Power pric­ing adds pres­sure

Sunday Tribune - - ENERGY -

SOUTH AFRICA’S MU­NIC­I­PAL ELEC­TRIC­ITY TAR­IFFS ARE HURTINGTHE ECON­OMY,WRITE RE­SEARCHERS

XZAVAREH RUSTOMJEE, LAURALYN KAZIBONI IAN STEUART

MA­CHIN­ERY and equip­ment in­dus­tries in South Africa have re­cently come un­der huge pres­sure. Fall­ing de­mand af­ter the 2008 fi­nan­cial cri­sis and ris­ing en­ergy costs have harmed the sec­tor.

These trends are wor­ry­ing be­cause the sec­tor em­ploys a tenth of the coun­try’s to­tal man­u­fac­tur­ing work force.

We an­a­lysed the struc­tural fac­tors fac­ing the in­dus­tries and zoomed in on the foundries. This is be­cause foundries are a key in­ter­me­di­ate seg­ment of the ma­chin­ery and equip­ment in­dus­tries value chain. They have been hard­est hit by ris­ing elec­tric­ity costs.

Foundries man­u­fac­ture metal com­po­nents by pour­ing molten metal into moulds. The com­po­nents are as­sem­bled into var­i­ous high value prod­ucts – in­clud­ing cars, pumps, ma­chines, min­eral pro­cess­ing and earth han­dling equip­ment.

Ris­ing power costs make up 16% of foundry in­put costs. This was be­fore Eskom’s re­cent 19.9% tar­iff in­crease.

Be­tween 2007 and 2016, 100 of South Africa’s 265 foundries were closed. About 6 000 di­rect jobs were lost.

This also had an im­pact on jobs and pro­duc­tion in down­stream ma­chin­ery firms. Some down­stream firms turned to im­port­ing foundry com­po­nent in­puts. Oth­ers stopped pro­duc­tion and im­ported fully as­sem­bled prod­ucts, such as pumps and valves.

There are 165 foundries left in South Africa to­day, down from 265 in 2007. More than 80% source their power from mu­nic­i­pal­i­ties. Half of these op­er­ate in Ekurhu­leni. This is a largely in­dus­trial metropoli­tan area, bor­der­ing Jo­han­nes­burg.

South Africa’s state-owned power util­ity Eskom dis­trib­utes 54% of na­tional power to end-users. About 180 mu­nic­i­pal power de­part­ments dis­trib­ute the re­main­der.

Mu­nic­i­pal tar­iffs dif­fer widely. Many are much higher than the equiv­a­lent tar­iff an Eskom cus­tomer pays. A medium-sized foundry pays 30% more for elec­tric­ity in Ekurhu­leni, per kilo­gram of out­put, than a sim­i­lar foundry sourc­ing power di­rectly from Eskom. A small foundry pays 19% more.

These higher tar­iffs erode Ekurhu­leni foundries’ prof­its and global com­pet­i­tive­ness.

What drives mu­nic­i­pal power tar­iff set­ting?

The mu­nic­i­pal fi­nance sys­tem lies at the heart of this prob­lem. They have to raise their own rev­enues, even though cen­tral gov­ern­ment partly funds them.

One source is through power sales. Ekurhu­leni’s power sales make up 40% of to­tal rev­enue com­pared with the sec­ond-largest source, the 17% in fis­cal trans­fers from the na­tional and pro­vin­cial gov­ern­ment. This de­pen­dency has pro­vided a ra­tio­nal but per­verse rea­son for rais­ing mu­nic­i­pal tar­iffs.

The Na­tional En­ergy Reg­u­la­tor of South Africa (Nersa) reg­u­lates elec­tric­ity tar­iffs. They use a pub­lished method­ol­ogy based on cost of sup­ply.

Mu­nic­i­pal­i­ties pur­chase power from Eskom at whole­sale prices. To this they add the mu­nic­i­pal dis­tri­bu­tion in­fra­struc­ture cost and an al­low­able profit mar­gin.

Too few mu­nic­i­pal power de­part­ments have con­ducted in­de­pen­dent cost-of-ser­vice stud­ies. Many lack the ca­pac­ity to pro­duce ac­cu­rate power dis­tri­bu­tion cost data.

Some are un­able to plan and man­age in­fra­struc­ture bud­gets and op­er­at­ing sys­tems.

There has also been his­tor­i­cal un­der-in­vest­ment in dis­tri­bu­tion in­fra­struc­ture. Of­ten in­ad­e­quate fund­ing has been al­lo­cated to re­pairs and main­te­nance.

Tech­ni­cal sup­port in­ter­ven­tions from na­tional gov­ern­ment have, so far, failed to ad­dress these prob­lems.

Per­for­mance-based grants for dis­tri­bu­tion in­fra­struc­ture up­grades were partly met through the Mu­nic­i­pal In­fra­struc­ture Grant.

