On electricity tariffs and fossil fuel subsidies

With the rising costs of fossil fuels and fossil-fuel based electricity generation, disparities in electricity tariffs and persistently high fossil-fuel subsidies are coming under the spotlight. This has important implications for South Africa's possible economic development trajectories.

From Moneyweb (see also Politicsweb with a link to the leaked dossier):

The Democratic Alliance (DA) can this morning reveal a secret 291 page Eskom dossier, which provides definitive proof, amongst other things, that Eskom has been charging vastly discounted electricity tariff rates to companies that provide little or no benefit to the South African economy. The document was leaked from high level officials in Eskom to the DA and we made use of its information yesterday to question the acting CEO in the portfolio committee on public enterprises. The chairperson of the portfolio committee tried to tell us not to use the report, but we are today releasing it in full, because we believe its contents are of manifest importance to the South African public. This report stands alongside the now notorious Olsen Report - also released publicly by the DA - in that it provides cast iron evidence of the extent of mismanagement at Eskom, the ANC government's complicity in it, and the damage that is being done to the South African economy as a consequence.

The signs were there much earlier as reported in the press (see here for example) and also on this blog in the context of potential additional carbon costs:

At an average emission rate of close to 0.9kg CO2/Kwh and a price for carbon between $20 and $40 per tCO2 start penciling in an additional cost of between 14-28 cents per Kwh ($1 = R7.5). To place this in perspective Business Day reports: Eskom is understood to have guaranteed the Coega project electricity at 14c/kWh.

Who pays the rest?

What was meant as a rhetorical question way back then is coming clearly in focus now. Of course, we South African citizens have been paying the rest, directly through our electricity bills and indirectly, with other global inhabitants, through the impacts of a changing climate.

Also this morning in my inbox was a study on worldwide fossil fuel subsidies - amounting to a whopping $500 billion annually. According to the report, South Africa subsidised electricity costs at almost $10 billion annually. It was not clear from the report what exactly went into this $10 billion, but that this is substantial is without doubt.

Cheap electricity used to be an integral part of South Africa's industrial policy. With rising electricity prices and potential carbon liabilities the costs of such a policy is becoming rapidly clearer. What the implications are and whether this creates space for new opportunities has been the focus of debate for some time now.

In this time of transition towards a new electricity regime expect more painful stories and hope for wise leadership in seeing opportunities.

Rising prices and... rising demand!?

Again...

Will electricity demand keep on increasing while prices are rising? (A few days ago I posted on a study done by the University of Pretoria showing a substantial reduction in electricity demanded when prices double)

Eskom seems to think that they can have both raising prices and raising demand as evident from their Proposed Revenue Application. Quoted from the document (p 30, for simplicity I am only showing the low sales scenario here):

The sales forecast for the next 10 years has some downside risk (i.e., lower sales) based on the

depth and length of the economic slowdown especially for the first 2 years.

Low

(GWh) % Growth

2010/11 220,260 1.0%

2011/12 224,737 2.0%

2012/13 232,388 3.4%

2013/14 239,536 3.1%

2014/15 248,621 3.8%

2015/16 258,921 4.1%

2016/17 265,399 2.5%

2017/18 271,946 2.5%

2018/19 279,163 2.7%

2019/20 286,388 2.6%

Economic theory says that as electricity prices rise the quantity of electricity demanded will fall, holding other factors constant. The percentage change in quantity demanded in relation to the the percentage change in price is called the price elasticity of demand.

Electricity demand traditionally was relatively inelastic to price which basically means that the rate at which demand slowed down was much less then the rate at what prices increased. There are many different price elasticities for different regions and sectors, but it seems that most tend to converge around a range of -0.2 to -0.7. That means that a 1% increase in price would lead to between 0.2 to 0.7% reduction in demand. There are also signs, at least in the US economy, that price elasticity of electricity is increasing.

This raises questions on the assumptions used in the utility's modelling as well as more serious implications of this modelling and the practical need to entrench market power from the utility's perspective. Will customers be freely allowed to respond to raising electricity prices even if it reduces the demand and thus the sales of the utility? Looking at Eskom's modelling assumptions I am not convinced.

(But then, we need to be sure that all substitutes for Eskom electricity are factored in (what substitutes?), and that the powering forces of raising incomes in South Africa will dwarf the increases in price (really?)).

See, I am still not convinced.