ESKOM’S APPLICATION FOR THE THIRD MULTI - YEAR PRICE DETERMINATION
SUBMISSION TO NERSA BY BUSINESS UNITY SOUTH AFRICA (BUSA)
November 2012
1. BACKGROUND
BUSA is a confederation of business organisations including chambers of commerce and
industry, professional associations, corporate associations and unisectoral organisations. It
represents South African business on macro-economic and high-level issues that affect it at
the national and international levels. BUSA’s function is to ensure that business plays a
constructive role in the country’s economic growth, development and transformation and to
create an environment in which businesses of all sizes and in all sectors can thrive, expand
and be competitive.
As a principal representative of business in South Africa, BUSA represents the views of its
members in a number of national structures and bodies, both statutory and non-statutory.
BUSA also represents businesses' interests in the National Economic Development and
Labour Council (NEDLAC).
2. INTRODUCTION
BUSA welcomes the National Energy Regulator of South Africa’s (NERSA) invitation to
submit input into its consideration of Eskom’s application for the third Multi-Year Price
Determination (MYPD3). However BUSA is concerned that the methodology for the
preparation of the MYPD 3 has still not been published. Comprehensive comments were
submitted on the methodology, which at the time of writing may or may not have been
incorporated into the revised methodology, which it is understood will be published on 3
December 2012.
BUSA wishes to express its view that failure to adhere to the regulatory system is
completely unacceptable. There seems to be no point in asking for public comment on the
methodology if Eskom is allowed to submit an application before the revised methodology is
published.
1
3. APPROACH TAKEN TO SUBMISSION
BUSA commissioned Genesis Analytics to undertaken an assessment of the application.
(Annexure 1)
In addition the examples of the impact on various sectors were obtained from members,
which are also attached. ( Annexures 2-5)
The impact of the Eskom application cannot be considered in isolation of the tariffs that are
charged at municipal level. Some examples of these impacts are also presented.
As a starting point, BUSA understands the need for electricity prices to become
progressively more cost-reflective. It is one of the core issues discussed in our substantive
submission [attached, as Annexure 1]. BUSA is also acutely aware of the stunting impacts of
electricity shortages on GDP growth and employment. At the same time, BUSA believes that
the increases that have been requested in the present application exceed what is costreflective, and projects that the overall economic impact of the requested increases will be
profound.
Below, BUSA makes some general comments in relation to relating to the application.
These are supported by the detailed submission in Annexure 1.
4. GENERAL COMMENTS
In the last few years, South Africa has witnessed unprecedented increases – in both
quantum and pace – of electricity prices. In the submission to NERSA during the
consideration of the MYPD2 application, BUSA cautioned on the deleterious impact of
significant and rapid price increases on businesses – particularly those within the energy
intensive industries and small businesses.
In the time since then, BUSA has been assessing the impact of present electricity prices
increases on the costs of doing business. South African businesses, including those in the
priority job-creating sectors, have become increasingly exposed to increased unit costs of
production. Our consultations with members and industry stakeholders have revealed
considerable knock-on effects on the viability of businesses, and the ability of industries to
create jobs. When taken in the context of global demand conditions, and the profile and
competitiveness of similarly placed trading partners, further inordinate increases in the cost
of electricity will have a real impact on the competitiveness and output of many South
African firms.
With the increases proposed in the MYPD3 application, South Africa will, by 2017/18, have
seen a four-fold increase in electricity prices over a period of only nine years. With
municipal and further increases in the electricity value-chain compounding that, the
magnitude of the shock to the economy will be significant.
2
BUSA makes the following specific observations relating to the application:
 Information Contained in the Application
In general, BUSA finds that the application does not contain sufficient information to allow a
fully informed evaluation of Eskom’s costs. BUSA is very concerned by this, as it hampers
stakeholders’ assessment of the application. BUSA requests that the Regulator, in its
consideration of the application, scrutinise the specific areas of information gaps that are
highlighted in Annexure 1.
 MYPD Methodology
BUSA has recorded its concern over the sequencing of the process relating to the revised
methodology, and the consideration of this application. BUSA believes that the new
application should not have been submitted prior to the approval of the new methodology.
Starting when the consultation paper was first published in 2011, BUSA and other
stakeholders have provided detailed input into the process for the revision of the
methodology. But consideration of this application has taken place as a parallel process,
since information on the revised methodology will only be available to the public after the
deadline for stakeholder consideration of the application has passed.
 Alternative Tariff Trajectory
The longer phase-in period will assist in averting the gravity of short-terms shocks that
would have been occasioned by a three-year phase-in period.
However, as already noted, BUSA notes evidence that the requested tariff could be lower –
while still allowing for Eskom’s cost recovery. According to the calculations in the analysis in
Annexure 1, alternative price path options, at a lower average rate, can be achieved without
negatively impacting on supply security. Significantly, they will be crucial to attenuating the
negative overarching economic impact that could ensue from the tariffs increases that have
been requested in MYPD 3. It is critical that these options for achieving the required
electricity supply at the minimum cost to the economy be considered.
