NEWLY appointed Energy Minister Ben Martins has an unenviable task. He has to address acute problems around the security of our energy supply, as well as the costs to consumers and industry. Manufacturing is one sector that depends heavily on stable and cost-effective energy sources to ensure its competitiveness. This is especially crucial now, as research firm NUS Consulting Group recently found natural gas in South Africa to be the most expensive in a basket of countries from North America, Europe and Australasia, while our electricity prices are also rising at a rate much faster than key competitor economies from those markets.
As per the NUS survey, gas prices in South Africa rocketed 101.7% in one year (2012-13). This appears to be calculated on the price caps in the recent determination by the National Energy Regulator of South Africa (Nersa) on maximum prices for piped gas, in response to an application by market monopolist Sasol.
It is still important though, as the price caps do pave the way for Sasol to significantly increase the price of natural gas paid by some of the largest employers in manufacturing.
A survey this year by the Gas Users Group, an ad hoc grouping of 13 large South African gas-consuming manufacturers, providing 42,000 jobs and consuming 49% of all Sasol’s external piped gas sales, shows gas costs make up as much as 40% of their input costs. This, along with the fact that they often participate in the same value chains, means the inflationary effect could be compounded. Segments competing with imports may not be able to pass on the costs, leading to rationalisation and increases in imports and job losses.
The problem is not that local manufacturers want to be sheltered from the real costs of energy to compensate for their lack of competitiveness. Rather, local manufacturers are in a position where aggressive cost-push as a result of rapid, bunched-up, administered price increases are undermining their ability to leverage whatever productivity gains they have been able to attain.
The problem is also that prices for natural gas are not being determined in terms of the real costs of exploiting and transporting the resource.
Instead, Nersa has elected to use a “price of alternatives” methodology, which regulates a maximum price only, setting it at about double what large industrial users pay. There may, therefore, be some relief for small-volume users, but Sasol will have free rein to renegotiate, with relative impunity, the price for captive large customers who take the bulk of supply.
A costs-based approach would be much more suitable to our market. It would ensure a fair return for Sasol, sufficient incentives for competitors to Sasol to emerge, and a fighting chance for South Africa to compete on a more equal footing with other economies where natural gas prices have been declining.
The US has only in the past year seen natural gas prices rebounding somewhat, after dropping for a decade. This has aided that economy’s manufacturing competitiveness hugely, to the extent that it is now repatriating manufacturing that had previously been outsourced to China.
The NUS report also found 2012-13 electricity price increases for South Africa to be the third-highest in the sample — slower than Germany and Australia, but far quicker than the rest. In fact, prices are actually declining in a number of European economies, with Poland (a formidable competitor to South African manufacturing) benefiting from the greatest (13.1%) reduction.
While our Brics (Brazil, Russia, India, China and South Africa) counterparts were not surveyed for the NUS report, the results still raise concern. Our own research indicates that while our energy prices escalated rapidly between 2000 and 2010, energy prices in India, Russia and Brazil declined over the same period. In addition, Brazil granted discounts of 30% in electricity rates to industrial users earlier this year.
Any minister faces limitations on his powers because of the need to ensure the sustainability of the solutions they back. It is no different in the case of Martins, who must respect the degree of independence Nersa needs to maintain, while balancing the needs of manufacturing with the needs of the broader economy. However, for the defined opportunities that there are for it to intervene and to co-operate with manufacturing, it is important for the Department of Energy to take a view on these matters.
• Bezuidenhout is executive director of the Manufacturing Circle.
Source Article from http://www.bdlive.co.za/opinion/2013/07/12/the-cost-dilemma-facing-the-energy-minister
