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

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More gradual tariff adjustments are <strong>of</strong>ten proposed as an obvious way to minimise the impact <strong>of</strong> rising electricity prices on the economy but this policy prolongs energy-inefficient investment and consumption and as a result could increase the risk <strong>of</strong> loadshedding • It is <strong>of</strong>ten argued that increasing tariffs more gradually is one <strong>of</strong> the most obvious ways to minimise the short-run impact <strong>of</strong> rising prices on output and employment • <strong>The</strong> basic reasoning is that gradual price increases over a given time path, provide firms with certainty, gives them time to adapt and therefore minimise adjustment costs. • However, the policy <strong>of</strong> gradual price adjustments also suffers from some drawbacks. Firstly, if costreflective tariffs are to be attained, domestic electricity prices must still rise faster than world electricity prices over the ‘transition period’. Secondly, introducing tariff increases more gradually prolongs the period over which energy-inefficient investment takes place and also moderates the pace <strong>of</strong> improvements in energy-efficiency. • Given that South Africa is currently facing power capacity constraints, introducing tariff increases more gradually could prove very costly if limits the extent to which higher prices encourage efficiency-improvements and therefore exacerbates the shortage and results greater load-shedding. Providing targeted support to vulnerable industries Accelerated EEDSM 44 Subsidies Policy Options Promoting competition in the electricity supply industry Gradual price adjustments Transition credits Gradual <strong>Price</strong> Adjustment Exploring the policy options available ©2012 Deloitte Touche Tohmatsu Limited. All rights reserved. 4
A sudden adjustment to ‘cost-reflective’ prices combined with transition credits proportional to current consumption is a policy alternative to gradual price adjustments. <strong>The</strong> advantage is that it provides an immediate incentive for consumers to become more energy-efficient but could be costly to administer • An alternative to gradual price adjustments would be to move electricity prices suddenly to costreflective levels and then recycle revenue to consumers in the form <strong>of</strong> a temporary subsidy or ‘transition credit’ which would be proportional to the consumer’s initial or current energy consumption. • <strong>The</strong> advantage <strong>of</strong> this approach is that it provides an immediate incentive for consumers to investment in more energy-efficient technologies because the credit is only provided on historical consumption and any additional consumption is immediately subject to cost-reflective prices. • <strong>The</strong> drawback <strong>of</strong> this approach (relative to more gradual price increases) is the cost <strong>of</strong> administering such a program but if it were feasible to administer efficiently, this policy option would have the same benefits as a gradual price adjustment without incurring the costs. Providing targeted support to vulnerable industries Accelerated EEDSM 45 Subsidies Policy Options Promoting competition in the electricity supply industry Gradual price adjustments Transition credits Transition Credits Exploring the policy options available ©2012 Deloitte Touche Tohmatsu Limited. All rights reserved. 4
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