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

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Assessing the impact <strong>of</strong> electricity price increases on sector employment, output and pr<strong>of</strong>itability 30 Introduction • In the previous section we assessed the relative vulnerability <strong>of</strong> different sectors, sub-industries and firms in the South African economy to rising electricity prices. But it is also important to consider the impact rising prices would have pr<strong>of</strong>itability, output and employment in these sectors. • <strong>The</strong>re are a few studies that attempt to assess the impact <strong>of</strong> electricity price increases on the different sectors and firms within the South African economy. <strong>The</strong>se studies typically focus on the impacts on employment, output, and pr<strong>of</strong>itability for the various sectors or sub-sectors over various periods <strong>of</strong> time and under different assumed price increases. • We discussed the results <strong>of</strong> two separate empirical analyses <strong>of</strong> the impact <strong>of</strong> rising electricity prices on the South African economy: o <strong>Electricity</strong> <strong>Price</strong> <strong>Increases</strong>, Eskom’s Capital Expenditure Programme and <strong>Impact</strong> on the SA Economy, conducted by Pan-African Investment & Research Services in May 2011. <strong>The</strong> net impact <strong>of</strong> rising electricity prices and Eskom’s six-year capital investment programme were evaluated in the context <strong>of</strong> both a dynamic time-series macro-econometric (TSME) framework and a static Computable General Equilibrium (CGE) framework. o Meeting South Africa's Future <strong>Electricity</strong> Needs - An <strong>Economic</strong> Growth and Development conducted by Conningarth economists in 2011 As part <strong>of</strong> the study the vulnerability <strong>of</strong> sector pr<strong>of</strong>its to real electricity price increases were modelled and compared. ©2012 Deloitte Touche Tohmatsu Limited. All rights reserved.
As part <strong>of</strong> broader study Conningarth economists explored the ‘pr<strong>of</strong>it vulnerability’ <strong>of</strong> different sectors <strong>of</strong> the economy to increases in real electricity prices 31 Pr<strong>of</strong>it Vulnerability <strong>Impact</strong> <strong>of</strong> rising electricity prices on different sectors • While the methods and data used in calculating the relative ‘pr<strong>of</strong>it vulnerability’ were not clearly articulated in the report, it appears that the analysis was based on data from the 2006 national social accounting matrix for South Africa and that the gross operating surplus <strong>of</strong> each industry may have been used as a proxy for its pr<strong>of</strong>it • ‘pr<strong>of</strong>it vulnerability’ was defined as the real electricity price an industry could absorb before becoming unpr<strong>of</strong>itable • Some <strong>of</strong> the industries that exhibit the greatest ‘pr<strong>of</strong>it vulnerability’ to electricity price increases are the Cereal & Crop, Gold, Iron Ore, Magnetite, Silver, Asbestos, other non-metallic minerals, Platinum, Stone quarrying, Zinc, Paper & Paper Products, Publishing & Printing, Wood and Wood Products, Manufacturing <strong>of</strong> Transport Equipment, Rubber, Basic Metals, Meat, Fish and Vegetables industries. • <strong>The</strong> analysis <strong>of</strong> pr<strong>of</strong>it vulnerability by Conningarth (2011) implies that in 2006, these industries would have been unable to absorb more than a 50% increase in real electricity tariffs prices before they became unpr<strong>of</strong>itable (some only 10%) • Had this measure <strong>of</strong> ‘pr<strong>of</strong>it vulnerability’ been accurate most <strong>of</strong> these industries would have already closed down since real electricity prices increased by close to 80% between 2008 and 2011 • While it is clear that industries are able to absorb a larger cumulative increases in real electricity prices than these rough estimates <strong>of</strong> pr<strong>of</strong>it vulnerability suggest, they probably still provide us a with a reasonably good indication <strong>of</strong> which sub-sectors <strong>of</strong> the economy are more vulnerable to electricity price increases than others ©2012 Deloitte Touche Tohmatsu Limited. All rights reserved. 3
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