Power costs to short-circuit spending

Julian Wentzel, head of research at financial services group Macquarie, said that "on average, this shaves off between 2.5% and 5% on consumption expenditure per annum".

"We understand the necessity for Eskom to raise the capital, but it is going to have a punitive effect on consumption and it will dislocate expenditure from other discretionary items."

Wentzel expects the impact to "set back retail in South Africa by a decade".

Using a base of 12 million households and an average monthly electricity bill of R600, it is equivalent to a capital reduction of R150000 for every household.

"Assuming average wage inflation of 8% per year for the five years, the shortfall per month net of your wage increase on an average electricity bill of R600 would be R1489 per month by 2014."

The impact of higher electricity prices is already filtering through.

In the six months ended August, Pick n Pay's electricity bill was R47-million higher than the previous comparable period, and is likely to be about R100-million higher for the full financial year.

Nick Badminton, CEO of Pick n Pay, said Eskom's proposed increases would result in a 40% increase in the supermarket chain's power bill for the full year, with more to come later.

"The price consumers will have to pay for electricity will have a huge impact on them. It's a massive worry," said Badminton.

The proposed hikes will be felt across the economy, but especially by industries that use a lot of electricity.

Nick Holland, CEO of miner Gold Fields, said that with a 35% increase in the electricity price since July, direct power charges now make up 14% of costs.

With what will effectively amount to a 200% increase over the next three years, the mining industry, the gold sector and the economy as a whole will be significantly affected, Holland said.

In addition to direct costs, "all input costs will be affected, so industries like mining get a double whammy".

Gold Fields estimated the direct cost of the hike to be 18% across the group, with South African operations experiencing cost increases of as much as 29%.

Power will soon account for about 30% of total costs.

"I am going to be urging government - with other parts of the industry - to do this in a better way," he said.

On top of higher costs, mining companies and other big users have had to cut back electricity usage since the national emergency in January last year. Holland said Gold Fields had cut back 10%.

Economists warned that the effect of the power price hikes would be huge. Economists.co.za's Mike Schussler said electricity already accounted for close to 7% of producer inflation.

For the manufacture of some gases, for example, like those used in soft drinks, electricity can account for 70% of costs. The effect on inflation and on economic growth are huge.

This year, once the new price rises kicked in, retail sales felt the pinch. If prices are increased at the same time each year, every third quarter will be weaker.

Annabel Bishop, economist at banking group Investec, said Eskom's biggest cost is capital expenditure - "which we estimate at R1.25-trillion to 2025".

"The South African private sector will never be able to finance the entire bill through an increase in electricity tariffs, nor should they. Infrastructure is financed through borrowings, operational costs through revenue.

"If Eskom, in conjunction with or without government, is unable to raise sufficient capital on the debt market, there is then a strong case for a loan from the World Bank," said Bishop.

A World Bank loan would be preferable to "the alternative route of reducing South Africa's competitiveness by implementing immense and ever-growing electricity price hikes".

Bishop said an ever-increasing financial burden was being placed on the dwindling taxpayer base.

Schussler agreed, and said government and Eskom should look at other ideas, like introducing two time zones, daylight saving, solar energy and reviving the gas network in Johannesburg.

Currently, industry is not able to sell excess power back to Eskom, and this should be facilitated. Also, the efficiency of municipalities is a major problem.

Kevin Lings, head of economic research at Stanlib, said the effect on GDP growth was estimated at 0.4% to 0.5% of GDP.

With electricity comprising 1.7% of the inflation basket, an increase of 40% to 45% in electricity prices has an immediate impact of 0.6% to 0.7% a year.

If electricity goes up 45% a year, that adds another half a percent to inflation on an annual basis.

However, Neil Cloete, managing director of construction and engineering group Grinaker-LTA, said the direct impact would be minimal in his industry, with construction costs marginally affected. Much of the power generated for contracts was via portable units and not Eskom-dependent.

Cloete predicted negative effects on private infrastructure investment "and our ability to attract big industrial electricity users to South Africa on the back of cheap electricity".

Source: Sunday Times

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