Eskom’s planned tariff increases, although lower than in the past few years, threaten to erode the competitiveness of the manufacturing and mining sectors, stunt job creation and add to inflationary pressures, analysts say.
The state wants the economy to create up to 5-million jobs by 2020, with manufacturing playing a key role in meeting this target.
The state-owned power utility declined on Sunday to confirm a report it had proposed to raise electricity tariffs by at least 14,6% over each of the next five years.
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This would climb to 19% if the government introduced a carbon tax or built new power plants beyond those already under construction.
In the document, CEO Brian Dames is quoted as saying Eskom was budgeting for revenue of R1-trillion over five years, which would translate into an annual average price increase of 14,6%.
Electricity prices have been a key culprit of rising inflation in the past few years, in the process eroding the purchasing power of consumers and the profits of manufacturing and mining companies.
Eskom was in 2010 granted an annual average 25% increase in tariffs over three years.
But the tariff hike for this year was reduced to 16% after the government intervened.
The power utility, one of the world’s least-cost electricity producers, hoped to use the tariff hikes to generate additional funds to finance an ambitious and badly needed expansion programme.
It is building the Medupi power plant, which is set to be commissioned towards the end of next year, and Kusile, which will be commissioned in phases from 2014 to 2017.
High electricity costs have claimed casualties in the mining sector, with Aquarius Platinum closing two mines, Royal Bafokeng Platinum curtailing three projects and the Xstrata-Merafe joint venture chrome smelters operating at half-capacity.
The mining industry is contracting and manufacturing is battling in the face of rising costs and falling demand from recession-hit Europe, one of South Africa’s main trading partners.
The fall in exports for manufacturing comes as Deloitte, the professional services company, warns that the global competitiveness of South Africa’s manufacturing sector has been eroded by spiralling production and raw material costs, taxation and a skills shortage.
Thomas Jankovich, director for innovation at Deloitte, said last week that the skills shortage was hampering efforts by companies to innovate and plan for the next economic boom.
The two sectors account for about a fifth of economic output and formal employment.
Citadel chief economist Dave Mohr said: "The problem is not just inflation, but the fact that the electricity tariffs reduce the competitiveness of small and medium-sized businesses and eat into their profit margins.
"A lot of these businesses can’t absorb these huge increases, so for job creation and competitiveness they are bad news."
Eskom said on Friday it had yet to finalise the application that it would submit to the National Energy Regulator of South Africa (Nersa) for tariff increases for the period from April 1, but said it would do so in the next few weeks, after it had received input from local government and the Treasury.
"It’s disappointing that the proposed tariff increase is more than double the inflation target range," Meganomics economist Colen Garrow said.
"It’s got a knock-on effect for prices throughout the economy and makes it much more difficult for the Reserve Bank to manage monetary policy," he said.
Consumer inflation was 5,7% in May, comfortably inside the 3%-6% official range the Reserve Bank targets with its decisions on interest rates.
But electricity prices rocketed 17,1% in May compared with the same month a year earlier, keeping inflation for administered prices set by government entities well above 11%.
Coenraad Bezuidenhout, executive director of the industry group Manufacturing Circle, also warned against the effects of the proposed tariff increases.
"For industry here, it is not good news," he said.
Eskom said electricity tariffs were not yet at cost-reflective levels. "They must continue to migrate towards those levels so that they can cover the full cost of producing electricity, as well as support the investment in infrastructure needed to ensure a secure supply of electricity for South Africa," the utility said.
Nersa’s decision on the tariffs must be tabled in Parliament by the middle of March next year.
Nersa had an extensive public participation process and Eskom was committed to extensive and transparent public engagement in electricity prices, Mr Dames said on Friday. "We encourage the public to participate in the process and engage with our application once we have submitted it to Nersa," he said.