 Municipal Tariffs
Consideration of this application cannot take place in isolation of the tariffs that are charged
by municipalities. Section 2.2 of our analysis highlights how the challenges associated with
municipality pricing practices will result in disproportionate impacts on downstream pricing,
and a significant over-recovery across the value-chain.
 Impact of MYPD 1 and 2
Given the broader economic and business context, including the cumulative impacts of
MYPD 1 and 2 increases, BUSA underscores the need for future tariff increases to not
represent any over-recovery of costs. Related to that, BUSA believes that the Regulator’s
consideration of the present application should be inextricably accompanied by an appraisal
of the MYDP 2 period and the application that supported it.
3. ECONOMIC IMPACT OF PREVIOUS PRICE INCREASES
3
All sectors of the economy are severely impacted by the current economic situation and the
electricity price has exacerbated the situation. While the current poor state of the economy
cannot be totally ascribed to the electricity price, the latter plays a significant role.
The continuing downward trend in manufacturing value added reflected in figure 1, will
need significant interventions to remove all contributing factors to this decline, if it is to be
addressed. Electricity price is certainly one of these. This declining trend in manufacturing
value added is further reflected in the widening trade deficit for the manufacturing sector as
reflected in figure 2.
20.00
19.00
18.00
17.00
GDP (%) 16.00
15.00
14.00
13.00
12.00
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year
Figure 1: Manufacturing value added as percentage of GDP (the dti from Quantec
database)
75
70
65
Manufacturing 60
exports and
55
imports
Imports
50
Exports
45
40
Year
Figure 2: Manufacturing exports and imports as percentage of annual growth (the dti from
Quantec database)
4
Another area of general concern is the increasing level of subsidy from the industrial sector
to other sectors. This cross subsidy occurs at both Eskom and municipal level. While it is
recognised that the Electricity Pricing Policy allows a degree of cross subsidisation, the
policy requires that any cross subsidy should have “a minimal impact on the productive
sector of the economy”. BUSA has previously argued that subsidies cannot increase in the
unconstrained manner that is being experienced.
Subsidy (2009/10
3
2
1
Subsidy 0
2009/10 R
billion -1
Municipality
(bulk)
Industry
Special
Agriculture
agreements
Domestic
-2
-3
-4
Figure 3: Eskom subsidy from bulk sales to municipality and industrial customers to other
users in 2009/10
It is estimated that the subsidy from industry to other users could be 30% of the Eskom
tariff by 2017/18. In addition most municipalities with an industrial base, use industry tariffs
to subsidise other consumers.
The sectors most affected by the electricity price are the same sectors that contribute
significantly to GDP as reflected in figure 4.
5
Chemical and
petrochemical
Agriculture
Share of total GDP (2010)
Mining
Share of total ouput
(2006)
Basic metals
0
5
10
15
20
%
Figure 4: Estimates of contributions to output and value add ( Genesis)
The cost of electricity as a percentage of total operating costs for Eskom’s key industrial
customers is reflected in figure 5. It is clear from this graph that it is increasingly difficult for
these customers to absorb the cost. It is also impossible to pass on the cost to global
customers that do not tolerate annual price increases above relatively low percentages.
South Africa firms are price takers in these markets and are not able to continue to face
these steep price increases and remain viable.
Other
2017/18
Metal
2012/13
2008/9
Mining
0.00
10.00
20.00
30.00
40.00
50.00
60.00
% of operating expenditure
Figure 5: Electricity costs as percentage of operating expenditure ( Genesis)
The Electricity Pricing Policy requires cost reflective tariffs to be introduced by all licensed
suppliers of electricity. Cost of supply studies are required to facilitate the development of
a cost reflective tariff. To date, BUSA is not aware of any such studies having been
undertaken.
6
In addition municipal tariffs are increasingly loading the fixed demand charge so that any
energy savings introduced by consumers have an increasingly limited effect on the tariff
paid.
4. DETAILED COMMENTS
BUSA’s substantive analysis of the application is attached as Annexure 1. The document
contains an overall assessment of the MYPD 3 application, presents an alternative tariff and
price path calculation, and undertakes a detailed economic impact assessment of the tariff
increases that have been requested.
This submission also includes additional annexures [Annexures 2 - 5], representing specific
examples, from industries and sectors, of the potential impact of the requested tariff
increases.
5. CONCLUSION
As already noted, BUSA believes that the requested tariff could be lower – and still be costreflective. According to the calculations in our analysis, an alternative price path, at a lower
rate, can be achieved without negatively impacting on supply security. Significantly, it will
be crucial to attenuating the negative overarching economic impact that could ensue from
the tariffs increases that have been requested in MYPD 3.
BUSA underscores the need for thorough engagement on this application to ensure the
imperative for long-term security of electricity supply in South Africa, while safeguarding
electricity customers, and the economy, from what might turn out to be a long-term
deleterious situation.
BUSA and its affiliates welcome the opportunity to engage further as part of the public
hearings, and would like to register for all to participate in January 2013.
