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

<strong>The</strong> sharp increases in electricity tariffs since 2008 have been met with
significant public resistance. Some critics contend that “consumers
have borne the brunt <strong>of</strong> a series <strong>of</strong> unjustifiable electricity price
increases”
Key Points
• An association representing large industrial electricity consumers, the Energy Intensive Users Group (EIUG) have argued that rising
electricity prices pose a serious threat to growth and that many industries are at “the tipping point” (EIUG, 2011).
• In a 2011 report, the Energy Intensive Users Group maintain “ that South Africa must have a transparent affordable [electricity] price”
and argue that the affordable price path is one that balances viability, economic growth, global competitiveness and social
development (where viability is defined as a price path that reflects a fair and efficient cost <strong>of</strong> supply) (EIUG, 2011).
• While the EIUG appear to support the notion that the electricity prices need to rise to a ‘cost-reflective’ level in principle, they argue
that lower and more ‘affordable tariffs’ can be achieved by manipulating five aspects <strong>of</strong> the Eskom’s ‘allowed revenue’ formula–
namely the rate <strong>of</strong> depreciation, the rate <strong>of</strong> return on assets (WACC), the cost <strong>of</strong> new capacity, assumptions regarding independent
power producers and taxes and levies.
• Following a similar line <strong>of</strong> argument, Xstrata Alloys (January 2011) and Frost and Sullivan (2011) call for a ‘justifiable’ electricity price
path for South Africa which <strong>of</strong>fers viable and affordable tariffs and that balances and supports future supply requirements with
developmental objectives. <strong>The</strong>y argue that four options to mitigate high electricity prices should be considered (see below)
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Industry Options to
Mitigate High <strong>Price</strong>s
Lower Eskom’s allowed return on assets
Don’t revalue the asset base (retain historic cost accounting)
Exploring the
policy options
available
Lower the target for renewable energy generation capacity in the
current integrated resource plan
Allow independent power producers (IPPs) to sell to a system
operator and to trade bilaterally
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