south africa: March 14, 2009

By most surveys, South Africa has some of the lowest electricity prices in the world. However, in our view, this condition is unsustainable due to rapid economic and population growth within the country.

Since 2008, Eskom’s price increases cover the nation’s CPI plus inflation in order to recover their return on investment, maintenance and other relevant costs. Historically, there has been very little expansion of electricity services especially in terms of generation resources. With rapid growth in South Africa, Eskom has been forced to devote significant funds to its generation sector just to meet demand.

Eskom has yet to submit its 2009/10 price increases to the national regulator as they are trying to answer the question of what price increase the public will accept. They do not wish to damage the country’s business environment, but they also realize a lack of generation will do more harm than any price increase.

Public hearings have been scheduled and the public are welcomed to attend. Eskom is actively courting customer feedback on how they can absorb any price increase and ensure economic survival while at the same guarantee that the power will be there when demanded. Eskom was provided R 60 billion from the Government for this fiscal year and can borrow another R 160 billion if needed. However, this loan will need to be paid back and such revenue will have to come from price increases.

With much focus on the environment, emphasis is currently being placed on green energy sources now that Eskom needs to create new power generation stations. However, green energy comes at a premium and with coal being a comparatively cheaper option, Eskom is looking to generate power at the lowest cost. As such two new coal-fired plants and one new pumped storage facility are being constructed and the cost of these sites can only be covered through price increases.