7
APPENDIX 2
SEIFSA submission NERSA on ESKOM’s Third multi-year Price determination
(MYPD 3) application
Introduction
The Steel and Engineering Industries’ Federation of South Africa (SEIFSA)
represents 20% (2,224 of 10,885 - Oct 2012) of all the companies engaged in the
steel and engineering sector. The SEIFSA membership employs 54% of the
employees engaged in the metal industry (225,533 of 414,542 industry employees Oct 2012). These companies are active within the following industry sectors:
Table 1: Components of the Steel and Engineering Sector
The Steel & Engineering
Industries
Manufacturing Steel &
Engineering
%
%
Rubber products
1
3.1
Plastic products
2.7
8.5
Basic
iron
and steel
products
7.7
24.1
Non-ferrous
metal
products
3.4
10.7
Structural metal products
2
6.3
Other
fabricated
metal
products
3.8
11.9
General
purpose
machinery
2.4
7.5
Special purpose machinery
3.1
9.7
Household appliances
0.6
1.9
Motor vehicles/trailers
0.5
1.6
Motor vehicle Parts &
Accessories
4.7
14.7
Totals
31.9
100
Apart from plastics
and
rubber
products, SEIFSA
membership
is
involved in smelting
and
extraction,
metal refining and
the production of
intermediary
products for gross
fixed
capital
formation / demand
(+/70%
of
production) in the
economy, as well
as final products
(+/- 30% of output).
The
Energy
Intensive
Users’
Group depicts the
value chain as
follows (Graph 1
below):
Source: Statssa, Quantec
Graph 1: The value chain for the steel and engineering sector in South Africa
8
The Problem Statement
South Africa’s electricity (gas and steam included) generation capacity has not kept
pace with increased demand due to expansion in the economy. Graph 2 below
shows fixed capital stock in generation capacity relative to the size of the economy
(lhs) and average GDP growth rates per decade (rhs).
Graph 2: Electricity generation capacity and growth
(Source: SARB, Quantec)
This
infrastructure
needs to be replaced
and new capacity
built to keep pace
with the demands
from
the
South
African
economy
(mining,
industries
and households).
The correct level of
the asset base or
capacity cannot be
answered
here.
Although the highest
growth rates were
recorded in the late seventies and early eighties in the economy, it is doubtful that
the same relationships and elasticities still apply. However, it is true that current
capacity is insufficient and is constraining economic expansion.
9
The investment in new capacity needs to be funded, and it is SEIFSA’s belief that
the costs cannot be recuperated from the envisaged tariff increases only, because
the cost ramifications for the steel and engineering sector may be fatal.
SEIFSA’s Argument
South Africa is a small (0,6% of the world), open (58% of GDP generated by trade)
economy. It is highly dependent on the international market for its exports (28% of
production) and international supply of imports (25% of the domestic market). Of
paramount importance for a developing economy is international finance to fund the
so-called savings gap (the difference between domestic gross capital formation /
investment and domestic savings / finance available). In 2011, the world financed
22,4% of investment in South Africa which, in perspective, was 128% of what
general government required, and in size, nearly 61% of what corporate South Africa
saved.
This is particularly true for the steel and engineering sector. A small open economy /
sector is a price taker (i.e. accept international prices for its products, and compete
with imports) and has little influence over market demand. It is therefore hypersensitive to any factors causing domestic unit costs of production to rise.
International trade in the steel and engineering sector products continue to grow over
time (Graph 3 below):
Graph 3: Importance of International Trade (Source: Quantec)
The international financial
crisis caused a short-lived
break in the trends, but the
rising patterns have resumed
since 2009. Exports are an
important part of expenditure
on domestic production and
employment creation, while
imports penetrate the domestic
market and replace domestic
products and employment.
The impact is dramatic (see
Table 2 below).
The table illustrates the worst case employment impact of each component of
demand. Using the domestic steel and engineering employment multipliers for each
year, column 1 shows the impact on employment for final products being replaced by
imports, column 2 for imported intermediary inputs, column 3 for imported
intermediary outputs, and column 5 the combined effect of 1, 2 and 3. Column 4
shows the employment impact of exported products, and column 6 the net effect
between employment replaced by imports, and employment created by export
production. The losses have become cumulatively worse.
10
Table 2: Opportunity costs (employment) of imports and exports
1991
1996
2001
2006
2011
Imported
Imported
Imported
Exported Employment
Net
Final
Interm
Interm
Final
related to Import less
Products
Inputs
Outputs
Products
Imports
Export
Employment Employment Employment Employment Employment Employment
1
2
3
4
5
6
14 206
16 916
24 512
103 995
55 634
48 361
40 820
31 382
48 169
146 426
120 372
26 054
38 370
40 170
52 092
122 507
130 631
-8 125
85 384
82 616
100 803
175 415
268 803
-93 388
113 250
100 877
138 503
135 588
352 630
-217 041
Source: Quantec
Graph 4: Steel & Engineering costs vs selling
prices
The
perception
of
the
divergence of unit costs of
production (increasing) and
selling
prices
(static
or
declining) is borne out by data
from the Bureau for Economic
Research over several years
now.
