This week has brought quite a stark shock to the general public of our Republic. It seems that our bragging rights at having one of the lowest electricity rates in the world is fast going to turn into a distant memory as these electricity prices triple in a matter of three years. In general, I have found that most opinion on this matter has been entirely consumer focused and thus harshly critical of Eskom’s plea for help and NERSA’s decision to allow for the price hikes. One has to, however, consider that there is a company involved. A company that cannot be profitable under current pricing structures, let alone be able to expand their operations for a fast growing demand for power within South Africa.

There are a few points to consider and as we think about the reality that we are faced with, it is probably best to not respond with hurt at the fact that this summer the air-con unit might have to stay off a bit more than we would like, but rather with a broader mindset.

POINT 1: INFLATIONARY PRESSURE

Looking at this from a macro-economic perspective only, the picture is indeed troublesome. Less than 18 months ago it seemed the ONLY worry of the SARB would be bringing inflation under control. At that time inflation was rampant and it took a global economic crisis (that term is used so often it should be a proper noun, even an acronym: GEC) to bring inflation to a level that is STILL not in the target range of the Reserve Bank. With power prices being drastically hiked the costs to produce, to refrigerate, to generate, to operate, to propagate and to promulgate will go through the roof. (Costs to advertise already adjusted) These costs will have to get handed on to the consumer who at this stage does not have the disposable income to handle this extra burden. A 45% increase in power prices will push the CPIX up by 0.8%. Along with this, economic growth will be stunted by up to 1.3% in the coming year. We will be in the position where BOTH the inflation target and positive growth will be under question. Good luck to Gill Marcus.

POINT 2: Helping the poor

In South Africa it is common knowledge that we sit with a big (and growing) marginalised poor. Marginalised from good healthcare, good schooling and good service delivery. Rising prices for electricity will hit this demographic the hardest, although one has to assume that the poorest are using gas / paraffin and not grid power. In response to this, Eskom is supplying a whopping 20kw extra electricity to low income household free of charge. Of course it is not free of charge and this means that it is actually being subsidised elsewhere. I guess it is kind of like the tax tables. Or Robin Hood. Or just basic wealth redistribution. It’s necessary and only the rich (minority) hated Robin Hood anyway.  It does make one wonder how ‘low-income’ households are chosen and the costs to administrate and monitor such an initiative, but we have to respect Eskom for trying to soften the blow to these households.

POINT 3: Most expensive in the WORLD??

“Electricity could become hugely expensive if Eskom’s application to increase the tariff by 45% a year over the next three years is approved. Should the plan get the go-ahead, in 2010 South Africans will be paying more for electricity than consumers in countries like the USA (83c/kWh) and South Korea (49.5c/kWh) are paying.

Locally, residential consumers will bear the brunt.

“These consumers, who are currently paying about 66c per kWh, could be paying 95c per kWh by 2010,” said economist Mike Schüssler.

These tariffs are based on Eskom’s residential homelight rate, which is expected to rise to R2.01/kWh by 2012.”

(click here to read full article)

We should be paying little for electricity because of the availability of cheap coal- this should be our competitive advantage. It should bring our manufacturing costs down and make exports cheaper to produce and increase the profit margins that manufacturing companies are making. And this increased revenue should increase the tax revenue of the country. BUT, electricity prices will unfortunately become like labour – paying a lot for a little. Is it possible to be competitive on a global scale under these circumstances?

POINT 4: Impact on the labour market

Every time a labour sector, in collaboration with their union, manages to get a price increase for the masses, employers look to cut jobs and retrench staff. It’s the unthought aspect of winning a wage-war. When the costs to produce increase dis-proportionately to the ability to increase revenue, job losses are an obvious result. An increase of 45% lies well above the inflation curve.

“If electricity price increases are out of proportion, it could have extremely negative consequences for workers and producers.” – Jaco Kleynhans

(full article)

All in all, I am on the side of the consumers because I am one. There is too much evidence of negative economic impact to make me feel comfortable with such a decision. Economic health depends on a holistic approach and it seems to me that government departments seem to be putting out fires as they erupt and hoping not to quench the economy with the run-off.