Part 1 Revenue Application: Multi-Year Price Determination ... - Eskom

Phasing in price increases over five years
Overview of Multi-Year Price Determination
2013/14–2017/18 (MYPD 3)
Page 83 of 144
In this application, Eskom seeks to balance the need for a sustainable electricity industry
with the need for economic growth and development. Ultimately, these two objectives cannot
be set in opposition. A secure supply of power is essential to enable economic growth. This,
in turn, requires that the electricity industry be financially sustainable. However, this objective
must be balanced against the negative economic effects of price increases. An electricity
price path that migrates towards cost-reflective levels over time can best achieve the
balance between these imperatives. This is a key reason why Eskom is proposing a five-
year price path, rather than a three-year price path.
However, phasing in electricity increases over too long a time could be just as detrimental to
the economy as phasing them in too quickly. According to a study by Deloitte, the longer
electricity prices are not cost reflective, the more energy the economy will demand.
Unchecked, this kind of cycle would require even more investment into capacity expansion
than already envisaged, for potentially little net gain in economic output. The overall
economic outcome of such a situation would be negative for the country.
The real costs of electricity and South Africa’s competitiveness
In the past, cheap power attracted local and international investment in energy-intensive
industries. At the same time, there was little or no financial motive for companies to invest in
energy-efficient technologies or generate power for their own use. Consequently, according
to a study by the University of Pretoria, the South African economy‟s energy intensity more
than doubled between 1990 and 2007. By contrast, the energy intensity of Organisation for
Economic Cooperation and Development countries increased by only 10% over the same
period.
South Africa now needs to invest more into new generating capacity at considerable
economic cost. The “competitiveness” that cheap electricity prices lent the economy in the
past arguably conferred short-term benefits at longer-term disadvantage.
Economic impact
This application acknowledges that the proposed electricity price increases will have several
short-term impacts on the economy.