Who’s fooling who when electricity prices rise in a stagnating economy?
There are enough impediments to growth without also increasing the cost of manufacturing’s lifeblood
April is associated with the world-recognised Fool’s Day. This year, where the SA economy is concerned, the electricity price, which has been hiked more than 15.6%, could be part of that April madness.
The economy is facing challenges such as low growth, declining levels of investment and low production levels, with industrial capacity utilisation below 75% on average. The industrial landscape is characterised by several impediments, including rising electricity costs, unreliable electricity supply, rising logistical costs, an influx of cheap imports, insufficient demand and declining producer prices of manufactured goods. These have affected industrial companies by increasing their costs amid dwindling revenues, making industry unattractive to investment, which has in turn led to job losses.
The manufacturing sector’s total employment fell from 1.3-million to 1.1-million between the third and fourth quarters of 2020. During the same period total employment in the metals and engineering sector fell from 448,532 to 394,651, representing a decline of 12%.
With unemployment at 32.5% and the economy having declined by 7%, the higher electricity prices effective from April Fool’s Day add irony in a country that wants to grow its economy, especially since that power is provided by Eskom, a utility that cannot supply it sustainably.
SA has been negatively affected by the Covid-19 pandemic due to the lockdown measures that were implemented. It is therefore strange that this decision was taken despite communication and opposition by both consumers and industry representatives such as the Steel & Engineering Federation of Southern Africa (Seifsa). To make matters worse, the tariff was enforced through the courts, leaving industry and consumers with no option but to comply, with no recourse available to them.
The growth and development of China, one of the largest economies in the world today, was made possible by the availability of relatively cheap energy. It is also recognised in economic theory that electricity is a fundamental factor of industrial production. The industrial process consists of work performance and information processing, in terms of which the production factors and the output can be defined and aggregated. The equation of growth relates the growth of output to the growth of production factors such as capital, labour and energy flow. Any policy direction should therefore take the energy factor seriously and form part of industrial policy strategy, especially in relation to its costs and provision.
SA’s policymakers are failing the nation on this front, given the electricity price hikes. It is worrying that such a decision would be taken at a time when manufacturing production’s share of the overall economy has declined due to the uncompetitive cost base of the industrial sector.
Electricity plays an essential role in SA’s production capacity. It is crucial for the manufacturing sector, where electricity is considered an irreplaceable input. In SA the industrial sector is responsible for an average of 47% of total electricity consumption, which makes it one of the most important from an energy consumption point of view. The manufacturing sector is the only one whose electricity consumption behaviour is sensitive to price fluctuations, which has been proved by empirical studies.
The basis for increasing electricity prices in a declining economy raises questions about who was fooling who this April. Price control should never be used as a method to control electricity demand in the short term. However, even if price control causes a decrease in electricity usage, the decrease in electricity demand results in a decrease in economic activity as electricity use plays a key role as one of the input factors. This has affected production in energy-intensive industrial sectors such as the metals, mining and steel industries in SA, in some cases leading to company closures.
Instead of trying to drive revenue generation through electricity price increases, SA should rather focus on expanding its capacity to supply electricity and grow the volume base of its industrial footprint, from which more revenue can be generated. It remains concerning that despite the country having constructed two additional power plants in Medupi and Kusile, these plants are still operating below capacity, with stories of mismanagement dominating headlines in recent years.
This makes the SA energy crisis a man-made problem that can be resolved through proper reform at Eskom. The government should take this process seriously, before our industrial base reaches below the level of a 5% contribution to overall GDP.
• Mhango is Seifsa chief economist.
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