The trend lines in Graph 4
show this clearly (actual,
opinion data always unstable).
Albeit for a smaller component of the steel and engineering market, this seems to be
the case in general, as well. According to the Energy Intensive Users’ Group this
could be as high as 75% (mining, industrial and commercial sales).
Several factors influence the international trade performance of a sector. Graph 3
above showed that import penetration and the export ratios evolved more or less in
tandem for the steel and engineering sector.
Graph 5: The importance of international trade
This, however, hides the
trade balance situation
with the rest of the world
(Graph 5). It shows the
balance between the
actual
imports
and
exports in 2005 prices,
and vividly illustrates our
vulnerability to trade
fluctuations.
11
Of great significant is the concurrence of periods of (faster) rising electricity prices
with the development of deficits (compare Graph 5 above with 6 below).
Graph 6: Historical average Electricity
Prices
During the latter half of the seventies,
the increases were 10% on average;
for the eighties, 0,1%; the nineties,
3,3%; for the next 10 years, 3,7% - of
which the last 4 years will be +/- 20% (if
the 16% increase requested is
accepted).These increases were the
average per annum.
Source; Deloitte Analysis, ESKOM data
Graph 7: Proposed increases in electricity prices
The quantum leap in the
proposed ESKOM increases
is shown in work done by the
Energy Intensive
Users’
Group for South Africa. It is
also compared with Chinese
and Indian outlook (yellow
shaded funnel) and the
probability
of
higher
efficiency within the South
African economy (orange
funnel).
Graph 8a: Electricity price increases by local
authorities
A further complication is that
metros and local authorities charge
significant mark-ups on bulk
purchases of electricity from
ESKOM. There is no doubt that
this is the case, as shown by
graphs 8a (EIUG, BDO and select
municipalities) and 8b (National
Foundry Technology Network,
12
IPAP 2012/13) and numerous case studies by members of SEIFSA.
Graph 8b: Electricity price increases by local authorities
There is also no doubt
that metros and local
authorities
use
the
surpluses generated on
the sale of electricity to
retail customers (both
industrial and private
consumers) to fund their
budget shortfalls.
This was part of the
official reason given for
the abandonment of the
idea mooted several
years ago regarding the
establishment of the socalled Regional Electricity
Distributors (REDS).
A study commissioned by BUSA (in early 2012) on the impact of demand side
management of electricity and water and the financial implications for local
authorities, gave further proof of this. Local authorities rely on between 25% and
30% of their income on electricity sales (8% to 10% from water sales).
One instrument for savings campaigns is price increases, which are not effective, but
have the result of spiralling costs for businesses. And savings from consumers /
businesses may mean higher increases from local authorities to compensate for
lower volumes of sales and lost income. The ‘incentives’ are therefore perversely
resulting in higher prices and little savings. Consumers have tighter budget
constraints and businesses are in a fix between rising costs and lower profit margins,
which have an impact on production and employment and lower growth.
SEIFSA therefore needs to reiterate its statement that the new build program cannot
be funded by user charges only as it would be fatal for many businesses. The sheer
quantum of the proposed increase is prohibitive. The structure of the steel and
engineering sector (its cost and profit drivers) and size distribution of businesses
make the impact of the increases even more problematic.
Table 3 shows various relationships of electricity (gas and steam included) to
intermediary inputs, value added, production and operating surplus. The top rows
show actual values and the bottom group, the relationships.
13
Table 3: Cost and profit drivers in steel & engineering
Source: Statssa, Quantec (Input-Output Models for various years)
Several deductions can be made from this:
 Net operating surplus averaged about 20% but halved recently (2011);
 Electricity costs as a percenage of intermediary inputs averaged around 5%
(around 14% of value add and around 4% of the value of production: but
 Started to increase significantly as a % of gross operating surplus (+20%), and net
operating surplus (119%).
These relationships vary according to the different industries mentioned in Table 1.
Electricity costs are significantly higher in foundries (14% of operational costs and
25% of value add).
It is significant that electricity costs were 137% of net operating surplus in 2011 and
will rise significantly if the proposed tariff increases become a reality. Neither the
current, nor the possible future scenario is economically viable.
Graph 9: fixed investment patterns
Graph 9: Fixed investment patterns
Graph 9 shows fixed investment
patterns in the sector. The data
in Table 3 clearly covers widely
different situations since 1991.
It seems as if a third cyclical
acceleration in investments was
stunted after 2008 by the
financial crisis and expected
lower demand. Investments to
increase energy efficiency will
14
have to take place if proposed tariffs become a reality.
The size distribution of companies in the steel and engineering sector is shown in
Graph 10.
Graph 10: Size distribution of companies / employees in steel and engineering
industry
The vulnerability of
the smaller sized
companies to cost
increases is due to
the lack of reserves,
profit margins being
crucial for survival
and the challenges
raising finance for
renewed investment
in capacity.
