South Africa's Electricity PricesAt the Tipping Point We cannot afford to get it wrong!
Presenting to the DTI PPC2 November 2012
AGENDA
• Primary Sector leads Job & Economic Growth
• MYPD3 Prices will Slash Growth and Jobs
• Industrial, Commercial and Domestic Sectors Impacted
• The Solution
• Conclusion
The delicate balance in transformation!Job retention/creation in primary, secondary and tertiary sectors
Exploration Mining ConcentratingSmelting/Extraction
MetalRefining
Producing Products for
ManufacturingValue Chain
Producing Products for
Retail
Marketing &Sales
China, India, Russia etc are progressively taking jobs from South Africa by importing South African ore in raw form
and investing in these higher value adding steps!South Africa then has to import the value add good from China.
South Africa is selling its birthrights!
New
Job C
reati
on
New
Job C
reati
on
SA cannot leapfrog the value nodes without a surplus of skilled labour!
Plus Tertiary Value Chain Jobs
Primary Value Chain Jobs
Plus Secondary Value Chain Jobs
Interrupted! South Africa’s
Economic Transformation
Source: GAPMINDER
Growth driven by credit fuelled Non-
tradable Sectors
Tradable export sectors have
languished…..
Tradable sectors
Non-tradable sectors
Low Job
Creating
High Job
Creating
Non-tradable sector – Sucking-in imports and creating external imbalances, such as running large current account deficits…..
AGENDAWe are at a Tipping Point
•Primary Sector to lead Job & Economic Growth
•MYPD3 Prices will Slash Growth and Jobs
•Industrial, Commercial and Domestic Sectors Impacted
•The Solution
•Conclusion
Losing the BalanceMust be Tough on Costs, Subsidies & Sales…
Soft on Prices
Price
Sales
Costs &Subsidies
Too Low!Too Low!
Rising TooRising TooFast &Fast &High!High!
= Unaffordable= Unaffordable
Too High!Too High!DictatingIndustrial
Policy?
Electricity Prices are Making South Africa Non Competitive
MYPD3 IRP 2010 Future Economy?
Sources: IRP2010, Eskom, Frost & Sullivan, EIUG
Eskom's MYPD3 Application
EIUG Modelling
Best CaseEfficiencyPrice Path
Worst CaseEfficiencyPrice Path
130 Rc/kWh (by 2022)
Eskom's MYPD3 Application (Scenario 1)
The Tipping Point for RSA
Source: Eskom and The U.S. Energy Information Administration (EIA)
Threat to the Future of Silicon Smelting in South Africa
Threat to the Future of Steel Production in South Africa
Source: EIUG Steel Industry Data
2022 South Africa MYPD3 Scenario 1
Threat to the Future of FeCr Smelting in South Africa
MYP
D 3
US
mill
s pe
r kW
h
Source: CRU for comparison up to 2011, SA escalations going forward shown in real 2011 terms with CPI of 5% assumed
Commodity World Rank in reserves
RSA % share of known total global reserves
PGM's 1 88%
Manganese 1 80%
Chromium 1 72%
Gold 1 14%
World Chrome Ore resources by region Breakdown of market share for FeCr production
SA Ferrochrome market share is being displaced to China
Flight of South African Industry!
Open
Closed
Semi-closed
8
13
18
23
28
33
38
43
Notwithstanding that South Africa is the World leader in ferrochrome manufacturing technology—almost 100% locally-sourced
China
India
Kazakhstan
South Africa
Furnace type(Open vs Closed)
China
India
Kazakhstan
South Africa
Furnace size (MVA)
China4.08
India
Kazakhstan
South Africa
Power consumption(MWh/t)
4.03
3.98
3.88
3.83
3.78
3.73
3.68
3.93
SA Mining and Industry being Priced out of Jobs Cost of doing business in SA has grown at an alarming rate
SA FeCr industry cost growth
Source: CRU, Xstrata Analysis, Company annual reports
CAGR 11.1%
CAGR 8.4%
Serious Impact from Electricity Price increases Sample of 13 Large South African Industrial
Companies
Source: Genesis Analytics
2012
2017
Mining Alone – An Essential Core Of SA Economy
• Creates 1.3 million jobs (500 000 direct & 800 000 indirect).
• Accounts for about 19% of GDP (9% direct, 10% indirect & induced).
• Critical earner of foreign exchange >50%.
• Accounts for 20% of investment (12% direct).
• Attracts significant foreign savings (R1.4 trillion/ 29% of value of JSE).
• 17.7% of corporate tax receipts, 2011 R26bn & R5.5 billion in royalties.
• R437 billion in expenditures, +/- R389 billion spent locally.
