Much has been made of Nersa’s recent multi-year determination of Eskom’s increases for the next 5 years. Eskom, to support its build and maintenance backlog, had requested 16 % over the next 5 years. Nersa on the other hand granted an increase of 8%. This will take energy levels from a current 61c per kWh to around 90c per kWh in 2018.
At face value this is good news for both business and consumers alike as any relief on energy and costs should always be welcomed. One must caution however that electricity is still going to be increasing at above inflationary rates and furthermore, the rates quote are Eskom sell rates.
Electricity pricing is a bit of a dark art and who you buy from (whether it be a local council or direct from Eskom) and how much you use or demand determines your rate. The majority pay significantly more than 61c per kWh with average corporate rates now in excess of R1 per kWh and consumer rates nearly double this in some instances.
The net effect is that energy efficiency and demand side management is still critical if businesses are to continue to operate in an above inflationary environment.
How will carbon tax impact energy rates?
In his budget speech, Finance Minister Pravin Gordhan proposed to price carbon by way of a carbon tax at the rate of R120 per ton of CO2 equivalent, effective from 1 January 2016. To soften the impact, a tax-free exemption threshold of 60 per cent will be set, with additional allowances for emissions intensive and trade-exposed industries.
The minister also pointed out that there will be a phasing out of the existing electricity environmental levy of 3.5c per kWh once the carbon tax is introduced.
The government really has its hands tied in respect of the carbon tax in our opinion. It needs to stimulate a low carbon economy to meet its commitments made in Copenhagen in 2010 to reduce emissions by 34% below business as usual by 2020. The diagram below illustrates how this works.
Unpacking the tax, the reality is that Eskom will pass any additional cost down to the consumer. This may be as much as 4.8c per kWh in 2015 rising to 6.2c per kWh in 2020. So energy rates are going up and may increase significantly beyond 2020.
The net effect is that businesses are now forewarned. Carbon tax is on its way and non-financial information and emissions quantification is now more important than ever. Businesses should evaluate their risk associated with these economic fundamentals in mind. Energy efficiency is still paramount and a carbon constrained future is on our doorstep.