Rising electricity tariffs are a major constraint for agriculture and the overall economy

Nicol Jansen, Agri SA Chairman: Economics and Trade Centre of Excellence

NERSA has announced its decision regarding Eskom’s Regulatory Clearing Account (RCA) application for the 2018/19 financial year. NERSA approved an RCA balance of R13,3 billion in Eskom’s favour. Eskom’s application was for R27.323 billion.

Agri SA provided written commentary to NERSA and presented at the public hearing that took place in February 2020. Our inputs highlighted the importance of agriculture for food security and the negative impact of rising electricity tariffs for the sector.

NERSA’s Reasons for Decision (RfD) and an implementation plan for the 2018/19 RCA balance must still be released. This RCA balance will be recouped by even further electricity tariff increases.
To stay afloat, Eskom requires higher and higher electricity tariffs. However, weak economic conditions and price sensitive consumers translates to lower electricity sales.

The national lockdown and limited economic activity weaken electricity demand and sales even further. In reaction to this, Eskom will again need higher electricity tariffs that push Eskom further into a utility “death spiral”. The current trajectory of rising electricity tariffs is unsustainable.
The agriculture sector plays a crucial role to ensure that national food security requirements are fulfilled. In the context of COVID-19, it is even more crucial for agriculture to be able to provide sufficient and affordable food.

Over 25% of the country’s food is produced by irrigation-reliant and energy-intensive industries, including horticulture, dairy, poultry, grains, and agro-processing.
Farmers are price takers, meaning that they cannot easily pass on rising costs to the consumer.

According to official figures from DALRRD, prices of agricultural products moved sideways for the last two years (2017/18 – 2018/19). Electricity is a key production input and accordingly, increased tariffs will have a severe impact on agriculture. Agricultural expenditure on electricity in 2019 amounted to approximately R7.4 billion.

The forthcoming increases in the costs of electricity will place tremendous liquidity pressure on agricultural enterprises, given that electricity constitutes a significant proportion of their variable costs.
Alternative solutions, as part of energy sector reform, should allow for greater private sector participation and competition in the generation of electricity to make it more affordable.
The Centre of Excellence Economics & Trade is active on various fronts to support agriculture’s growth and sustainability. In terms of electricity, we lobby to mitigate electricity and fixed cost tariff increases, whilst we have made significant strides in opening-up regulations for the use of renewable energy in agriculture.
Tariff increases are implemented according to the ERTSA methodology whereby fixed cost tariffs are increased by the same percentage as electricity tariffs. Agri SA has undertaken several actions to raise this issue with NERSA and Eskom.
Eskom’s revenue application to NERSA and the approved percentage increase for electricity tariffs are based on projections of electricity sales.

Accordingly, we have always maintained that fixed cost tariffs should not be increased on the same basis or by the same percentage. We will continue our engagements to support a sustainable solution to make electricity more affordable for the whole sector.

The South African Pork Producers’ Organisation (SAPPO) coordinates industry interventions and collaboratively manages risks in the value chain to enable the sustainability and profitability of pork producers in South Africa.