Energy supply constraints were one of the factors stifling the local economy, the International Monetary Fund (IMF) said yesterday as it cut the country’s economic growth outlook for the fourth consecutive time on Tuesday, to 1.4 percent from 1.7 percent in July.
Last Friday, the National Energy Regulator of SA (Nersa) granted Eskom a 12.69 percent electricity tariff hike for next year. This is double the rate of inflation and will put a damper on the already weak economy and worsen consumer indebtedness.
Nersa said the tariff hikes were to recover costs Eskom had not budgeted for when it was granted an 8 percent hike.
Azar Jammine, the chief economist at Econometrix, said the electricity hike had been met with dismay from many quarters, with the conclusion that it was likely to inflict significant damage on the economy and cause inflation to soar.
“However, intimation of such a tariff revision was already given in July to the effect that Nersa had come round to Eskom’s argument as to why it needed a bigger tariff increase.”
Johan Muller, the programme manager for energy and the environment at Frost & Sullivan, said the effect of these tariff hikes was hard to determine at this stage, since it would depend largely on the ability of the specific sector to pass the costs on to the end consumer.
“It is, however, safe to say that the effect will be negative, since the price hikes are coming at a stage when the South African economy can least accommodate them.”
Muller said South Africa had reached the point where price rises were a given, if the status quo was maintained.
He said annual price hikes of 12 percent to 20 percent over the short to medium term seemed to be the obvious solution to Eskom’s woes, given the utility’s R225 billion shortfall on its planned expenditure for the period up to 2018.
It seemed to be the right time not just to look at the Eskom business model, but also the various sectors affected by the power utility, said Muller.
“If I sat on a strategic team of any company in South Africa, I would conduct serious scenario planning to plan for the impact of not only a changing Eskom business model, but longer-term price paths, given the entry of private sector parties as well, who would also require a move towards cost-effective tariffs.”
Jammine said the fact was that in the context of the parlous funding situation of Eskom, the utility desperately needed to raise revenue through tariff increases, although at the expense of slightly lower electricity demand and slightly reduced economic growth.
“According to our calculations, a revised tariff increase of the order of magnitude now indicated, if persisted with for another four years, will go a long way towards resolving the utility’s funding requirement without inflicting as much damage as would from either the absence of an upward revision in the tariff hike or an even bigger upward revision of the tariff increase.”
He said the decision might also stave off a ratings downgrade by Standard & Poor’s.