South africa s electricity prices at the tipping point we cannot afford to get it wrong
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South Africa's Electricity Prices At the Tipping Point We cannot afford to get it wrong!. Presenting to the DTI PPC 2 November 2012. AGENDA. Primary Sector leads Job & Economic Growth MYPD3 Prices will Slash Growth and Jobs Industrial, Commercial and Domestic Sectors Impacted The Solution

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South africa s electricity prices at the tipping point we cannot afford to get it wrong

South Africa's Electricity PricesAt the Tipping Point We cannot afford to get it wrong!

Presenting to the DTI PPC

2 November 2012


Agenda

AGENDA

  • Primary Sector leads Job & Economic Growth

  • MYPD3 Prices will Slash Growth and Jobs

  • Industrial, Commercial and Domestic Sectors Impacted

  • The Solution

  • Conclusion


South africa s electricity prices at the tipping point we cannot afford to get it wrong

Value Chain

Marketing &

Sales

Producing Products for Retail

Exploration

Mining

Concentrating

Smelting/

Extraction

Metal

Refining

Producing Products for Manufacturing

The delicate balance in transformation!Job retention/creation in primary, secondary and tertiary sectors

New Job Creation

SA cannot leapfrog the value nodes without a surplus of skilled labour!

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!

Plus Tertiary Value Chain Jobs

Plus Secondary Value Chain Jobs

Primary Value Chain Jobs


Interrupted south africa s economic transformation

Interrupted! South Africa’s Economic Transformation

Source: GAPMINDER


South africa s electricity prices at the tipping point we cannot afford to get it wrong

Growth driven by credit fuelled Non-tradable Sectors

Tradable export sectors have languished…..

Low Job Creating

Non-tradable sectors

High Job Creating

Tradable sectors


South africa s electricity prices at the tipping point we cannot afford to get it wrong

Non-tradable sector – Sucking-in imports and creating external imbalances, such as running large current account deficits…..


Agenda1

AGENDA

  • We 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 balance must be tough on costs subsidies sales soft on prices

Losing the BalanceMust be Tough on Costs, Subsidies & Sales…Soft on Prices

Rising Too

Fast &

High!

Price

Dictating

Industrial Policy?

Too High!

Costs &

Subsidies

= Unaffordable

Sales

Too Low!


Electricity prices are making south africa non competitive

Electricity Prices are Making South Africa Non Competitive

130 Rc/kWh (by 2022)

Worst Case

Efficiency

Price Path

EIUG Modelling

Eskom's MYPD3 Application

Eskom's MYPD3 Application (Scenario 1)

Best Case

Efficiency

Price Path

IRP 2010

Future Economy?

MYPD3

Sources: IRP2010, Eskom, Frost & Sullivan, EIUG


The tipping point for rsa

The Tipping Point for RSA

Residential

Residential

Commercial

Mining & Industrial

Commercial

Industrial

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 Silicon Smelting in South Africa


Threat to the future of steel production in south africa

Threat to the Future of Steel Production in South Africa

2022 South Africa

MYPD3 Scenario 1

Source: EIUG Steel Industry Data


Threat to the future of fecr smelting in south africa

Threat to the Future of FeCr Smelting in South Africa

MYPD 3

US mills per kWh

Source: CRU for comparison up to 2011, SA escalations going forward shown in real 2011 terms with CPI of 5% assumed


Flight of south african industry

SA Ferrochrome market share is being displaced to China

Flight of South African Industry!

