Tariff developments for electricityintensive industry in South Africa

Abstract

It is common cause that South Africa's mining and industrial sectors are struggling to compete in global markets. Electricity pricing is frequently cited as one of the primary causes; typically current price levels, uncertainty around future prices, or both. From a low base by international standards, South Africa has experienced above-inflation electricity price increases over the past decade. Eskom's sales data confirms a declining trend in electricity sales to its large industrial consumers, particularly since 2011; attributable to efficiency gains, an increase in cogeneration, as well as cutbacks and closures across a range of market segments. High and/or rising electricity prices inevitably pose the greatest threat to the most electricity-intensive users, including the ferroalloy producers. Logically, other competitiveness factors, such as manpower and logistics costs, rise in relative importance as electricity intensity decreases. Reduced consumption by large industrial consumers reduces the system load factor, exerting upward pressure on the unit cost of electricity at the generation level. Furthermore, as large users contribute significantly to the subsidization of other users' prices, falling consumption risks everincreasing cross-subsidy contributions by the remaining contributors, further increasing prices. In response, Eskom proposes to introduce a suite of more cost-reflective tariffs aimed at stabilizing, and even growing, consumption by electricityintensive customers with high load factors, who stand to gain the most from more cost-reflective electricity pricing, while contributing meaningfully to keeping the unit cost of electricity down.