Conclusions
Investment in new electricity capacity needs to take place and must be funded, but
SEIFSA’s view is that finance cannot be generated from the envisaged tariff
increases only, because the cost ramifications for the steel and engineering sector
may be fatal.
The sector is small in world terms, very open (+/- 60% of production exported) and
therefore a price taker (i.e. accepts international prices for its products and competes
with imports) and has little influence over market demand. More than a quarter of
employees are directly involved in export production and the net (negative) effect of
import penetration could be as high as 200,000 people.
A small number of industries in the manufacturing sector are responsible for export
earnings, with the steel and engineering group as part of them. Of great significant is
the concurrence of periods of (faster) rising electricity prices with the development of
deficits in this group. The proposed tariff increases will cause unprecedented cost
escalation, and loss of competitiveness.
The sector is hyper-sensitive to any factors causing domestic unit costs of production
to rise. Electricity costs (in the order of 6% of intermediary inputs and 14% of value
add) can significantly influence the viability of companies, even those that do not
compete internationally.
15
APPENDIX 3
Zimco Aluminium a Division of Zimco Group (Pty) Ltd.
State of Manufacturing – Electricity Prices and its Impact on IPAP 02
November 2012
Company Profile
Zimalco is the largest Secondary Aluminium Smelter in South Africa with an installed
capacity for Aluminium Scrap beneficiation of 30,000 tonne per annum. Current
capacity utilization is only 25-30% and the total labour force has depleted from over
300 to less than 170 over the last decade. Zimalco was the first smelter in SA to be
certified ISO 9001 (quality) and was recently certified by the South African Bureau of
Standards as compliant with ISO 14001 (environmental) and OHSAS 18001 (health
and safety).
Location
Zimalco is located at
3 Falkirk Road
Contact: Bob Stone
Tel: 0119144300
Benoni Industrial Sites
Sales Director
www.zimalco.co.za Gauteng 1501
bobs@zimalco.co.za
The Municipality Administrative area and electrical distribution is Ekurhuleni.
Products
1. Aluminium Foundry Alloys – these are supplied to the foundry and die casting
industry and are split into three main grades:
Primary Grade – alloys used in the manufacture of military components,
automotive brake components, alloy wheels and articles in contact with food.
High Grade – alloys used in the manufacture of components for High Tension
Electrical Distribution (pylon furniture), interior and street lighting, garden furniture
and engineering components where corrosion resistance is critical.
Commercial Grade – alloys used for the production of most of the automotive
components including engine blocks and cylinder heads, hardware articles,
window furniture, toys, and computer components.
2. Aluminium Powder – this is a critical product supplied to the Explosive
Manufactures used in the production of packaged explosives for the underground
mines and military projectile propellants. It is also the major raw material used in
the manufacture of water treatment chemicals used to purify South Africa’s
potable drinking water. It also has many other chemical uses from the production
of underarm deodorants to drain cleaners. It is recently being used as an energy
source replacement for electricity in the production of Ferro-alloys. It is also a
critical component in the infrastructure development of the rail network where it is
used in the welding of rail lines.
16
3. Aluminium Deoxidant – this product manufactured in several different qualities
and various forms from 20kg ingot to pea sized pellets and is used as a critical
addition in the manufacture of both steel and stainless steel. It is also used as the
major critical raw material by the manufacturers of water treatment chemicals.
4. Master Alloys, Grain Refiners and Hardeners – these products are used as
additions in the manufacture of aluminium sheet, extrusions, foil and beverage
can stock. Without the addition of these alloying products Primary Aluminium as
produced by BHP Billiton in Richards Bay and other Primary Smelters worldwide
would have no commercial value.
Industrial Development / Manufacturing
As a Secondary Aluminium Smelter Zimalco uses ALUMINIUM SCRAP which is
generated by many various industries throughout South Africa and through various
refining, smelting and alloying processes beneficiates the scrap metal into the
products mentioned above. The energy required to melt the scrap aluminium is only
+/-5% of the original energy used by BHP Billiton and other worldwide primary
smelters in the production of Primary Aluminium. Without these products produced
from scrap metal by the secondary smelters we would not be able to produce
effective explosives for the mines; chemicals for water purification; alloy wheels and
critical automotive components; quality steels and stainless steels. Due to the very
high potential energy stored in aluminium from the initial energy input at the primary
production stage it will burn and thermite under specific conditions at temperatures
up to 2700 degrees. Recent developments have started to use this ability of
aluminium as a substitute for electrical energy input in the manufacture of FerroAlloys, including the beneficiation of South African Ores and reduction of oxides into
metal. This attribute has been known by many international producers for many
years hence the high demand for aluminium scrap worldwide and the massive
quantities of aluminium scrap freely exported from South Africa each year. With the
possible introduction of some form of export control / price control which would
increase the local availability and competitive pricing of aluminium scrap the use as a
substitution for electrical energy could be increased.
Electricity tariffs
Zimalco electricity demand is supplied by the Ekurhuleni Municipality.
