since 2008 “Electricity Supply Crisis” • Insufficient Generating Capacity - ESKOM’s Build Program • Shift towards “Cost Reflective Tariff Regime” • MYPD 1, 2 and 3

  7. Distribution Network Inequality • Direct (Eskom) supplied customers: • Only exposed to Eskom's MYPD increase. From 2008 there has been an upward adjustment by an average yearly tariff increase of 27% per year over the 4 year period to April 2012. • Indirect (municipal) supplied customers experience a ‘double impact’: • Tariff loading on Eskom Megaflexrate • Non-tariff surcharges and levies • This amounts in many cases to triple digit increases on top of Eskom prices

  8. Distribution Network Inequality • No single tariff. Municipalities distinguish between commercial, industrial and domestic users. Apparently arbitrary focus on fixed charges with heavy bias towards levying high surcharges and levies against industrial users. • Significant differences between municipalities. Renders a single national strategy to ameliorate prices very difficult. • Alleged that municipal tariffs not in accordance with NERSA guidelines. Surcharges and levies fall outside of NERSA mandate.

  9. Distribution Network Inequality • Some municipalities appear to be using electricity tariffs to generate revenue and cost recovery inefficiencies. This may lead to closing down of companies and reduce municipal revenue base. • Some companies report employing a range of measures already – off-peak hours usage and shutting plants for part of the week/month.

  10. Electricity Tariff Increases Compared to CPI (annualised) (Source: Eskom)

  11. Municipal Tariff Margins Above Eskom Megaflex (Source: EIUG, 2012)

  12. Electricity Rev as % of Total Rev 40% 34% 35% 32% 30% 30% 28% 28% 27% 30% 27% 26% 26% 24% 24% 25% 20% 15% 10% 5% 0% 07/08 08/09 07/08 08/09 07/08 08/09 07/08 08/09 07/08 08/09 07/08 08/09 07/08 08/09 Joburg Cape Town Tshwane eThekwini Nelson Mangaung Newcastle Mandela Bay Electricity as Municipal Revenue (Source: Eberhard, 2010)

  13. Global Benchmarking: Nelson Mandela Bay Municipality NMBM 2012/13 forecast. NMBM two Tariffs Time of use and Metered demand Eskom is competitive (Source: dti modelling)

  14. Impact on Manufacturing Sector • Real threat of reaching ‘tipping point’: • 13 sectors (25% of Eskom revenue) contain a electricity price increase ‘tipping point.’ • Example: 2.8% reduction in electricity demand in SIC 35 (basic and fabricated metals) = 0.7% loss of GDP & 86,304 jobs lost (Source: Cameron et al, 2012) • Energy intensive manufacturing sectors most vulnerable include: Chemicals and Plastics/Metals/Foundries/Glass

  15. Recommendations - Intra-governmental Task Team proposed to examine the impact of sharply escalating electricity tariffs: • Eskom MYPD increases • Municipality tariff increases and surcharges • Need to focus on sectors deeply vulnerable with short term measures • Agree with Energy Intensive Users Group on need for ‘one national set of tariffs as set out in the Electricity Pricing Policy’ • In the interim the DTI has argued strongly for a single digit increase

  16. Recommendations • Carbon tax should be approached with caution given the existing threats to the manufacturing sector • Support the re-capitalisation of energy intensive capital equipment by installing energy efficient technologies and systems: MCEP incentive made available for this purpose, amongst others.

  17. Further Research • The dti has commissioned research into: “Impact and Policy Implications of Escalating Electricity Prices and Changing Energy Mix in South Africa” • The study will gather much needed, detailed data on the: • Municipal tariff structure • The existing and future impact of MYPD 1, 2 and 3 on manufacturing sector together with muncipal premiums • Determine maximum electricity price competitive/viability threshold. • Possible demand side amelorating measures and policy recommendations

  18. Thank You

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