PMG 6 August 2013.
Date of Meeting: 6 Aug 2013 | Chairperson: Mr S Njikelana (ANC)
The Department of Energy (DoE) briefed the Committee on energy pricing, with specific reference to electricity prices. It was agreed that the discussion was necessary because of the impact of electricity prices on the country’s economy, especially on manufacturing,
The presentation on fuel prices explained the fuel pricing mechanism currently being used in South Africa. The price of crude oil was determined mainly by the events which affected oil-producing countries. Geopolitics was therefore becoming a bit more challenging. There were three basic forms of fuel pricing globally: ad hoc pricing, which set prices irregularly, with no transparency between countries, formula based/ automatic price adjustments — which was used in South Africa — where prices were published, as well as the pricing formula, and the liberalised pricing system, which meant that the market set the prices.
In South Africa the price of petrol was regulated, while the price of diesel was not regulated. For illuminating paraffin, the single maximum retail price was regulated, but the wholesale price was not regulated, and this was the cause of some of the main disputes in the industry about liquid fuels regulation. In addition, South Africa used the Import Parity Principle (IPP) for pricing determination. The Basic Fuel Price (BFP) was based on the import parity pricing principle, which determined what it would cost a South African importer of petrol to buy the petrol from an international refinery, transport the product from that refinery, insure the product against losses at sea and land the product on South African shores. The Central Energy Fund (CEF) had been appointed by Cabinet in 1994 to be an impartial body which would determine the BFP. The BFP made provision for all grades of petrol, diesel and illuminated paraffin. Elements of the BFP were free-on-board (FOB) value, freight and average freight rate assessment, insurance, ocean loss, demurrage, cargo dues and stock financing costs.
South Africa was supplying Botswana, Lesotho, Namibia and Swaziland with oil. However, the pump prices in these countries were significantly lower than those in South Africa. The reason for this was that these countries did not have most of the fuel levies which South Africa had to adhere to, such as the Road Accident Fund (RAF) levy, Customs and Excise Levy, and Demand Side Management Levy. Subsidies were there to cushion the price of fuel on consumers. However, by themselves, subsides were not sustainable.
Illuminating paraffin regulation was one of the main points of discussion, with Members arguing that a household energy strategy was necessary to facilitate a transition from paraffin use to other forms of energy, such as gas. Paraffin safety issues were still a major concern. Other concerns raised by Members involved regulatory and policy instruments, where reference was made to the Gas Act of 2001 and the Petroleum and Natural Gas Regulatory Board Act 2006 — why did there need to be two Acts, which seemingly tackled one aspect? The DoE was asked about its plans and strategies to cut out the costs of the “middle man” in the paraffin market, and what implications these would have on the sector overall? What would be the likely impact of improving household access to appliances?
The focus of the presentation on energy pricing was on the DoE’s policy position, its electricity pricing methodology and Eskom’s asset re-evaluation. The main drivers of electricity generation costs were the acquisition of assets, operating and maintenance costs, and fuel costs.
The DoE needed to develop a long-term electricity path which would be integrated with the Integrated Resource Plan (IRP), which was revised from time to time. The electricity demand in the country was not being met by the available sources of power, therefore more power stations needed to be built to facilitate the country’s economic growth. The tariff would increase because more capital was needed to build these new power stations. It did not matter whether the IPP approach or the utility approach was used in the building of new power stations. The difference between the two was that the IPP approach raised capital on its own — it did not need revenue from tariffs. With the utility/demand approach, the utility was allowed to raise its own capital through demand. However, regardless of which approach was used, tariff prices would be increased.
Members were concerned that the DoE wanted consumers to pay for the building of new power stations now and to fund future assets which would be built, together with the return on these assets. This would make the price increase utterly unaffordable to consumers. They asked if the DoE planned to subsidize municipalities for the replacement of meters? On the question of Eskom wanting to be a stand-alone entity, they were told that Eskom no longer wanted to rely on the government’s limited resources, but wanted instead to be able to approach the market and raise its own funds. The state would still remain the main shareholder, however. Other questions covered such issues as the DoE’s plan to revise its long-term strategy in line with the IRP, the impact of “wheeling” costs, what had happened to the paraffin stoves project, and the effect of micro-generation on pricing, especially at the municipal level.
Documents handed out:
Department of Energy (DoE): Electricity Pricing final version
Audio recording of the meeting:PC Energy: Energy pricing: briefing by Department of Energy