The Impact of Electricity Tariff Hikes on the Manufacturing Sector?

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