Colloquium on impact of administered prices on the manufacturing sector

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Colloquium on impact of administered prices on
the manufacturing sector

• 6 March 2013
• Portfolio Committee on Trade and Industry

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NERSA announcement

• Eskom requested a revenue increase of 13 a year
  plus 3 for Independent Power Producers (mainly
  in the DoEs renewable energy procurement
  programme) giving a total of 16 a year for the
  next 5 years.
• NERSAs determination allows for an average price
  increase of 8 a year for the next five years,
  including costs for IPPs.
• NERSA has not yet published its full Reasons for
  Decision.
• Eskom will have to study the consequences of
  NERSAs decision and assess its impact for Eskom.
• Eskom is busy developing the detailed rates for
  the various tariffs in line with NERSAs
  determination.
• Eskom will be in a position to provide more
  detail on tariffs and other initiatives once the
  decision has been unpacked and analysed.
• This presentation will focus on broad principles.

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Economic impact of electricity tariffs

• Many studies (Pan African Consulting, University
  of Pretoria, Economic Modelling Solutions and
  Deloitte) were conducted to determine the
  economic impact on the various industries.
• Various scenarios were modelled but not as low as
  8.
• The results of empirical studies suggest that the
  mining and manufacturing sectors are likely to
  suffer the largest declines in output if
  electricity prices rise but there is considerable
  variation within these sectors.
• The construction and finance and business
  services sectors emerge as the industries that
  are the least affected by electricity price
  increases.
• Macroeconomic modelling of the impact of price
  increases reveals that because of second-round
  impacts the services sectors are more exposed to
  electricity prices than basic vulnerability
  assessment would suggest.
• Manufacturing on aggregate appears to be fairly
  resilient to price increases, but there is
  considerable variation in the vulnerability of
  different sub-industries and firms within this
  very diverse sector.
• A simple profit vulnerability analysis suggests
  that the paper and chemical manufacturing
  industries are vulnerable to price increases
  despite their relatively low reliance on
  electricity as an input as their already slim
  profits would be quickly eroded by electricity
  price increases.
• For some industries the quality of supply is more
  important than the price of electricity, as their
  processes is dependable on a continuous and
  steady supply of electricity.

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Manufacturing sector is too diverse to make
generalisations about the vulnerability of sector
to rising electricity prices
Manufacturing

• Basic metals are one of the most heavily reliant
  on electricity, both in terms of the share of
  electricity in direct costs and measures of
  electricity intensity.
• Cement production is also quite heavily reliant
  on electricity, however the ability of cement
  producers to pass on increased costs is
  relatively strong.
• Paper and pulp-manufacturing is also a relatively
  energy intensive activity, but the share of
  electricity in total costs seems to vary
  considerably from one plant to the next. Sappi
  report that electricity costs ranged from 5 to
  9 of total costs for three of its plants.

Some of the studies are out-dated
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Comparison of electricity intensity of SA
industries to counterparts in the OECD suggests
that there is significant scope for energy
efficiency gains
Sectors Electricity intensity GWh/million Electricity intensity GWh/million Difference between OECD SA Difference between OECD SA
Sectors South Africa OECD Difference Weighted relative to output difference
Agriculture and forestry 0.316 0.016 1870.90 1242.4
Basic metals 1.095 0.111 887.30 644.2
Chemical and petrochemical 0.203 0.034 494.70 462.9
Construction 0.002 0.087 -97.90 -155.9
Food and tobacco 0.021 0.023 -11.30 -7.8
Machinery 0.005 0.028 -81.20 -416.9
Mining and quarrying 0.634 0.026 2305.60 482.1
Non-metallic minerals 0.524 0.02 2517.70 3169.7
Paper, pulp and printing 0.207 0.021 891.50 1758.6
Textile and leather 0.067 0.01 548.80 398.3
Transport equipment 0.003 0.004 -20.10 -21.7
Transport sector 0.089 0.013 563.40 505.7
Wood and wood products 0.069 0.027 153.60 162.5
Scope for efficiency gains

• This is particularly true in the non-metallic
  miners, mining and quarrying, agriculture, paper
  and basic metals sectors.
• If South Africa is to remain competitive relative
  to its OECD counterparts under more stringent
  trade regimes, including carbon and climate
  change considerations, improvements in
  efficiencies will be necessary.
• Electricity efficient technologies can be costly
  and can take a long time to implement, especially
  within capital intensive sectors like mining.
• A study by HSRC (2008) found that only short
  term energy saving options available to the
  mining sector, which did not involve reducing
  output, were in hostels or administrative
  offices.

Once-off incentives should be provided to
industry to replace inefficient plant, BUT not
through subsidised electricity tariffs.
Source (Inglesi-Lotz Blignaut, 2011)
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Eskom and municipalities (including Metros)

• Municipalities make up 45 of Eskom sales.
• Eskom tariffs are based on its unique customer
  base and the cost-to-serve these customers.
• Customers pay for electricity up to the point
  they take electricity.
• Not possible for all distributors (Eskom and
  municipalities) to have the same tariffs - due to
  different circumstances, type of customers and
  cost bases.
• Similar electricity users (Size and voltage
  level), within and beyond Eskoms borders, pays
  different prices due to the different cost
  structures between Eskom and municipalities.
• The regulatory process for municipalities is less
  stringent than that for Eskom.

