Electricity pricing and supply with special attention to the impact on employment and income distribution: final report

Abstract

Electricity has historically been cheap in South Africa and, until recent times, plentiful. Industries that are energy-intensive such as smelters have been encouraged, and there has been little incentive for energy efficiency. Rolling blackouts in 2008 brought the true state of electricity supply to public attention, with serious implications for the economy arising just at the onset of the global economic crisis. Most seriously affected were firms supplied directly by Eskom, especially the smelters and the mines.

In 2008, the Human Sciences Research Council (HSRC) prepared independent recommendations on an appropriate price path for electricity charged by Eskom, keeping in mind the needs of both the economy and Eskom itself. The context was one of electricity shortages, mostly caused by underinvestment and poor management of coal stocks. It became clearer to the public and policy makers that some critical decisions were needed to overcome these challenges. This included decisions required by the National Energy Regulator of South Africa (NERSA) on the electricity price. The Presidency and the National Electricity Response Team (NERT) required support to form a view on an appropriate approach to raising the price to cover costs. This was regarded as an important contribution by an institute that does not have a vested interest in the outcome.

Since then circumstances have changed, especially with the global economic slowdown. In addition, new information is continuously coming to light in a context that has, until recently, been characterised by very limited knowledge-sharing. Further, it appears that South Africa's 'electricity crisis' will not go away soon. In 2008, when the electricity shortages came to light, there were deep concerns about the effect on potential economic growth. There was a respite as the pressure on electricity supply waned due to the global economic recession in 2009 and 2010. From a peak of 21 780GWh in July 2007, electricity consumption fell dramatically to a low point of 18 668GWh, but recovered to 21 316GWh by July 2010 (Stats SA 2009-2010). There have been questions about the approach to rationing electricity and its price. The HSRC study in 2008 recommended that electricity not be rationed, but instead that the price should increase over time in a way that sets expectations and therefore encourages firms and households to improve efficiency. The policy approach has included the announcement and implementation of a known price path over three-year periods (although not always implemented as announced by municipalities), 'carrots' (incentives for improved efficiency), and 'sticks' (disincentives such as the Power Conservation Programme). Industry rationing is part of the policy mix, requiring a trade-off between existing operations, expansions and new investments. It has taken some time to implement these policy elements, especially those related to sticks and carrots, and so this study in part aimed to explore the extent to which firms implemented efficiency improvements since the electricity crisis, and what their plans are going forward. We wanted to find out which policy elements have most impact on behaviour.