Electricity price hike in South Africa

On one hand, South Africans are unhappy with the electricity price hike announced at the end of February 2010.  On the other, they are relieved that the increase is smaller than demanded by the national electricity supplier, the state-owned company Eskom.

Eskom generates about 95 percent of the electricity used in South Africa. The company has been battling with electricity shortage since January 2008, but its problems date a decade earlier and are due to lack of investment in new capacities and in updating the existing power stations. Last year, Eskom increased its tariffs by 31 percent and asked for 35 to 45 percent annual increases for three years in order to scrape together about R400 billion needed to build new power plants.

However, in February 2010 the National Energy Regulator of South Africa (Nersa) approved lower increases:

  • 24.8 percent for 2010/11 financial year, which will bring the average Eskom electricity price to 41.31c per kWh;
  • 25.8 percent for 2011/12, bringing the average Eskom electricity price 51.68 c per kWh; and
  • 25.9 percent in 2012/13, making the average Eskom electricity price 65.06c per kWh.

electrical poleThe local financial markets are happy because the approved increases are expected to add only 0,3 percent to 0.4 percent to the inflation figure. Labour and businesses are more concerned with the negative effects. Some economists say that the electricity price increase could cost 250,000 to 500,000 South Africans their jobs, a big blow for a country with official unemployment rate of almost 25 percent. Industries expected to be hard hit include mining (gold and platinum), petrochemicals, metal smelters and other industries where electricity is a significant part of the operational expenditure. Trade union federation Cosatu threatened to mobilise its  two million members for a strike to protest against the effect of electricity price hike on the poor.

Focusing on solar energy

South Africa currently produces over 90 percent of its electric power by burning coal, but as a result of the electricity price hike more households will be tapping into solar energy.

Eskom will use part of the money it gets from the higher rates towards increasing its solar water geyser subsidies, from about R2,500 to about R7,000. With the new subsidy in place, almost half of the cost of a solar geyser will be covered by Eskom. Eskom introduced solar geyser subsidy in 2008, planning to help convert one million geysers over five years. During the first two years of the programme only 2,000 households had taken up the offer. However, one month after the increase of the subsidy, 762 applications were received.

About 40 percent of an average South African household's electricity bill goes to pay for heating the geyser.  With new, bigger subsidies, a household will recover its initial investment within five years, and then go on to use free hot water.

The cost of subsidizing solar geysers is lower than the cost of building a new power station.

Focusing on other providers

Eskom is no longer in a position to provide total energy for the country. The state-owned company, which currently provides 95 percent of South Africa’s electrical energy, will rely more on independent power producers. Eskom will be buying power from companies such as Sasol and Sappi, as well as from suppliers outside of the country. The company will be looking at producers that provide power from different sources - coal, renewable materials, etc.

It is expected that Eskom will sign a cogeneration agreement with other power producers in March 2010, adding about one thousand megawatts to the national power grid. According to the data from January 2008, South Africa's peak demand has reached 36,700MW, while Eskom is able to supply 38,500MW. The provider has to have reserve energy supply. International best practice dictates that power companies must have the capacity to generate 15 percent over and above what is actually needed.

Focusing on ownership web

The latest electricity price increase has provoked some questions in the South African media. There are concerns that the ANC’s front company stands to benefit financially, which would be a conflict of interest.

ANC in a ruling party in South Africa, and has been so since the first general suffrage elections in 1994. ANC owns the Chancellor House group of companies, which in its turn owns 25 percent of Hitachi Africa – and Hitachi Africa has a R38 billion contract to install boilers in the two power stations that are being built with the proceeds from the electricity price hike, Medupi and Kusile.

Two years ago, there were plans to withdraw Chancellor House from the project, but that has not been done.

Image source: Eskom photo gallery

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