Introduction

Eskom Tariff Motivation

Cost Implications

Economic and Global Competiveness

Recommendation

Content

The Port Elizabeth Regional Chamber of Commerce & Industry (PERCCI), representing the interests of business in the Nelson Mandela Bay metropolitan area, rejects Eskom's proposed 35% electricity tariff increase.

The proposed increase will have a significant adverse economic impact and pose a considerable challenge to the continued survival of the manufacturing industry and commercial sector in this region.

The increase will constitute a serious setback to the competitiveness of our products locally and on the global market.

It has been argued that the proposed increase is required to fund capital expenditure to bring generation capacity in line with expected demand. However, the build programme appears to have lost momentum in line with reduced demand due to the economic downturn. In light of the reduced spending requirement, the need for additional funds is questionable. In addition, efforts to reduce demand through promoting energy efficiency must be stepped up.

The proposed Power Conservancy Programme “PCP” legislation has not been finalised and will have a devastating impact on high energy users and limit growth. Coupled with this proposed 35% increase, the effect will greatly reduce viability of certain industries.

Introduction

Electrical Tariff Increases Motivation

The need to increase generation capacity and to find capital for the build programme is recognised. However, we have the following concerns:

The NERSA application is to fund increased capacity. This is to improve the low reserve margin. Eskom are delaying a portion of the build program. Why can we not re-phase the increase accordingly?

Consumption decreasing: Sales decreased in the last financial year by 4.2% according to Eskom’s 2009 financial report. With negative growth in the economy why can Eskom not reconsider timing on capital spend?

With new technology we improve efficiencies. There is no commitment to ensure efficiency improvements will offset increases of this nature going into the future. What is Eskom doing to reduce its capital, operating and primary energy costs? This is without affecting reliability due to reduced maintenance as proposed in your application?

Coal cost in S.A is one of Eskom’s concerns. Coal supply was one of the primary reasons for the rolling black-outs in 08/09. What is Eskom doing to improve its efficiencies in meeting coal requirements efficiently and effectively?

We started 2008 with little or no coal stockpiled. In 2009 we essentially brought this up to 41 days. The coal purchased for this financial year will be for 12 months and not include the expense of 13,5 months as did 2009. Why are our coal costs increasing for 2010?

Coal production in terms of long-term coal supply agreements is down, resulting in more expensive short/medium-term coal agreements having to be utilised. Why are we allowing these inefficiencies from the coal miners on long-term contracts and what is Eskom doing to manage its coal pricing and transportation?

With the 35% increase you show you will still have a deficits of R14,1-billion for 2011/12 and R7,9-billion in 2012/13. Then 2013/14 shows a R18.089-billion surplus and 2014/15 a R43.302-bllion surplus. Why can we not spread this increase over 5 years if required?

Impact on Business

The negative knock-on effect on the Eastern Cape economy.

Predictions that staff will have to be retrenched.

Goods and services would be less competitive on local and global markets.

Small businesses with high electrical input cost would not be able to afford the increase along with high rentals, and would simply have to close down. Examples of these are Hair Dressing salons, Laundromats, Fast Food outlets.

The Nelson Mandela Metro has already increased the water tariff by 20% due to the drought. The added utility costs will negatively impact business in the region.

The introduction and legislating of the “PCP”. The process as is only targets business and they are the ones we should be protecting to ensure job security.

After-tax profits will be impaired.

Negative impact on the poor.

Trend of Electricity Cost Large Business 6.6kV and Above

NMBM absorbed Eskom Increases

Eskom Increases - Estimated Cost Implication to Large BusinessConsumer Category: 6.6kV and Above

An example of how much higher an average business' electricity bill will be after the 2010 hike, using a large manufacturer – one of the city’s top 40 electricity users – as an example. 1st Year increase = R6-million MORE 2nd Year increase = R14-million MORE 3rd Year increase = R25-million MORE NEW BILL in 2012 = R42.7-million

Note: This is over and above what the company pays now.

Eskom Increases - Estimated Cost Implication

Consumer Category : Medium BusinessA medium-sized business consumer with an average bill of a R100,000 per month, i.e. R1.2-million/year, would see the following :

1st Year increase = R420,000 MORE 2nd Year increase = R987,000 MORE 3rd Year increase = R1.75-million MORE NEW BILL in 2012 = R2.95-million

Note: This is over and above what the company is paying now.

A medium household with an average bill of R 800.00/month, i.e. R9,600.00/year, would see the following :

1st Year increase = R3,360 MORE 2nd Year increase = R7,896 MORE 3rd Year increase = R14,019 MORE NEW BILL in 2012 = R23,619

Note: This is over and above what the household pays now

Consumer Category : Domestic

Socio-economic & development impact

• Interest rates increase.

• Personal disposable income would be reduced.

• Lowered employment.

• Socio-economic domino effect.

Economic Impact and Global CompetitivenessThe proposed increase will have a significant adverse economic impact and pose a considerable challenge to the continued survival of the manufacturing industry in this region. The increase will constitute a serious setback to the competitiveness of our products locally and on the global market.This becomes increasingly difficult for manufacturers as the overhead cost is not absorbed with the lower volume.

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Electricty Consumption [ MWh ] Production [units] Electricity per unit

Typical Automotive Production and Electricity Consumption data (kWh) 2004 – 2009

Economic Impact and Global Competitiveness

The historical cost of electricity has given the manufacturers in the region a competitive advantage against the global competition.

This is being eroded. South Africa's relatively cheap electricity cost, in comparison with the rest of the world, is a major competitive advantage in attracting investment. Eskom can argue that the proposed increase will not bring us to the price levels of the rest of the world, but the fact remains that it will seriously erode this competitive advantage and bring us in line with first world electricity costs.

Global Electricity Cost Benchmarking (US$/MWh)2008

In rejecting the proposed increase, we recommend:

• That attention is paid to the efficiency of Eskom's structures and reduction of structural costs across all sectors of the organisation.

• As Eskom is a state-owned enterprise, Government should subsidise Eskom's build programme because of the reluctance to introduce private enterprise into the energy industry; IDC and DBSA can be approached with a debt service plan.

• That the price of exported electricity be increased above that of the local increase in order to first protect the viability of industry within our own borders.

• That incentives be considered to reduce and remove non-productive, wasteful and inefficient energy consumption from the grid. DSM is one tool but is not efficient and effective to allow participation of all sectors. Measures be put in place to approve funding at a regional level to eliminate some of the bureaucracy.

• That the import of inefficient energy appliances, fixtures and lighting be prohibited, in order to contribute to demand reduction and limit the need for capital expenditure on new generating facilities;

• That Government legislates energy efficient practices in the building industry to reduce the burden when new infrastructure is connected to the grid.

• As in the MYPD application we support the call for Government to ensure the roads are maintained.

• Theft of electricity and conductor theft contributing to revenue loss and maintenance costs. Engage Government and request improved legislation on metal merchants who are creating the market for conductor theft and safety and security services for illegal connections.

Recommendations

Regional Demand Profile – Eastern Cape 30% increase in demand for 3

hours/day.

06h00 18h00

Agricultural, 3

Commercial,

28

Domestic (Rural), 4

Domestic(Urban), 33

Industrial, 28

Traction, 4

Reduce the peak demand•The high energy users who have the benefit of cheaper electricity because they can be interruptible. This needs to be enforced to eliminate peaks.

•Explore the use of Ripple Control thoughout South Africa to interrupt non-essential loads.

•Time of Use Tariff – Applicable to Commercial and Domestic consumers.

•Educate domestic consumers that they are responsible for 33% of the load and play a part in peak demand

Recommendations continued