Eskom powers inflation shock

9 October 2009

Power utility Eskom's proposed electricity tariff hikes would raise inflation, both directly and indirectly, by between 3.45 percentage points and 12.7 percentage points in the first year, putting pressure on the Reserve Bank to raise interest rates, an economist said yesterday.

The Reserve Bank's annual inflation targeting band ranges from 3 percent to 6 percent. The consumer inflation rate fell to 6.4 percent in August.

The inflationary impact of the hike is based on electricity prices increasing by between 40 percent and 146 percent in the first year, to help fund the power utility's R385 billion capital expansion programme.

The proposed electricity hikes are outlined in Eskom's tariff application submitted to the National Energy Regulator of SA last month, and leaked to the media this week.

It is envisaged that the first increase will kick in during financial 2010/11.

The application, of which Business Report has a copy, said Eskom hoped to secure a smoothed price rise of 22c per kilowatt-hour (kWh) a year over three years to raise prices substantially from the current average of 33c a kWh.

The application said this was an average nominal increase of 42.8 percent, although it is unclear how this percentage has been arrived at.

An increase of 22c a kWh from 33c a kWh amounts to a nominal hike of 66 percent in the first year. Two sources told Business Report that the lowest proposed increase actually amounted to about 40 percent in the first year.

The application noted that the alternative to smoothing the price hikes was to apply the provisions of the electricity pricing policy "immediately and to the full extent necessary". This would raise unit costs 146 percent in real terms (taking into account the effect of inflation).

T-Sec economist Mike Schussler said that a 40 percent increase in electricity tariffs in the first year would directly increase the consumer price index (CPI) by 0.75 percentage points. Including indirect effects, it would raise the CPI by 3.45 percentage points.

A 146 percent increase in power tariffs would directly increase the CPI by 2.7 percentage points and, together with indirect effects, by 12.7 percentage points, said Schussler.

He noted: "Somewhere between 3.5 percentage points and 12.7 percentage points is where we can expect the total inflationary impact. These effects are going to hammer the consumer in quite a significant way." He added that the inflationary impact would put pressure on the Reserve Bank to raise interest rates.


In its application, Eskom said it was "acutely aware of the impact that electricity price increases could have on the economy, particularly in regard to short-term effects on CPI, and related matters of interest rates, investment, as well as consumption".

To avoid a shock increase of 146 percent in the first year, it said "additional interventions" would be required to address its funding shortfall, such as issuing further guarantees by the government, without which the scheduling of certain capital projects would be at risk.

Eskom added that the government had endorsed an approach based on smoothing the price increase.

It said: "In particular, the government has confirmed that it will accelerate the guarantees to Eskom to facilitate higher borrowings in order to address the funding shortfall."

Energy Minister Dipuo Peters would not confirm this. She said the National Treasury was best placed to answer. The government has extended a R60bn subordinated loan to the power utility, while providing guarantees of R176bn.

Trade union Solidarity claimed yesterday that Eskom's proposal would raise tariffs by between 312 percent and 666 percent over five years.

"Eskom and government are acting irresponsibly in shifting the responsibility for their poor planning for the expansion of capacity onto the consumer," Solidarity said. It would "actively oppose" hikes.

Industrial parties should help Eskom

Industrial consumers benefiting from long-term power supply contracts with Eskom had to "come to the party" and accept responsibility for helping to fund the utility's capital expansion, Energy Minister Dipuo Peters told Business Report yesterday.

"Industry is still locked in the old tariff structure," she said. "It must allow itself to renegotiate contracts with Eskom," she said, adding that households could not be expected to bear the burden of price rises.

Eskom said in its latest tariff increase proposal that average industrial tariffs for 2008/09 were 22c a kilowatt-hour (kWh), while average residential tariffs were 54c a kWh.

She said households that had the means should feel the impact of price rises, but the poor needed to be cushioned.

Eskom suggested in its application that the free basic electricity allocation for poor households be raised from 50kWh to 70kWh a month, and that the incremental costs be funded through a cross-subsidy. Peters said research indicated that poor households' electricity use ranged between 70kWh and 80kWh.

Original Article Link:

http://www.busrep.co.za/index.php?fArticleId=5195953