On the Real Exchange Rate Effects of Higher Electricity Prices in South Africa



in price, as measured by the elasticity of demand. The implicit financial subsidy on electricity prices
is clearly shown in Table 1, which gives an international perspective on electric power prices. South
Africa’s USB0.01∕kWh price on electricity for industry is matched by no other country and only
India (USB0.04∕kWh) comes close to the retail prices of electricity for households of USB0.03∕kWh
charged in South Africa. The average international price of electricity for industrial use in 2004
was B0.10∕kWh for upper-income countries and B0.06∕kWh for developing countries. For household
use, the average international price of electricity for upper-income countries was B0.14∕kWh, and
B0.09∕kWh for developing countries.

INSERT TABLE 1 HERE

2.2 Trends in electricity prices

One can clearly see from Table 2 the large differences in electricity prices among different users in
South Africa. In 2004, Households (38.7 c∕kWh) and Agriculture (30.8 c∕kWh) paid the highest
rates for electricity, whereas Manufacturing and Mining continued to pay much lower prices (13.97
c∕kWh and 15.36 c∕kWh respectively) - less than half of what domestic users paid. One reason for
this is that the number of clients serviced in the Residential sector is much larger than the number
of clients serviced in the Manufacturing and Mining sectors, who consume about 65 per cent of total
electricity. This indicates that Manufacturing and Mining receive bulk sales at lower prices.

INSERT TABLE 2 HERE

In general, electricity prices in South Africa have declined in real terms since 1991, when Es-
kom announced its
price compact with the conviction that cheap electricity was essential for rapid
economic growth (Van Horen, 1996). Under the
price compact, Eskom undertook to decrease the
real price of electricity substantially. Table 3 shows that the real price of electricity for all sectors
declined by 11 per cent, whereas the real price for the industrial sector decreased by 25 per cent
over the period 1970 to 2005. Since 1990, the price of electricity for all sectors declined by 43 per
cent, while for Manufacturing, the price dropped by 53 per cent.

INSERT TABLE 3 HERE

The relatively low electricity prices could be attributed to a number of factors. Eskom enjoyed
relatively low production costs in terms of the value of its key inputs (coal), and hence a low marginal
cost of production - only operations (estimated to be between 4 c∕kWh and 5c∕kWh). This allowed
Eskom fairly high average profit margins.

Figure 1 illustrates Eskom’s announced and effective price adjustments since 1995. The an-
nounced price increases are the increases approved by the National Energy Regulator of South
Africa (NERSA). The effective price increases illustrate the actual increase that occurred during a
year, as reflected in Eskom’s balance sheet for the relevant year. The difference between announced
and effective increases is due to the difference between projected and actual sales, as well as struc-
tural changes to prices. In 1995, 2000, 2002 and 2006 the effective price increase experienced was
above the price increase granted.

INSERT FIGURE 1 HERE

Table 4 shows the percentage change in Eskom’s average prices per customer category after each
annual price adjustment during the period 1994 to 2002.

INSERT TABLE 4 HERE

As shown in Table 4, in nominal terms, prices in general had an upward trend. However, if
this is compared with the effective annual price increase, it is evident that these increases did not
necessarily follow a general upward trend, except for the last couple of years. As stated before, these
price changes originated from a fairly low base and, as such, represented marginal changes with a
fairly high level of volatility.



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