‘Economic growth in S.Africa is really, really a miracle right now by any standard' - CNBC Africa

‘Economic growth in S.Africa is really, really a miracle right now by any standard'

Southern Africa

by Rofhiwa Madzena 0

Consumers will feel the pinch of Eskom's proposed tariff hike & with the impact of poor management will the power utility sink or swim?

WHAT’S THE ISSUE?

The chilling reality currently facing South Africa is that its power supply ran out in 2007 and since then power utility, Eskom, has struggled to keep households and businesses lit.

According to Andrew Kenny, engineer and energy commentator, grid electricity is what the country is desperately short of. The power crisis could have been averted had we built “power stations in the 90s when it was blindingly obvious that we should build them”.

Since 2007, the power utility has not been able to meet growing electricity demands and according to Kenny, South Africans should expect power failures to continue for at least another five years or until the big new coal stations; Kusile and Medupi are fully powered. Grid electricity is what we are desperately short of, he reiterates.

CRUNCHING THE NUMBERS 

Inflation

But it is not just keeping the lights on that Eskom has to worry about it is also its financial situation. The power utility recently announced that it wants a 25 per cent tariff hike on electricity. Mike Schüssler, who is with Economists.co.za, says that while the proposed tariff hike will help to service some of the parastatal’s debt; it is unlikely that it will bring its rating out of junk status. On March 19, 2015 Standard and Poor’s downgraded Eskom’s ratings to junk; adding that the outlook is negative.

He continued to explain that the effects on the consumer and local manufacturers would be dire.

Schüssler says the proposed tariff hike will directly add 1 per cent to the consumer price index (CPI) and “consumers will feel the pinch of that”.

“This will harm the consumer pocket overall in the sense that it will be very difficult for consumers not to cut back from somewhere else.”

Above the effects consumers could be faced, the proposed hike will affect manufacturing firms, which use a lot of electricity. The increases will make them a lot more uncompetitive, manufacturing costs will rise significantly at a time when commodity prices are under pressure, Schüssler reveals.  

Car Manufacturer

He added that there will be a process where different actors are forced to rethink their investment in the country as well as manufacturing companies evaluating how much production they can deliver.

So far of the 25 per cent tariff hike, NERSA, which regulates electricity, has already approved 12.7 per cent, 2.5 per cent of that tariff is tax which is controlled by the minister of finance, Nhlanhla Nene. “He puts it in a central kitty some may go back to help Eskom but he makes that decision,” says Schüssler.

Interestingly, now Eskom says it requires an extra 10 per cent because of running diesel generators.

 “It hasn’t, however, told us about the savings it may have made on coal or anything else … they are in negotiations with NERSA and they are being allowed, seemingly, to selectively introduce reasons for tariff increase; not looking at anything else except diesel generators … this is a concern for businesses.” He continues to explain that there has been a shift in electricity usage in manufacturing.  In previous years it constituted 4 per cent of operations and that has grown to 8 per cent.

“We don’t know what NERSA will do but they have been pressurised because the power utility’s ratings have dropped to junk status,” he argues.

AN ALTERNATIVE SOURCE OF ENERGY & PRIVATISATION

Power Tutuka Power Station , Mpumalanga , South Africa

What are Eskom’s options? Kenny explained that alternative nuclear energy is one of the most viable options for the country.  Nuclear energy is clean safe and economically reliable, he said. Gas is another option which could either be attained through fracking in the Karoo or exporting from Mozambique.

He further explained that the power utility has invested in gas turbines which are the quickest short-term solution to the power shortage. They run on diesel or paraffin. “Eskom built 14 gas turbines in Mossel Bay and Atlantis and they are costing a fortune to keep running.”

Kenny highlighted that there is nothing in the short-term that can be done to resolve the power crisis they all take time as long-term solutions take time.

Chris Bekker, an economic analyst at African Alliance says privatisation is not a magic wand; it’s not going to resolve the power solution.

“Distribution and transmission network is a state monopoly regulatory environment that has been created to make it extremely difficult even for an independent power producer to supply electricity to a retail consumer or a corporate.”

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