World Chrome Ore resources by region

Breakdown of market share for FeCr production


South africa s electricity prices at the tipping point we cannot afford to get it wrong

Notwithstanding that South Africa is the World leader in ferrochrome manufacturing technology—almost 100% locally-sourced

  • Furnace type

  • (Open vs Closed)

  • Furnace size

  • (MVA)

  • Power consumption

  • (MWh/t)

  • Closed

  • South Africa

  • 3.68

  • South Africa

  • South Africa

  • 43

  • 3.73

  • 38

  • 3.78

  • Kazakhstan

  • 33

  • 3.83

  • 28

  • Semi-closed

  • 3.88

  • Kazakhstan

  • 3.93

  • 23

  • Kazakhstan

  • India

  • 3.98

  • 18

  • India

  • India

  • 4.03

  • 13

  • 4.08

  • China

  • China

  • China

  • Open

  • 8


South africa s electricity prices at the tipping point we cannot afford to get it wrong

SA Mining and Industry being Priced out of Jobs

Cost of doing business in SA has grown at an alarming rate

CAGR 11.1%

SA FeCr industry cost growth

CAGR 8.4%

Source: CRU, Xstrata Analysis, Company annual reports


South africa s electricity prices at the tipping point we cannot afford to get it wrong

Serious Impact from Electricity Price increases Sample of 13 Large South African Industrial Companies

2017

2012

Source: Genesis Analytics


South africa s electricity prices at the tipping point we cannot afford to get it wrong

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


Agenda2

AGENDA

  • We 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

Household electricity prices on PPP basis using the Big Mac Index – 2009 to 2012

RSA

2012

RSA

2009

www.Economists.co.za


Agenda3

AGENDA

  • We 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


Recommendations

Recommendations

  • Cut Inefficient Costs

    • Improve ESKOM Operating Efficiencies

    • Improve ESKOM Capital Cost Efficiencies

    • Accelerate IPP’s

    • Remove Non-Electrical Subsidies

    • Improve Consumption Efficiencies

  • Increase Electricity Sales

  • Reduce Excessive Safety Margins if Funding Allowances


Eskom s operating efficiencies low

Eskom’s Operating Efficiencies Low!

  • A Universal Fact:

  • Unplanned Work is > 50% more expensive than planned work

IPP’s and Competition will Ensure Efficiencies Return


Eskom s building efficiencies low

Eskom’s Building Efficiencies Low

Eskom

95 c/kWh

IPP’s

< 75 c/kWh

Source: Black & Veatch


Inefficiency in current domestic demand

Inefficiency in Current Domestic Demand

Reducing

Increasing


Eskom revenue is guaranteed prices soar if energy sales are low or fall

Eskom Revenue is GuaranteedPrices Soar if Energy Sales are Low or Fall

Revenue Requirement

=

Return &

Depreciation

Prudent expenditure

+

+

Other

  • Levies

  • Taxes

  • Claw-back

Revenue

Price

Forecast

Energy Sales

=

% Return on Assets (ROA)

Cost of Sales

x

+

Primary Energy

Imports

IPP Purchases

Asset Base

O&M

Revalued Assets

WUC

+

+

Staff

Maintenance

  • Reduce Prices by

  • Increasing Sales

Overhead Costs

Asset Depreciation


Reduce excessive safety margins in funding

Reduce Excessive Safety Margins in Funding

Source: Frost & Sullivan

Price

(10% ROA)

Justifiable Price

Price

(4% ROA)

d:e

(4% ROA)

Justifiable d:e

d:e

(10% ROA)


Subsidies are killing jobs

Subsidies are Killing Jobs

By 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

On Top of this Municipalities are Loading the variable (energy) charges

Sources: BDO, select municipalities

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.


And on top of this municipalities are also loading the fixed demand charges

And on Top of this Municipalities are also Loading the fixed (Demand) charges

Sources: BDO, select municipalities

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.


Agenda4

AGENDA

  • We 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


Conclusion tough on costs subsidies sales soft on prices

ConclusionTough on Costs, Subsidies & SalesSoft on Prices

Cut Inefficient Costs – Do Not Simply Increase Prices

Refine funding Model – Regulatory Methodology needs to be reassessed

Remove Excessive Funding Safety Margins

Increase Sales – This reduces Prices

We do not need Subsidies – Just Remove the non Cost Reflective charges


Questions

QUESTIONS


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