• R89 billion spent in wages and salaries
• 50% of volume of Transnet’s rail and ports
• 94% of electricity generation via coal power plants
• 15% of electricity demand
• About 37% of country’s of liquid fuels via coal
• R4 billion spent on skills development
• R1.4 billion spent on community investment
AGENDAWe are at a Tipping Point
•Primary Sector to lead Job & Economic Growth
•MYPD3 Prices will Slash Growth and Jobs
•Commercial and Domestic Sectors also Impacted
•Recommendations
•Conclusion
Household electricity prices on PPP basis using the Big Mac Index –
2009 to 2012
www.Economists.co.za
RSA 2012
RSA 2009
AGENDAWe are at a Tipping Point
•Primary Sector to lead Job & Economic Growth
•MYPD3 Prices will Slash Growth and Jobs
•Industrial, Commercial and Domestic Sectors Impacted
•The Solution
•Conclusion
RecommendationsA. Cut Inefficient Costs
A. Improve ESKOM Operating Efficiencies
B. Improve ESKOM Capital Cost Efficiencies
C. Accelerate IPP’s
D. Remove Non-Electrical Subsidies
E. Improve Consumption Efficiencies
B. Increase Electricity Sales
C. Reduce Excessive Safety Margins if Funding Allowances
Eskom’s Operating Efficiencies Low!
A Universal Fact:Unplanned Work is > 50% more expensive than planned work
Metric Eskom's Standard Actual Today
Availability Factor >90% <84%
Unplanned Work <3% >14%
IPP’s and Competition will Ensure Efficiencies Return
Eskom’s Building Efficiencies Low
IPP’s< 75 c/kWh
Eskom 95 c/kWh
Source: Black & Veatch
Inefficiency in Current Domestic Demand
Reducing
Increasing
Eskom Revenue is GuaranteedPrices Soar if Energy Sales are Low or
Fall
=Revenue Requirem
ent
Cost of SalesCost of Sales
O&MO&M
Overhead CostsOverhead Costs Asset DepreciationAsset Depreciation
+
+ +
Prudent expenditure
Prudent expenditure
x
OtherOtherReturn &Depreciation
Return &Depreciation+ +
% Return on Assets (ROA)
% Return on Assets (ROA)
Asset BaseAsset Base
• Levies• Taxes• Claw-back
Primary EnergyImportsIPP Purchases
StaffMaintenance
Revalued AssetsWUC
ForecastEnergy Sales
ForecastEnergy Sales = Revenue Revenue
PricePrice
Reduce Prices byIncreasing Sales
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Debt
:Equ
ity R
atio
or P
rice
(R/k
Wh)
Price & Debt Equity Cones (Prices Real 2010)
Reduce Excessive Safety Margins in Funding
Source: Frost & Sullivan
Parameter Current Justifiable
Return on Assets Real 8,16% 4 to 6%
Asset Valuation Historic to Replacement Slower transition
Financing Tariff Tariff and Project Financing
Eskom Debt Equity 0.2 to 0.5 0.5 to 0.8
Price (10% ROA)
Price (4% ROA)
d:e(4% ROA)
d:e(10% ROA)
Justifiable d:e
Justifiable Price
Subsidies are Killing JobsBy 2017/18 >24% of the
Industrial Tariff is Subsidy
Contribution
By 2017/18 It could be >30%
Excluding Municipal
Subsidies Added
On Top of this Municipalities are Loading the variable (energy) charges
The true reflection of what is actually being charged is however often understated due to non-standard charges. NERSA regulates categories consisting of an energy charge, a demand charge and a fixed charge. Surcharges and levies fall outside the mandate of NERSA and Nersa is thus not in a position to regulate additional levies or surcharges that municipalities impose. Municipalities appear to be able to apply such non-standard charges at their discretion with little or no regulation.
Sources: BDO, select municipalities
And on Top of this Municipalities are also Loading the fixed (Demand)
charges
A recent BDO analysis of the purchase costs from both Eskom and the municipalities making up the study found that there is a heavy bias in the costs for the demand charge component of electricity. The tariffs bear the imprint of historical investment decisions at the point of their inception. The question must be asked why such inflated charges are still being charged against equipment that should be fully depreciated.
Sources: BDO, select municipalities
AGENDAWe are at a Tipping Point
•Primary Sector to lead Job & Economic Growth
•MYPD3 Prices will Slash Growth and Jobs
•Industrial, Commercial and Domestic Sectors Impacted
•The Solution
•Conclusion
ConclusionTough on Costs, Subsidies & Sales
Soft on Prices
A. Cut Inefficient Costs – Do Not Simply Increase Prices
B. Refine funding Model – Regulatory Methodology needs to be reassessed
C. Remove Excessive Funding Safety Margins
D. Increase Sales – This reduces Prices
E. We do not need Subsidies – Just Remove the non Cost Reflective charges
QUESTIONS
34