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

Overview of Multi-Year Price Determination
2013/14–2017/18 (MYPD 3)
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Inflation – The National Treasury estimates that the impact of the price increase on the
CPI could be between 0.7 and 1 percentage points. Further, the contribution of electricity to
the inflation basket will be reweighted and, as a result, electricity price increases will
probably have a greater effect on inflation than they have in the past. Electricity price
increases will also have a pronounced knock-on effect on inflation. Businesses that can pass
on price increases to customers will do so, resulting in “second-round” effects that could well
be more severe than the direct impact.
Businesses – Generally speaking, mining and manufacturing will be hardest hit. The
finance and business services sector are considerably less energy intensive than many
other industries and are less likely to be negatively affected. Some sectors are more
vulnerable than others and this could lead to calls for differentiated pricing – in effect,
subsidies. Eskom‟s view is that subsidisation is an industrial policy question that must be
addressed by the government, rather than through the electricity tariff process. Similarly, any
subsidies deemed appropriate should be routed through the fiscus rather than the electricity
tariff.
Investment – If the South African economy is inefficient in its electricity use, there is
probably scope for firms to adapt to higher prices by investing in energy-efficient processes,
and the economics of doing so would be attractive. If the economy is already fairly efficient in
its energy use, however, then there is little room for firms to reduce electricity demand
without also reducing their output.
The evidence on current efficiency is mixed. Eskom is of the view that price is more effective
at promoting investment into energy-efficiency technologies than incentive schemes or other
factors. And if price levels provide the correct signals, consumers will respond by limiting
electricity use and employing more energy-efficient technologies, reducing demand on the
grid. If the price is set too low, however, or if the migration to cost-reflective prices is done
too gradually, energy-inefficient investment and consumption are likely to continue.
Unchecked, this could result in electricity demand exceeding supply.
Cost-reflective tariffs achieved through a predictable medium-term price path, as proposed in
this application, will attract future investment in industries and businesses that are as
energy-efficient as possible and will not pose an undue long-term burden on South Africa‟s
electricity infrastructure.