WHY SA should have the cheapest electricity in the world. (Energy Mix)

Does South Africa have the cheapest electricity in the world?

Why consumers pay for Eskom’s mismanagement.

Other Issues

Expressed in the same currency using officialexchange rates, the coal prices vary by a factor of twenty between South Africa - where the prices are the lowest at 0.1/0.15 USD/GJ - and more than 2 USD/GJ in many European countries and in Japan.

Coal as a primary energy source is diminishing in many parts of the world, although it is one of the cheapest sources.

In the 27 countries of the EU, coal composes only 22,5% of all primary sources when generating energy. Natural Gas and Nuclear-sources make up more than coal, while Wind energy has seen the biggest growth.

This is because the world is moving to more “cleaner” energy sources – despite costing more than coal.

Most countries have tightened pollution controls concerning the production of electricity using coal.

▪ SA uses cheap and “dirty” coal.

According to the IEA of the US, fossil fuels still represent 68% of the resources used to generate electricity today. Fossil fuels here are divided between coal,

natural gas and oil. However, on average, fossil fuels

comprise 93% of the resources used to produce electricity in SA This is mainly coal - which is cheaper than

either Natural gas or petroleum products.

World coal produces daily export coal prices

Spot, Thermal, South Africa, FOB Richards Bay

Spot, Thermal, Russia, FOB Vostochn

Spot, Thermal, Colombia, FOB Puerto Bolivar (US)

Spot, Thermal, Australia, FOB Newcastle

Spot, Thermal, Russia, FOB Baltic

Source: Reuters EcoWin

Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan

03 04 05 06 07 08

US

D/t

on

20

30

40

50

60

70

80

90

100

110

120

130

140

150

Spot, Thermal, South Africa, FOB Richards Bay 107

Spot, Thermal, Russia, FOB Vostochn 133

Spot, Thermal, Colombia, FOB Puerto Bolivar (US) 112.5

Spot, Thermal, Australia, FOB Newcastle 122.5

Spot, Thermal, Russia, FOB Baltic 126.2

SA uses mainly coal - which is the cheapest fossil fuel Our environmental standards are “softer”

than most other countries - saving ESKOM some costs.

Power plants are normally right at the source - saving around 33% of the price of coal due to lower transport costs

SA export coal is up to 25% cheaper than that of other countries.

SA coal prices for electricity generation are cheaper by a factor of twenty when compared to European prices. (according to IEA - based on Gigajoules Energy produced.) From Projected Costs of Generating

Electricity 2005 Update of the OECD/IEA/NEA

Other SA factors such as land prices, labour rates, etc are also be cheaper.

ESKOM and other government agencies claim this as a fact after NUS consultants in London produced this research in London.

12

0

5

10

15

20

25Price of electricity – Industrial customers Source: Extract from © 2005-2006 NUS Consulting Group International Electricity Survey and Cost Comparison, April 2007

USc/kWh

74% GAP

• ‘Gap’ increased to 74% from

30% in 2006

• Capital commitments in

excess of R200 billion

• Current pricing is half of the

replacement value

• Appropriate increases above

inflation needed to fund

future capacity expansion

• Prices will still remain

competitive

• Eskom supports a pricing

policy that ensures

predictable price increases

Source: Eskom Annual Report.

Firstly the comparison from Eskom is on Industrial Tariffs and is compared to developed countries which have higher costs because of fuel mix and environmental standards.

Kazakhstan in a survey of 55 countries has the lowest industrial tariff in the world by a factor of 40% over SA.

Russia tariffs are slightly higher than SA but come close as well.

Ten other countries out of a survey of 55 countries have lower household electricity tariffs in nominal dollar terms.

These countries include developing countries such as Argentina, Russia, India, China, Paraguay, etc.

As for municipality tariffs - four more countries are cheaper including Bulgaria and Latvia.

Average Eskom residential tariffs are 274% higher than those charged by Eskom for power sold to our neighbours

In General - Municipalities charge slightly more than Eskom.

In SA higher usage often brings higher tariffs - while internationally it happens the other way around.

Municipalities make around R25 billion per annum from water and lights to fund other projects - so electricity rates are already fulfilling a tax function.

Despite higher tariffs, we do not benefit from a cleaner environment as have developed countries

But from Eskom Document some households – read: middle class – will pay even more. Effectively this means 10,06 cents per kWh vs.

An international average of 10,68 cents per kWh But the emerging market country average is

only 8,57 cents per Kwh (35 emerging countries in Survey.)

The Eskom application document says Home and Business tariffs will increase by between 63,5% and 100%.

SA will then have electricity above the international average rate! 11.8 cents per Kwh vs. 10,68 cents for the international average. I am sure municipalities like Joburg, who already

have higher rates than Eskom will actually start to charge some of the most expensive household tariffs around. (12,82 cents per Kwh vs. 10,68 cents per Kwh international average)

IF these rates are on top of the 14,2% already granted - then SA municipality rates will be in the ten most expensive rates in the world today.

SA does not have the cheapest electricity in the world - a carefully selected group of industrial countries was used rather than any developing countries.

Household rates are in the bottom third of international rates, but if electricity tariffs are implemented we may end up having some of the most expensive electricity in the world – even more expensive than France.

▪ Without some add-ons that other countries get like a cleaner environment or free air-conditioning.

33,6% of our electricity is sold below the cost of production. According to ESKOM’s annual report of 2007 -

both industrial prices and international prices are below the cost of production.

For more than 11 years Eskom has sold electricity at below-cost to international customers.▪ The absolute loss over this period is R3,3 billion.▪ If power was sold at average prices then the loss is

R5,4 billion.▪ If sold at commercial rate then loss equals R10

billion!

Household electricity prices for metropolitan areas went up by 9,8% over the last year ended February 2008 according to Statistics South Africa. Yet again electricity price increases exceed

the average inflation rate in South Africa. Consumers in SA not only subsidises the

poorer households, but also industry - as the PPI for electricity is up only 7,7%

Coal stockpiles were depleted and this probably helped ESKOM show more profits. Did management then have an incentive

to play robber?

Recent reports suggest that approx. 15% of all power is not paid for (other than losses in Transmission) This is exactly the reserve requirement –

without this loss we would all have power now.

Is inaction on behalf of the authorities therefore slowing the economy?

Free basic electricity is perhaps good BUT - the system should be transparent - a tax subsidy should rather be given to people for electricity so that the cost of the free electricity is transparent to the public It should not be hidden in municipality

and Eskom accounts – otherwise Electricity will be seen as a tax!

32

South Africa, Production, By Industry, Mining and Quarrying, Total, including gold, SA, Index

Source: Reuters EcoWin

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

200

0=1

00

85

90

95

100

105

110

115

120

South Africa, Production, By Industry, Mining and Quarrying, Total, including gold, SA, Index 106.2

SA manufacturing production and Investec PMI

Production, By Industry, Manufacturing [c.o.p 12 months] Business Surveys, Investec PMI

Source: Reuters EcoWin

00 01 02 03 04 05 06 07 08

Pe

rce

nt

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

Ind

ex

42.5

45.0

47.5

50.0

52.5

55.0

57.5

60.0

62.5

Building plans passed % change on year ago

Non-residential buildings, total Residential buildings, total, SA Total, SA

Source: Reuters EcoWin

00 01 02 03 04 05 06 07 08

Per

cent

-75

-50

-25

0

25

50

75

100

Brought to you bywww.economists.co.za