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

<strong>The</strong> cost <strong>of</strong> failing to achieve cost-reflective tariffs can be enormous
and also has distributional implications…
If consumers don’t bear the full cost <strong>of</strong> electricity supply, the taxpayer will
• Too <strong>of</strong>ten the criticism levied against Eskom or NERSA with respect to electricity prices hikes simply
implies that tariff increases can be avoided without considering how the cost <strong>of</strong> new power capacity
will be paid for or who will ultimately bear the burden.
• We found that while debt and equity are used to prefund major capital investment in electricity supply,
ultimately tariffs need to cover the full cost <strong>of</strong> electricity supply, including the provision <strong>of</strong> an
acceptable return on the equity or debt provided by the utility’s shareholders and lenders. So in other
words, if electricity consumers don’t bear the full cost <strong>of</strong> electricity supply, the taxpayer eventually will.
In addition many studies <strong>of</strong> the impact <strong>of</strong> rising electricity prices fail to acknowledge that load
shedding and ‘unserved energy’ (foregone growth) comes at far greater cost to the economy than
rising prices.
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• Most studies <strong>of</strong> the impact <strong>of</strong> electricity price increases also focus solely on the short-run impact <strong>of</strong>
rising prices on employment and output but fail to note that in the absence <strong>of</strong> cost-reflective prices,
costly mismatches between supply and demand are likely to continue to occur. It has been proven
that power outages or ‘unserved energy’ come at far greater cost to the economy than rising electricity
prices.
• A study by Deloitte (2008) found that load-shedding had substantial economic impacts across most
sectors <strong>of</strong> the economy and continued at 10% <strong>of</strong> total power capacity over a year could shave as
much as 0.7 percentage points <strong>of</strong>f GDP growth.
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