South Africa’s international competitiveness will increasingly be dampened by the rapid rate at which the domestic electricity price is rising, Energy Intensive User Group chairperson Mike Rossouw said on the second day of the Africa Energy Indaba in Sandton.
He said that, while electricity prices were steadily, and understandably, increasing across the world, the rapid rate of increase in South Africa’s electricity tariffs was not sustainable and manufacturing and mining investors were already looking elsewhere.
“South Africa’s economy was historically, and still is today, driven primarily by the mining sector, accounting for about 22% of the gross domestic product. However, the trend is that miners and other energy-intensive manufacturers are closing their South African operations in favour of more economic destinations,” he said.
The mining sector was not only a significant contributor to the domestic economy and a large job creator, but also accounted for about 55% of direct foreign investment in the country.
But the seven largest energy users, which accounted for about 10% of the country’s total energy demand, were struggling to adjust to Eskom’s fast-raising tariffs. Margins were being squeezed, while previously sustainable operations were being made nonviable.
“We have already seen a number of large firms close their doors and relocating operations elsewhere. For example, where South Africa for many years was the top ferrochrome producer in the world, we are currently losing our market share at a phenomenally fast rate to China. With that goes the domestic jobs and economic growth opportunities as well,” he said.
This shift was occurring notwithstanding that fact that South Africa’s ferrochrome furnaces and smelters, through locally developed innovations, were considered to be the most efficient globally. The relocation of production to less efficient, but higher-margin jurisdictions, had thus left the world “worse off”, as the product was now being produced in a less environmentally acceptable way.
The competitiveness of of South Africa’s mining and manufacturing sectors could also be severely impacted should government move to introduce carbon taxes. In the 2012 Budget it was indicated that the first phase of such taxes could be implemented during the 2013/14 fiscal period. However, this could be delayed given that a revised carbon tax policy paper would only be published during the course of this year.
He foresaw a ‘tipping point’ from which demand for electricity could start falling, and not be replaced by large industries, which are responsible for the bulk of South Africa’s energy demand. The result would be that the brunt of South Africa’s ambitious electricity build programme would have to be funded by household and retail users, at expensive tariffs.
He also warned that independent power producers remained reluctant to enter the domestic market, owing to “regulatory bottlenecks”.
The World Energy Council secretary general Christoph Frei echoed Rossouw’s concern about regulatory constraints as being a significant holdback to ensuring supply security.
“Africa is in need of innovative regulatory solutions to allow for a balance being reached between social agendas, seeking access to power, and government goals of economic growth,” he said.