Power prices not viable, says Eskom

Eskom chairman Bobby Godsell has taken aim at SA’s relatively low electricity prices, saying the prices should reflect the cost of producing electricity. The power supplier has been lobbying the National Energy Regulator of SA (Nersa) to allow for prices that would recover the costs of production.

Godsell’s comments at a briefing recently came as the country awaits Eskom’s next proposal for an electricity price increase. Nersa last granted the utility an average 27.5 per cent increase. Eskom had asked for a 53 per cent increase in electricity tariffs for the 2008-09 financial year.

Godsell described the pricing of electricity as below its real cost as the consequence of folly over a long time. He said the policy of under pricing electricity had been followed deliberately by both the apartheid and post-apartheid governments. He said cheap electricity was used as part of an industrial strategy to attract foreign direct investment in sectors such as aluminium smelters.

He said there was also a perception that South Africans could not afford the prices that would cover the full cost of production of electricity.

“The trouble with such strategic pricing is that unless the government’s explicit and regular provision for the subsidies is implied in under pricing, secure and adequate provision (of electricity) will be undermined. And so it has been. So we arrive at the uncomfortable joke that “SA has the cheapest electricity in the world. Unfortunately we just don’t happen to have any in stock.” He said the government’s decision that Eskom should not add capacity in order to make way for private investors had contributed to the electricity supply shortages.

He said an industry controlled by a regulated price, “deliberately set at below cost”, could not attract investors. “Until we get the pricing correct, it will be difficult to get private sector participation,” Godsell said. Low prices had also contributed to the inefficient use of electricity.

Source: Siseko Njobeni, Power prices not viable, says Eskom, Business Day, February 09, 2009.

For text: http://www.businessday.co.za/articles/topstories.aspx?ID=BD4A935229

FMF Policy Bulletin/ 20 July 2010