The economic crisis fades but new danger lurk on the horizon for SA – Mike Schussler Economists.co.za 1

The Eskom effect and what we can do.

The economic crisis fades but new danger lurk on the horizon for SA – Mike Schussler Economists.co.za

www.economists.co.za 1

Eskom effect.

Background to electricity.Why we should have cheap

electricity and why we do not.A few selected solutions

2www.Economists.co.za

Some facts about electricity in South Africa.

The income from residential and businesses from electricity is not only Eskom.

Eskom had a revenue of over R53,6 billion in the year to March 2009 while municipalities revenue from electricity was about R32,9 billion for the same period. That is a total R86,5 billion or around

3,7% of GDP. That means Electricity is bigger than

agriculture.


Facts about residential electricity

The average municipality household paid around R365 pm in 2008 while Eskom customers paid an average of R124 pm.

There are now over 12,3 million electricity accounts in South Africa (Some small businesses included here)

By comparison there are only 1,839 million mortgage accounts in SA.

This means that the effect of an electricity price hike is felt by 6,7 times more by consumers


Select SA cities: Electricity price per kwh.


Ba-Phalaborwa

Blouberg

eNdumeni

Bitou

Westonaria

Ulundi

Govan Mbeki

Tshwane

Cape Town

City of Joburg

Emfuleni

Kgatelopele

Letsememg

Greater Kokstad

0 20 40 60 80 100 120 140

Cents per Kilowatt hour for Eskom Residential sales


1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

50

100

150

200

250

300

Eskom Residential prices in cents per kwh.

Electricity prices and inflationEskom electricity prices have

increased with 91% since 2005 while inflation has only increased with about 35% over the same period.

Electricity prices are set to increase around 200% over the next five years.

This means that over a 10 year period between 2005 and 2014 Electricity prices on the current proposal would have increased 633%!


How we worked out an SA average household electricity price

We took a household using 800 kwh per month on a 60 Amp connection (This is an international standard used

by Eurostat.)We collected the actual prices for 51

municipalities and 8 different Eskom price rates.

From this we got a simple average which was just over 88 SA cents per kwh.


Household electricity prices in 53 selected countries 08/09.

9www.Economists.co.zaArgentina

Kazakhstan

Vietnam

Trinidad and Tobago

Korea, South

Mexico

Honduras

Chinese Taipei (Taiwan)

Ecuador

Estonia

United States

Romania

South African Average 09

Peru

New Zealand

Norway

Singapore

Uruguay

Chile

Brazil

Czech Republic

United Kingdom

Spain

Austria

Netherlands

Germany

Denmark

0.000 0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400

Projected household electricity prices 2010.


Argen

tina

China

Kazak

hsta

n

Trin

idad

and

Tob

ago

Korea

, Sou

th

Mexico

Hondu

ras

Chine

se T

aipe

i (Ta

iwan

)

Ecua

dor

Esto

nia

Colom

bia

Roman

ia

El S

alva

dor

Austra

lia

Greec

e

Pola

nd

Switz

erla

nd

Turk

ey

Finla

nd

Fran

ce

Sing

apor

e

Unite

d Kin

gdom

Spai

n

Austri

a

Nethe

rland

s

Germ

any

Denm

ark

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

SA increase @ 35% rest of the world at 6,5%

Projected household electricity prices 2012.


SA increase @ 35% rest of the world at 6,5%

Argen

tina

China

Kazak

hsta

n

Trin

idad

and

Tob

ago

Korea

, Sou

th

Mexico

Hondu

ras

Chine

se T

aipe

i (Ta

iwan

)

Ecua

dor

Esto

nia

Colom

bia

Roman

ia

El S

alva

dor

Austra

lia

Greec

e

Pola

nd

Urugu

ayChi

le

Brazil

Czech

Rep

ublic

Portu

gal

Slov

ak R

epub

lic (S

lova

kia)

Hunga

ry

Austri

a

Nethe

rland

s

Germ

any

Denm

ark

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

Current SA household electricity prices in a broader sense.

Household electricity prices in SA, are near the middle of these countries.

Currently the average household price is 14 US cent per kwh. SA is at 11,6 US cents per kwh.

Taking out developed countries however paints a different picture as the average rate for 29 developing countries is 10,4 US cents per kwh 12www.Economists.co.za

Households vs. Industry.

In SA Industry pays about 37,5% of the average household price. Only four countries give more of a discount. The average price that bigger industrial

users pay around the world is about 74% or about twice the SA rate.

This means that households in a sense subsidies industry. This is not sustainable.


Household electricity prices on PPP basis using the Big Mac Index.


ArgentinaNorway

South KoreaIsrael

MexicoUSA

EstoniaTaiwan

BrazilCzech Republic

ChileSouth Africa

United KingdomUruguayHungary

Euro area

0 0.05 0.1 0.15 0.2 0.25 0.3

Household electricity in PPP terms.

Out of 31 countries or areas SA household electricity price are already in the top third of countries.

All other things being equal if the proposed electricity rate hike come though we will have the most expensive electricity in this group within two years on a PPP basis.

Within four years our PPP electricity rate could be double that of the second most expensive area.


