LUNGILE MASHELE: Suppressing power tariffs has shot the economy in the foot
Consumers end up pay far more for both electricity and energy than if charges reflected Eskom’s costs
01 August 2024 - 05:00
byLungile Mashele
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Electricity tariffs can no longer be suppressed; they need to be cost-reflective. Not just for utilities and municipalities to remain sustainable, but for customers to get quality and reliable services. Over the past two decades tariffs have been kept superficially low to “grow the economy”, but it has had the opposite effect.
Tariffs that do not adequately reflect costs lead to energy poverty. This may sound counterintuitive, but allow me to explain. If utilities and municipalities are unable to meet societal energy demands due to constrained tariffs, people have to resort to alternatives, such as paraffin, solar, gas and lignite. These costs are coupled with electricity tariffs they still need to pay.
Consumers end up paying far more for both electricity and energy than if they had just had to cope with a tariff increase. For instance, a person now experiencing load-reduction (which is most likely to be a low-income customer) has the added burden of paying for candles, gas canisters or paraffin, and buying takeaways for dinner, over and above their monthly electricity spending.
For many years we have accepted that suppressing electricity tariffs is beneficial to the economy. However, if the past year has proved anything it is that by allowing fair recovery of the tariff, assisted by a fiscal injection, Eskom has been able to execute maintenance that has allowed it to stave off the load-shedding that was crippling the economy.
The financial constraints Eskom faced led to inadequate investment in infrastructure and maintenance. This resulted in frequent power outages, affecting households, businesses and industries.
Suppressing tariff revenue worsens the root cause of an economic crisis. The lack of electricity leads to suppressed economic growth. Industry is not guaranteed adequate electricity, and industry and commerce start to decrease output, which leads to their closure, followed by unemployment and no economic growth.
The World Bank’s 2016 report Financial Viability of Electricity Sectors in Sub-Saharan Africa found only two utilities that were financially viable. Most couldn’t cover their operating costs and had challenges with revenue collection, and the average tariff increase that was required was 24%.
The SA Reserve Bank has previously said the intensity of load-shedding directly affects the real GDP growth. Its estimate is that load-shedding reduced economic growth by about 1.8 percentage points in 2023.
Electricity prices need to be cost-reflective, but the real issue is: who pays and what must they pay? A mix of the user-pays principle and government subsidies is required.
There are about 3.51-million indigent households in SA. These are the people who should benefit from government subsidies that are targeted, direct and transparent. Targeted and direct subsidies would mean that by electricity volume they would constitute only a small percentage of consumers.
The subsidy must come from the fiscus. If it is funded through cross-subsidisation, you force more people and companies to invest in rooftop solar, and inadvertently kill the goose that lays the golden egg by encouraging the wrong tariff structure. The policy instruments are limited, though, because this means you must increase tax rates (PAYE or VAT) to fund it.
Then there are prepaid customers who were previously subsidised, the subsidy having fallen away due to the migration of more people to prepaid meters. SA’s municipalities introduced the fixed tariff component in 2017, but the City of Johannesburg failed to do so. Hence the sudden shock.
In cost-reflective tariff setting, if you increase your fixed tariff component, your volumetric tariff should come down. The tariff structure in both instances should not change the utility’s revenue, which is sacrosanct.
The costs of unserved energy, load-reduction and load-shedding are more expensive than tariff increases. Stable electricity and economic growth are what we all need. When utility tariffs are suppressed it leads to a downward economic spiral that ends up hurting the very people you’re trying to protect.
• Mashele, an energy economist, is a member of the board of the National Transmission Company of SA.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
LUNGILE MASHELE: Suppressing power tariffs has shot the economy in the foot
Consumers end up pay far more for both electricity and energy than if charges reflected Eskom’s costs
Electricity tariffs can no longer be suppressed; they need to be cost-reflective. Not just for utilities and municipalities to remain sustainable, but for customers to get quality and reliable services. Over the past two decades tariffs have been kept superficially low to “grow the economy”, but it has had the opposite effect.
Tariffs that do not adequately reflect costs lead to energy poverty. This may sound counterintuitive, but allow me to explain. If utilities and municipalities are unable to meet societal energy demands due to constrained tariffs, people have to resort to alternatives, such as paraffin, solar, gas and lignite. These costs are coupled with electricity tariffs they still need to pay.
Consumers end up paying far more for both electricity and energy than if they had just had to cope with a tariff increase. For instance, a person now experiencing load-reduction (which is most likely to be a low-income customer) has the added burden of paying for candles, gas canisters or paraffin, and buying takeaways for dinner, over and above their monthly electricity spending.
For many years we have accepted that suppressing electricity tariffs is beneficial to the economy. However, if the past year has proved anything it is that by allowing fair recovery of the tariff, assisted by a fiscal injection, Eskom has been able to execute maintenance that has allowed it to stave off the load-shedding that was crippling the economy.
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The financial constraints Eskom faced led to inadequate investment in infrastructure and maintenance. This resulted in frequent power outages, affecting households, businesses and industries.
Suppressing tariff revenue worsens the root cause of an economic crisis. The lack of electricity leads to suppressed economic growth. Industry is not guaranteed adequate electricity, and industry and commerce start to decrease output, which leads to their closure, followed by unemployment and no economic growth.
The World Bank’s 2016 report Financial Viability of Electricity Sectors in Sub-Saharan Africa found only two utilities that were financially viable. Most couldn’t cover their operating costs and had challenges with revenue collection, and the average tariff increase that was required was 24%.
The SA Reserve Bank has previously said the intensity of load-shedding directly affects the real GDP growth. Its estimate is that load-shedding reduced economic growth by about 1.8 percentage points in 2023.
Electricity prices need to be cost-reflective, but the real issue is: who pays and what must they pay? A mix of the user-pays principle and government subsidies is required.
There are about 3.51-million indigent households in SA. These are the people who should benefit from government subsidies that are targeted, direct and transparent. Targeted and direct subsidies would mean that by electricity volume they would constitute only a small percentage of consumers.
The subsidy must come from the fiscus. If it is funded through cross-subsidisation, you force more people and companies to invest in rooftop solar, and inadvertently kill the goose that lays the golden egg by encouraging the wrong tariff structure. The policy instruments are limited, though, because this means you must increase tax rates (PAYE or VAT) to fund it.
Then there are prepaid customers who were previously subsidised, the subsidy having fallen away due to the migration of more people to prepaid meters. SA’s municipalities introduced the fixed tariff component in 2017, but the City of Johannesburg failed to do so. Hence the sudden shock.
In cost-reflective tariff setting, if you increase your fixed tariff component, your volumetric tariff should come down. The tariff structure in both instances should not change the utility’s revenue, which is sacrosanct.
The costs of unserved energy, load-reduction and load-shedding are more expensive than tariff increases. Stable electricity and economic growth are what we all need. When utility tariffs are suppressed it leads to a downward economic spiral that ends up hurting the very people you’re trying to protect.
• Mashele, an energy economist, is a member of the board of the National Transmission Company of SA.
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