The Economic Impact of Electricity Price Increases on ... - Eskom

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Opportunities for fuel-switching as means to avoid rising electricity costs appear to be concentrated in a small number <strong>of</strong> sectors by the cost savings can be significant 22 Vulnerability <strong>of</strong> sectors to rising electricity prices Potential to substitute electricity with cost-effective alternatives • A survey conducted on behalf the South African National Treasury, <strong>of</strong> 32 firms across 17 sub-sectors <strong>of</strong> the economy found that a few firms had implemented fuel switching investments in response to rising electricity prices (DNA <strong>Economic</strong>s, 2011). • <strong>The</strong> vast majority <strong>of</strong> these investments have been made since 2008 when real electricity prices began to rise sharply. • Most <strong>of</strong> the firms who were invested in fuel substitution were switching away from grid electricity towards more efficient and less costly low-carbon alternatives including gas, waste and biomass. ©2012 Deloitte Touche Tohmatsu Limited. All rights reserved. 2
<strong>Electricity</strong> costs as % <strong>of</strong> total costs <strong>The</strong> share <strong>of</strong> electricity in total costs varies considerably from one type <strong>of</strong> mining operation to another because <strong>of</strong> the considerable additional electricity costs associated with underground mining (gold and platinum) 23 25 20 15 10 5 0 14 Simmers & Jack Mines 12 12 DRD Gold Share <strong>of</strong> electricity in total costs - selected mining companies Harmony 7 Gold Fields 6 AngloGold Ashanti 7 Northam Platinum 6 Impala Platinum 5 5 Anglo Platinum Aquarius Platinum 3 Lonmin 21 Merafe 7 African Rainbow Minerals 4 Exxaro 3 3 Anglo American ** Gold Platinium Diversified Mining Groups Kumba Iron Ore Source: (Deutsche Securities (Pty) Ltd, 2010) Mining and quarrying Vulnerability <strong>of</strong> sectors to rising electricity prices • Of the mining firms, gold are the most reliant on electricity as an input to production (with electricity costs as a percentage <strong>of</strong> total costs ranging from 6 to 14%), followed by platinum miners and lastly the diversified mining groups. • A major challenge in trying to assess the impact <strong>of</strong> rising prices at firm level is that there are many instances where costs between local and <strong>of</strong>f shore activities cannot be distinguished from one another – so attempts to assess exposure to rising costs or impact on pr<strong>of</strong>itability will not be robust. • This problem is further exaggerated in the case <strong>of</strong> large global diversified mining groups who are involved in a multitude <strong>of</strong> activities and typically only report financial results at a group level. • According to the report by RMB-Morgan Stanley (2011) the contribution <strong>of</strong> utility costs to total costs has rose steadily from 2007 to 2010, probably largely as a result <strong>of</strong> the sharp and consistent increases in real electricity prices over the period ©2012 Deloitte Touche Tohmatsu Limited. All rights reserved. 2
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