Why we should have cheaper electricity prices.South Africa uses coal the most and has one of the cheapest sources of coal in the world.

www.Economists.co.za 16

Steam coal prices in US dollars a ton – 2008/09


Sout

h Afr

ica

India

Turk

ey

Mex

ico

Unite

d St

ates

Polan

d

Tota

l OEC

D

Belgu

im

Korea

Unite

d Kin

gdom

Ireland

Finlan

d

Chine

se T

aipe

i

Austria

Fran

ce

Germ

any

Portu

gal

0

20

40

60

80

100

120

140

160

Steam coal for electricity prices in US Dollar per ton in 2008/9

Coal contract prices in Rand.Downward spiral.


Coal contract prices in selected countries

South Africa Russia China

Source: Reuters EcoWin

03 04 05 06 07 08 09

ZA

R p

er

met

ric

to

nn

e

100

200

300

400

500

600

700

800

900

1000

1100

1200

1300

1400

Why we don’t have cheap electricity prices.


Product market regulation in energy, transport and communication.Scale of the indicator is 0 - 6 from least to most restrictive of competition


United

Kin

gdom

United

Sta

tes

Austra

lia

Net

herla

nds

Den

mar

k

Ger

man

y

Canad

a

Swed

en

Spain

New

Zea

land

Belgiu

m

Japan

Nor

way

Finla

nd

AustriaItal

y

Portu

gal

Switze

rlan

d

Fran

ce

Irel

and

South

Africa

Gre

ece

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Municipal gross profit margin on electricity and water services.


Gauteng

North West

Free State

Total SA

Kwa-Zulu natal

Mpumalanga

Limpopo

Eastern Cape

Northern Cape

Western Cape

20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 110.0 120.0

Gross Profit margins

Was it a “real” R9,7 billion loss in 09?

Reason Rand Million

Extra coal bought R 2 192

Revenue loss from economic crisis R 2 261

Financial instrument loss R 2 370

Extra employee expenses R 3 813 Net Fair value loss on embedded Derivatives R 9 514

Total R 20 150


Just the derivative and financial instrument losses were R11,88 billion.

Some other Annual statement facts.

Personal costs rose 33,6% in one year. According to labour data Electricity

sector averages wages rose with 26,1% in year to March.

Energy costs rose by 38,4% but actual energy costs only rose about 25% while the rest was rebuilding the stockpiles.

Other operating expenses rose 30,8%!

Clearly Eskom does not have expenses under control.


Some mitigating facts.

Financing expenses will have to increase as the build program commences.

Higher maintenance for older power station are a fact.


Another look at income projection without build costs or financial instruments.

IncomeNormal energy

Personel

Depreciation Other Total "Profit"

200954902.5

2 19229.7 15166 4916 8591 47902.7 6999.82

201064167.3

217306.7

317061.7

5 5530.59664.87

549563.8

614603.4

7

201191221.8

720768.0

819194.4

76221.81

310872.9

857057.3

434164.5

3

2012133594.

4 26998.5 22553.56999.53

912232.1

168783.6

564810.7

8

2013 195649 32398.225372.6

97874.48

114678.5

3 80323.9115325.

1

2014 23879738877.8

427909.9

68858.79

216513.3

592159.9

3146637.

1

2015271464.

446653.4

130700.9

59966.14

118577.5

1 105898165566.

4


Table in millions of Rand. At the end of the period Eskom would have earned R548 billion enough to pay off all new power stations in five year period. Excludes government R60 billion. Includes current proposal at 45%.

Our thinking on Eskom.

No way is energy sector in South Africa efficient. We cannot burden the country for the

“few” and need to relook everything. We need better regulation and a better

regulator in this sector. We are governed by short-term thinking

and not longer term thinking. It has been a fact for quite a while that SA

does not have the cheapest electricity in the world. Get that false “fact” out of your heads! 26www.Economists.co.za

What we can do.


What we can do.

Break Eskom up into producers (about four) and combine reseller and Eskom before breaking them up into say 6 or 8 that must compete to sell to customers. Keep distribution separate from both producers and sellers. Producers (sell and list four with all

proceeds going into new power supply) Resellers who sell onto end users (Sell

and use money to fund poorer households)


More of what we can do

Buy electricity producers in neighbouring countries and fix them to provide electricity for us.

Get many longer-term international loans. WB, ADB, DBSA, and other government

agency finance. Implement two time zones in SA as

this could reduce electricity peak with up to 2,5%


Solutions in pricing.

Sell at the right price. Industrial and International electricity are sold below average cost. (Some years mining too) 32% of our electricity is sold below cost.

(Or if mining included then 47%)Much electricity is lost due to theft.

According to BBC about 6% of total but certain areas up to 60%! Charge people with illegal connections for theft in court and fine.


Transparency and taxes.

Electricity is also free for poor households and subsidised by other users. We need to fund this from taxes and give

vouchers so that poor can survive but also they can see what they are getting for free.

Municipalities need to have maximum gross profit margins set at say 50% and not up to 140%! Municipalities use this as a form of tax

and not service delivery.


Demand side management

Solar Geysers are expensive to most. We set too high standards and now one

can get a solar geyser for about R7000 from China but same Geyser on ESKOM website costs around R20 000 or more.

We must implement the buying of electricity from bigger users ASAP. It may pay them to more to produce

electricity at peak times and this would help.


Management.

Better management at ESKOM and Local government level needed urgently. One cannot let costs get out of control,

so much of the economy depends on it. More transparent management.

▪ Why big price increases at first then a little later others?

Local government must also publish figures of their costs more regularly.

Compare more aspects of electricity and not just cheap industrial rates in annual reports.


Thank youQuestions.


Documents

The economic crisis fades but new danger lurk on the horizon for SA – Mike Schussler Economists.co.za 1