Eskom called its application for a 45 percent per year electricity tariff increase over the next three years a "smoothed" hike. In reality, it implies a massive hike of 204.9 percent over the three years. It will, calculated with the previous two hikes of 27 percent and 31.3 percent, represent a total increase of 408.4 percent over a period of five years — and turn the country's once investment-friendly electricity cost regime into one of the most expensive in the world. This could happen as early as next year.

The attempted spin around the application for these hikes is so bold that it amounts to little more than big fat lies.

Besides the fact that the massive increases are a serious threat to potential investment by large electricity consumers in the country — as proven by the scrapping of the planned aluminum smelter at Coega in the wake of the application — it will also suck in billions of disposable income of consumers. This will pose a further serious threat to the economic recovery of other sectors of the economy.

Households to pay 14% VAT

It should be kept in mind that individual households will also be paying 14 percent VAT on much higher amounts for the electricity they consume.

At the time of the application, Eskom's chief executive officer Jacob Maroga said the current price of electricity was around 33c/kWh, which did not allow for the recovery of all Eskom's "prudently incurred" costs and the building of reserves to sustain its asset base. Eskom required a price of between 80c/kWh and 88c/kWh. The projected 45 percent annual increases would, however, take the cost to 100.6c/kWh.

All this is happening while South Africa has an abundance of coal reserves, which remain the cheapest resource for the generation of electricity in the world. This alone begs the question if some of the fundamentals of the generation of electricity in the country deserve serious attention.

'Nothing sinister' about coal industry

Earlier this year, the National Energy Regulator of South Africa (Nersa), in response to the trade union organisation Solidarity, said it would investigate the role of the coal industry in the cost structure of electricity production. Last week, the regulator admitted that it did not take a look at the coal industry, since "there was nothing sinister observed" in the industry.

Some of Eskom's largest suppliers of coal have seen increases of as high as 143 percent in their after-tax profits last year. There are also indications that the cost of transporting coal from mine to power stations may be playing an important role in the electricity cost structure.

As early as next year, the cost of electricity in South Africa, including VAT and municipal add-ons, could be more than the 83c/kWh of the US, and 49.5c/kWh of South Korea. The present average cost to household consumers in South Africa is 66c/kWh and could rise to 95c/kWh by next year.

The fact that South Africans pay relatively little in terms of tax on electricity (about 17 percent, compared to the 25 percent of certain European countries) would, even after the massive tariff increases, leave little room for subsidies to stimulate the development of alternative renewable technologies.

Article courtesy of Leadership Magazine.

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