During the recent Municipal Tariff Study undertaken by EIUG (Energy Intensive
Users Group of Southern Africa) and published 04 September 2012 they stated the
following:
“Municipal tariff structures are inconsistent and significantly fragmented”
“Surcharges and non-standard levies can account for up to 28% of the total bill”
“There is a lack of financial management with some municipalities charging well
above NERSA guidelines and approved tariffs”
“Municipalities charge mark-ups in excess of 700% with regards to demand charges”
Ekurhuleni published rates for energy during the 2011/2012 are 127% of the Eskom
rate, (27% above Eskom Megaflex). Ekurhuleni demand charges are charged at
213% of the Eskom rate, (113% above Eskom Megaflex).
Electricity Tariffs 2001 – 2012
17
The graph below shows the effective rise in the average yearly cost of electricity
in cents per Kilowatt-hour between the years 2001 to 2012. It can be seen that
from 2007 to 2008 prior to the recent Eskom power station build increases the
municipality increase was a massive 227%. In the last 5years since 2007 the
electricity increase in the average yearly cost per kWh has been a massive
461.15%
ELECTRICITY COST PER KW/h 2001 - 2012
R 1.2000
R 1.0000
R 0.8000
R 0.6000
R 0.4000
R 0.2000
R 0.0000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
This has resulted in a significant underutilization of Zimalco installed capacity from
close on 80% to the current 25% - 30% with the resulting labour reduction. The
increase from 2011 to 2012 an amount of 33.96% has resulted in the mothballing of
the Master Alloy, Grain Refiner and Hardener cost centre due to the excessive
electrical energy required to produce these products. These products are now being
imported from Brazil, Russia, China and the Middle East at prices equal to local
production less the new energy cost.
Electricity / Production Cost Break-down
The cost / usage of electricity per product category varies due to the nature of the
product being produced and the production cycle of Melt, Alloy, Hold, Cast or
Atomise etc. The chart below shows the variance over the last three years in
percentage of cost. Energy saving developments and installations and rationalisation
of products has had to be instigated to minimise the effect of the increased energy
costs. The effects are clearly evident in the underutilisation of available capacity and
apart from the slowing demand due to the current economic scenarios export of
18
finished product has reduced by more than 70%. It has also caused us to stop local
production of several products and import the finished product for local distribution.
Electricity as a Percentage of Production Cost Per Product Group
Product Group
Foundry Alloys
Powders
Deoxidants
Master Alloys
OVERALL TOTAL
2010
21.69%
54.82%
43.66%
44.25%
17.77%
2011
28.60%
37.70%
52.30%
51.46%
20.72%
2012 YTD SEPT
14.01%
26.54%
40.25%
40.52%
20.19%
Gas as an alternate energy source for melting
Secondary Aluminium Smelters such as Zimalco can also use gas as a medium of
energy for melting and in some cases holding the molten metal during the process of
certain products. The production of most Master Alloys, Grain Refiners and
Hardeners and Powders require mostly electrical energy and do not in many cases
use gas as can be seen below.
Gas as a Percentage of Production Cost Per Product Group
Product Group
Foundry Alloys
Powders
Deoxidants
Master Alloys
OVERALL TOTAL
2010
58.11%
9.63%
65.61%
1.22%
18.32%
2011
44.28%
14.12%
73.66%
2.04%
17.18%
2012 YTD SEPT
21.13%
16.42%
61.21%
2.59%
20.19%
Gas supplied via SASOL sourced from the Mozambique off shore gas fields
(MOZGAS) does not yet fall under the ‘NERSA Regulation’. We are led to believe
that this will only happen during the 2014 increase period. Smelters and Foundries
using both electricity and gas have suffered a double blow as the gas prices have
increased in line with electricity. In fact the increase for 2012 was not reduced in line
with the lower electricity increase but remained above 21%. The effect of the recent
increases is shown in the graph below.
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GAS COST RAND PER G/J 2001 - 2012
R 80.00
R 70.00
R 60.00
R 50.00
R 40.00
R 30.00
R 20.00
R 10.00
R 0.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Since 2007 the price of gas has increased by 231% from 2010 to 2011 the increase
was 31.8%. The 2012 increase of over 21% has been somewhat lessened to an
effective 11.5% by the investment in a new furnace and burner system technology
valued at over R4M without which the jobs would have been lost.
Effect of Electricity tariff increases over the next 5 years
If we are to be subjected to continued energy increases significantly above the level
of inflation the Secondary Smelting and Foundry Industry in South Africa will die. We
have already seen a significant number of Foundry and Smelter closures and
consolidations in the industry sector over the last several years. This reduction in the
Foundry industry has been accelerated by the importation of finished products by
many traders and major industry players rather than purchasing locally produced
components. We have already seen a massive drop in the export of Smelter and
Foundry products, as highlighted above Zimalco exports have reduced by 70% and
capacity usage down to 25%. Should manufacturing costs continue to increase at
the anticipated rate of 3 times inflation we will find ourselves living in a deindustrialised country with increased unemployment, reduced investment and NO
FOUNDRY INDUSTRY. The graph below shows the effect of the compounded
increase of 16+% over the next 5 years.
