An economist has warned that SA could end up with the world’s most expensive electricity if Eskom gets its proposed tariff increases.
“SA’s electricity is more expensive than electricity in the US, Israel and Mexico and if Eskom gets its 45% increase every year for three years, SA will have the most expensive electricity in the world,” Mike Schussler told a presentation in Johannesburg entitled “Recovery or Eskom”.
Out of 31 countries or areas, the SA’s household electricity prices were already in the top third of countries. “We keep being told that we have the cheapest electricity in the world and this is not the case. Let’s start calling Eskom’s prices the most expensive in the world and change the public’s mindset.”
From 2005 up to the present, electricity prices had increased 91%, while inflation rose only 35% over the same period.
Schussler said electricity prices were set to increase around 200% over the next five years. “This means that between 2005 and 2014 electricity prices on the current proposal would have increased 633%.”
Schussler noted, however, that income from residential properties and businesses for electricity went not only to Eskom. “Eskom had a revenue of over R53,6bn in the year to March 2009 while municipalities’ gross revenue from electricity was about R32,9bn for the same period.”
That, he said, was a total R86,5bn or around 3,7% of GDP.
The average municipalilty household paid around R365/month in 2008, while Eskom customers paid an average of R124/month. “There are now more than 12,3m electricity accounts in SA. By comparison there are only 1,8m mortgage accounts in SA. This means that the effect of an electricity price hike is felt by 6,7 times more by consumers,” Schussler said.
Turning to why South Africa should have cheaper electricity prices, he noted the country used large quantities of coal and had one of the cheapest sources of coal in the world.
Eskom did not have its costs under control and was passing on its problems to consumers, he said. He pointed out that in one year Eskom’s personnel costs rose 33,6%. “No union member in SA got that sort of increase.”
Better regulation and a better regulator were needed in the energy sector. “We seem to be governed by short-term thinking and not longer-thinking.”
Turning to the effect of electricity prices on consumer price inflation, Schussler said this number would be around 1,2% higher in the first year of Eskom’s proposed tariff increase, 2% higher in the second year and probably the same in the third year.
“There will be little chance of interest rates declining as inflation won’t be close to target. In fact, interest rates may have to rise by up to 2% to help curb second round effects.”
Schussler predicted mining costs might rise as much as 25% in total as a result of doubling energy costs. “And remember that gas production has a 70% electricity input cost.”
Services such as rail transport, pipelines and cold storage could see price rises by as much as 20% over the three years, assuming profit margins remained intact.
“SA’s growth will be constrained by between 1% and 1,5%.”
Schussler explained that before the financial crisis he had put the country’s growth at an average of 3,7% in the next five years. With the crisis he predicted growth of around 2,7% in the next five years.
Now, with “the Eskom effect”, Schussler said the parastatal would take about 1,1% away from that figure so that growth would average only 1,6% in the next five years.
“I think that 2010 will now also be a tough year.”
He expected growth of just over one percent if Eskom got its 45% every year for the next three years. “I think 2011 will be even worse with growth of less than 1%.” — Sapa