But this is be­ing re­duced in the 2018 bud­get. The ap­proach to the dis­tri­bu­tion as­set man­age­ment pro­gramme (Adam) ini­tia­tive was adopted in 2012. This has failed to re­verse the mu­nic­i­pal dis­tri­bu­tion in­fra­struc­ture back­log. And the pro­gramme ap­pears to be un­funded now.

The mu­nic­i­pal fi­nanc­ing sys­tem is be­ing re­formed but the process is slow, sug­gest­ing that parts of our gov­ern­ment sys­tem are blind to the da­m­age be­ing in­flicted on the man­u­fac­tur­ing sec­tor by mu­nic­i­pal power dis­tri­bu­tion in­ef­fi­ciency.

Given the slow pace of re­form, pol­i­cy­mak­ers should look for so­lu­tions else­where.

First, the search must fo­cus on en­sur­ing mu­nic­i­pal tar­iffs are costre­flec­tive and don’t re­ward poor plan­ning and in­ef­fi­ciency.

This re­quires the phys­i­cal and eco­nomic state of each mu­nic­i­pal and Eskom man­aged elec­tric­ity dis­tri­bu­tion in­fra­struc­ture sys­tem to be mon­i­tored.

The elec­tric­ity tar­iff de­tail, the re­spec­tive cost struc­tures, out­age per­for­mance, back­logs and in­vest­ment plans should be pub­licly avail­able to any con­sumer.

Here, the De­part­ment of Wa­ter and San­i­ta­tion’s sys­tems could be em­u­lated. They run pub­licly ac­ces­si­ble in­fra­struc­ture con­di­tion mon­i­tor­ing sys­tems.

These are for wa­ter qual­ity (Blue Drop) and san­i­ta­tion con­di­tions (Green Drop).

Lob­by­ing

Sec­ond, mu­nic­i­pal in­fra­struc­ture and main­te­nance in­vest­ment pro­grammes, such as Adam, should be bet­ter funded. And the na­tional Trea­sury’s bud­get dis­ci­plin­ing con­di­tional grants and other pol­icy in­stru­ments should be ap­plied to speed up a move to mu­nic­i­pal cost­based tar­iff set­ting.

Third, an­other so­lu­tion could come out of the evolv­ing en­ergy mar­ket. South Africa’s en­ergy gen­er­a­tion sur­plus is set to rise in the next decade. En­ergy-in­ten­sive sec­tors are al­ready lob­by­ing for spe­cial pric­ing agree­ments. Their ar­chi­tec­ture and tar­gets will need care­ful con­sid­er­a­tion.

The process must in­volve the De­part­ment of Trade and In­dus­try, Eco­nomic De­vel­op­ment De­part­ment and other in­dus­trial pol­icy cus­to­di­ans.

Ap­pro­pri­ate con­di­tions should also be ap­plied to re­cip­i­ents of spe­cial pric­ing agree­ments. These in­clude con­di­tions of pass­ing the ben­e­fits of lower elec­tric­ity prices through to down­stream labour­in­ten­sive sec­tors (such as foundries and ma­chin­ery).

It’s equally im­por­tant that such con­di­tions be en­forced more ro­bustly than in the past.

Fourth, it may take some time be­fore the re­al­i­sa­tion of some of the struc­tural re­forms to the lo­cal gov­ern­ment fi­nanc­ing sys­tem. There­fore pol­icy cus­to­di­ans in­volved in ad­min­is­ter­ing in­vest­ment in­cen­tives should con­sider pro­mot­ing en­er­gy­in­ten­sive in­vest­ments only in those mu­nic­i­pal­i­ties with more re­li­able, sus­tain­able and com­pet­i­tive power dis­tri­bu­tion in­fra­struc­ture.

A spe­cific re­lo­ca­tion in­cen­tive for those firms that are likely to fail, due to un­jus­ti­fi­ably high mu­nic­i­pal power costs, should also be con­sid­ered.

Fi­nally, new tech­nolo­gies such as dis­trib­uted gen­er­a­tion, rooftop PV pan­els, im­proved bat­tery stor­age sys­tems and “smart-grids” are al­ready dis­rupt­ing the struc­ture and cost of dis­tri­bu­tion in­fra­struc­ture.

Their wide­spread adop­tion is likely to un­der­mine the cur­rent sys­tem of lo­cal gov­ern­ment fi­nanc­ing, de­pen­dent as it is on elec­tric­ity rents, long be­fore the cur­rent fis­cal fi­nanc­ing re­form time­lines have any im­pact. – The Con­ver­sa­tion

Rustomjee is a se­nior as­so­ciate at the Cen­tre for Com­pe­ti­tion, Reg­u­la­tion and Eco­nomic De­vel­op­ment, Univer­sity of Jo­han­nes­burg, and Kaziboni is a re­searcher at the cen­tre, while Steuart is a se­nior eco­nomic de­vel­op­ment spe­cial­ist at Cowa­ter­so­gema In­ter­na­tional.

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