20
ELECTRICITY COST PER KW/h 2006 - 2017
R 2.5000
R 2.0000
R 1.5000
R 1.0000
R 0.5000
R 0.0000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
It is clear from the graph above that the cost of electricity from 2007 to 2017 a period
of 10years will have increased by 981%. This is an impossible number for any
thriving industry, let alone a struggling industry sector, such as the Smelting and
Foundry industry to withstand, and remain competitive in the world market.
R. Stone
Zimalco Sales and Marketing Director
01 November 2012
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APPENDIX 4
SUBMISSION BY NATIONAL AUTOMOTIVE ASSOCIATION OF SOUTH AFRICA
For the automotive industry in South Africa the issue of international competitiveness
is imperative especially in view of the new Automotive Production Development
Programme (APDP) which will commence in 2013 and where the vision, shared by
government and industry, is to double vehicle production in the country to 1,2 million
units by 2020.
Inflationary pressure by the weaker rand, higher electricity tariffs, high logistics
inbound and outbound costs and above inflation wage agreements not linked to
productivity improvements impact on the cost of doing business in the country and
hence industry’s ability to being considered for future new generation model and
subsequent component investments and export contracts.
The vehicle manufacturers in South Africa continues to implement electricity savings
initiatives, however, the rising cost of electricity in energy intensive areas such as the
paint plant and press shops continues to present challenges. Some vehicle
manufacturers have participated in implementation of energy efficiency programmes
focusing on areas such as lighting and hot water supply. Higher electricity price
increases on the back of earlier above inflation wage settlements will also continue
to add significant risk to suppliers’ competitiveness. The achievement of
government’s objectives will largely depend on the ongoing successes of priority
sectors, such as the domestic automotive sector and jeopardising the sustainability
of the industry in the country with above inflation electricity price increases would
obviously not contribute in this regard.
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APPENDIX 5
REVENUE APPLICATION MULTI YEAR PRICE DETERMINATION
2013/14 TO 2017/18
SUBMISSION BY CHEMICAL AND ALLIED INDUSTRIES’ ASSOCIATION (CAIA)
NOVEMBER 2012
Introduction
CAIA represents the interests of the chemical industry in South Africa and is the custodian
of the Responsible Care initiative, which is the global chemical industry’s initiative to
continuously improve health, safety and environmental performance in the chemical
industry.
The South African Chemical industry is the largest and most diverse in the Sub-Saharan
African region. CAIA members operate in the following subsectors:
•
•
•
•
•
•
Basic or primary organic chemicals, organic intermediates and solvents
Polymers and rubbers in primary form
Basic inorganic chemicals and industrial gases
Fine chemicals
Speciality chemicals
Fertilizers and explosives
It is clear from the above profile that CAIA’s members provide inputs into a range of
other manufacturing sectors and the primary sectors mining and agriculture.
Over the last decade the growth of the South African chemical industry has not been
optimal, and the contribution of the industry to the overall growth of the economy is lags
behind the global trends. The trade deficit has grown from US$ 1.0 billion to US $ 5.3
billion from 2001 to 2011. (Note US $ is used for these statistics to reduce the impact of
the volatility of the Rand on the data).
The global basic chemical subsector grew by 357% over the period 2001 to 2011, in
comparison to the same subsector in South Africa which only grew by 231% based on sales
volumes in US$.
The contribution of the basic chemicals subsector to the total manufacturing sector
remained steady from 2001 to 2011 with contributions of 4.4 and 4.5 % respectively. In
contrast the other chemical subsector’s contribution to manufacturing dropped from 7.1% in
2001 to 5.4% in 2011, which resulted in a drop in the total chemical sector’s contribution to
manufacturing from 11.5% to 9.9% over the same period.
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The chemical industry is an increasing contributor to the overall decline in manufacturing
value add and the manufacturing trade deficit.
While the above inflation increases in electricity price are not the only factor affecting this
poor growth performance, it has certainly made a significant contribution to it, particularly in
respect of export products.
GENERAL COMMENTS ON THE ESKOM APPLICATION
CAIA supports the overarching submission made by BUSA but wishes to make the
following specific input in respect of the upstream chemical sector represented by CAIA,
an affiliate of BUSA.
Before providing specific examples of the tariff increases, CAIA wishes to highlight a
number of areas of concern in relation to policy.
While it is recognised that the Eskom revenue requirement is dealt with separately from
the distribution of electricity by local authorities, the impact on customers must be viewed
holistically. The lack of a nationally harmonised system, the change in tariff structures
applied to individual consumers, year on year and the excessive mark ups on the Eskom
tariffs are all having a negative impact on chemical firms. If the unacceptable tariff
situation in the distribution sector was addressed then the extremely negative impact of
the Eskom increase could at least be partially alleviated. This submission therefore
seeks to illustrate why the Eskom revenue application should not be considered in
isolation of the overall impact on the manufacturing sector.
The Electricity Pricing Policy published in 2008, identifies the inequitable treatment of
consumers, resulting in a wide range of tariffs for the same or similar groups of
consumers and also unfair discrepancies between Eskom and municipalities as one of
the key challenges facing the distribution industry and yet 4 years later, there is no sign
of relief in this regard.