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WHAT IMPACTS THE COST OF ELECTRICITY TO CUSTOMERS?

• The voltage of the supply
• The lower the voltage the greater the cost
• More assets have to be built and maintained
• Greater technical losses (energy has to travel
  further)
• The location of the supply
• Rural networks are more expensive than urban
  networks as there are less customers per
  transformers and greater distances between
  customers.
• Eskom has the majority of the rural customers in
  SA
• The distance from the power stations also impacts
  costs i.e. it costs more to supply the Cape than
  Joburg as electricity has to travel greater
  distances.
• How and when energy is used
• The more energy used in peak periods, the more
  expensive is the generation cost as more
  expensive generators and fuel has to be used
• The size of the supply
• Larger supplies get more individualised service
  and therefore have a higher retail cost

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Eskoms tariffs cost reflectivity

• Eskom designs its tariffs based on the principle
  of cost reflectivity.
• Tariffs are also to send out a signal to use
  electricity efficiently and to promote usage in
  different time periods.
• Support the intent of IBT to provide relief to
  the poor against increasing electricity tariffs.
• Not designed around economic customer classes,
  but around tariffs that are based on the cost to
  supply electricity to the point where the
  electricity is used.
• Eskom does not deviate from the NERSA approved
  standard tariffs except for one customer with a
  Negotiated Pricing Agreement.
• Any tariff that is not cost reflective must be
  recovered from another tariff
  cross-subsidisation.
• Types of cross-subsidies
• Inter-tariff subsidies
• Rural networks, Electrification (historical
  operational), Geographical
• Intra-tariff subsidies
• Geographical, Voltage, Load factor
• External Subsidies
• Energy Taxes, Free Basic Electricity (FBE)

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Eskoms support to its customers

• Eskom supports industry by ensuring localisation
  where possible. Localisation includes local to
  site for some services like catering.
• Through Eskoms preferential procurement process
  local suppliers were developed, including those
  suppliers assisting the IDM process.
• Eskom has regular discussions with industry
  leaders, like the Manufacturing Circle, to see
  how Eskom can support industries.
• Regular meetings are held with suppliers, like
  coal suppliers, to see how suppliers can assist
  Eskom in containing the cost.
• Eskom supports suppliers not only within its own
  borders but also beyond its borders.
• Eskom supports municipalities by assisting with
  tariff structuring and other initiatives.
• Industries with flexibility in manufacturing
  plant assist Eskom with demand response for a
  financial benefit.

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Eskom support (continue)

• Eskom cannot support industry through subsidised
  tariffs but can assist with other initiatives
  like IDM.
• Subsidisation of one industry will be at the
  expense of other industries.
• Therefore, a National cross-subsidy framework is
  required in line with Governments economic
  policy. The policy must include the funding of
  subsidies and criteria for subsidisation.
• Eskom propose to participate with industry and
  government to
• Agree on measures to protect specific sectors of
  the economy and specific sectors of society
  informed by economic analyses and part of the
  government's industrial policy
• The focus needs to be on sectors of the economy
  where South Africa has a strategic advantage and
  market power
• Development of a National cross-subsidy framework.

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Conclusion

• Research showed all countries have a goal to move
  towards cost-reflective tariffs.
• Most countries are replacing aging infrastructure
  and/or adding new infrastructure to cope with
  growing demand and a shift in the energy mix.
• Nearly all countries have policies to protect
  some sector of society
• The common thread in all of this is that the
  State is significantly involved in determining
  the sectors and type of support that is needed.
  In the successful cases, it is also involved in
  co-ordinating the support and ensuring there is
  fiscal support. 
• Due to the various spheres of Government involved
  in electricity pricing, it is critical that
  National Government plays a significant role in
  determining which sectors of society and the
  economy require support, ensuring there is a
  level playing field between customers of Eskom
  and municipalities and ensuring there is fiscal
  support either to the suppliers of electricity
  and/or the consumers of electricity.

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Recommendations

• The following key recommendations are made
• An inter-governmental task team needs to set up
  to agree on measures to protect specific sectors
  of the economy and specific sectors of society.
  The extent of the support should be informed by
  the various economic analyses that has been done
  and inline with the NDP industrial policy.
• The focus needs to be on sectors of the economy
  where South Africa has a strategic advantage and
  market power. For example in the platinum,
  ferrochrome and ferromanganese sectors. This is
  to ensure that there is coherence between support
  for the ferroalloys sector and pricing in the
  platinum by-products sector.
• An inter-governmental task team needs to agree on
  measures to align municipal tariffs and Eskom
  tariffs to level the playing field in the
  manufacturing sector and ensure that there is
  sufficient fiscal support for the municipalities
  to maintain infrastructure and support social
  services.
• An inter-governmental task team must assist with
  the development of a National cross-subsidy
  framework.

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Thank you