In terms of the policy, electricity distributors are required to undertake cost of supply
studies at least every five years, but at least when significant licensee structure changes
occur, such as in customer base, relationships between cost components and sales
volumes. Tariff structure and levels are required to be aligned with the results from these
studies in which the resultant income will equal the revenue requirement. In addition
tariffs should be nationally harmonised. While it is accepted that this cannot occur
overnight, by this time progress should have been visible.
Examples of experiences with members who are municipal customers are presented
below to illustrate the lack of a harmonised approach to tariffs and the rapid escalation in
electricity as a portion of input cost. CAIA through BUSA has on many occasions
expressed concern at the seemingly uncontrolled mark up by local authorities.
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SOME EXAMPLES OF MEMBER EXPERIENCES
Figure 1: Increase in electricity price for a factory in Ethekwini.
Overall the standard tariff has increased 269% from Jan 2007 (0.11377 R/kWh) to Oct
2012 (0.42020 R/kWh) due to the compounding effect of the rate increases.
Figure 2 demonstrates the difference in unity cost between Eskom and the municipality
for the identical service.
Figure 2:
customer
Comparison of unit cost for an Eskom customer and a municipal
In this case, for the period from 2005 to 2011, the Eskom tariffs increased from
R130/MWh to R509/MWh, an overall increase of 296%. The municipality increase for
the same period was from R190/MWh to R780/MWh, an overall increase of 309%.
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This difference between Eskom and municipal tariff has resulted in this customer, which
draws electricity directly from an Eskom transmission line with no intervention from the
municipality, paying a premium on the Eskom tariff of 18 million per annum in 2007 to R
85 million in 2012.
This increased premium exacerbates the negative impact of the above inflation Eskom
increase and is clearly unsustainable.
In 2009 electricity was 17% of the total direct cost of the manufacture of manganese
oxide; in 2012 this percentage has increased to 26% despite the 12% improvement in
usage per metric ton of product manufactured. If the proposed 16% increase is factored
in, by the year 2015 electricity will form 33% of the direct cost of manufacturing
manganese dioxide, which will be almost equivalent to the cost of the manganese ore.
Figure 3 : IIlustration of the increase in the cost of electricity per ton of product
This product like many chemical products is priced globally and has to contend with
global product prices on average increasing no more than 3% or 4% annually.
This an export company and competes in the global market the firm strives to improve
efficiencies on a yearly basis to stay competitive but with cost input prices increasing
above 10% over the last five years competiveness has been eroded and a plant
beneficiating a South African mineral ore domestically will not remain viable.
Another company is the only one that beneficiates the locally produced fluorspar, of
which South Africa has the third highest reserves in the world. The global market in
which this product competes is very price sensitive and operates in a 2% /year inflation
environment.
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Electricity is the biggest cost after salaries and is estimated to increase from 5.61% of
sales in 2010 to a projected 11.44% of sales in 2016, based on a price increase of 15%.
Electricity on its own eroded 5.83% of the firm’s profit in a period of seven years. This is
clearly not sustainable as price increases cannot be transferred to customers. The firm is
of the view that the higher than inflation price increase Eskom is proposing will lead to
premature closure of businesses and the loss of jobs.
In another example, the cost of electricity per ton of product increased by 77% from 2008
to 2011.
The complexity of municipal tariffs makes it difficult for the regulator to evaluate the
actual impact on individual consumers. The example below reflects a common scenario
that firms face.
Industrial tariffs are often categorised according to consumption and a seasonal tariff is
often applied. Customer faced the increases in the tables 1 and 2 as a result of the
annual increase.
Table 1: Winter tariff
Tariff D
Standard
(HS)
Off-peak
(HS)
Max
demand
(HS)
Peak (HS)
Network
Access
Increase from 2009/10 to 2010/11
53%
26%
40%
68%
39%
Table 2: Summer tariff
Tariff D
Increase from 2009/10 to 2010/11
Standard (HS) 7%
Off-peak (HS) 15%
Max demand
(HS)
40%
Peak (HS)
-38%
Network
Access
39%
At the same time the customer was moved from Tariff D to Tariff E based on lower
usage over the previous
year. In other words improved efficiency was a
disadvantage to the customer.
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Tariff E is much more expensive than Tariff D as reflected in table 3.
Table 3: Difference between tariff D and E
Tariff E
Standard (LS)
Off-peak (LS)
Max demand
(HS)
Peak (LS)
Network
Access
Increase from tariff D
20%
24%
55%
20%
0%
CONCLUSIONS
The trend in the upstream chemical sector reflects the same trajectory as the overall
manufacturing trend. The sector’s trade deficit overall has increased from 1 billion
US$ in 2001 to 5.3 billion US$ in 2011; a decline that is at least in part due to the
increasing loss of competitiveness as a result of the electricity price increases.
Approval of the increase proposed by Eskom will have a significantly negative effect
on the sector.
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