Thirdly, in both the long- and the short-run, CPI ends up lower if an administered price is used
to model the change in the price of electricity, than with a tax. If we compare the values of macro
demand quantities in the first four rows of Table 8 the administered price leads to larger decreases
in demand because the initial shock to electricity prices is larger. The same argument holds as in
the previous discussion, namely that the larger decrease in total demand leads to lower increases in
CPI than would be the case if the decrease in total demand had been smaller.
6 Conclusion
The main conclusions from the modelling exercises are:
• Electricity price increases have mostly negative effects on the economy. All industry production
decreases in the short-run (GDP declines as well), while many industries are also worse off in
the long-run.
• Poorer groups are affected in a worse manner than other groups; price increases should be
carefully chosen. The most efficient policy is not necessarily the most equitable policy.
• While some industries enjoy the benefits of exemptions, the consumers and industries who
are not exempt have to bear the costs of those exemptions, i.e., if some industries face lower
increases in prices, other industries and final consumers that face higher increases in prices
would obviously be worse off. The latter industries would then face a greater negative effect,
than in instances where all industries pay the same price increase.
• When foreign consumers of electricity pay less than domestic consumers, there is cross-subsidisation
from the domestic consumers to the foreigners. In general, exports and the foreign markets
determine what the industry results would be if electricity prices increased. The effect on the
terms of trade and balance of payments is important - export-driven sectors are particularly
vulnerable to an electricity price hike.
• Some sectors, such as the Iron and Steel industry, are sensitive to a change in electricity prices.
Electricity makes up a large proportion of their input cost, with the result that any increase in
the price influences their cost significantly. Moreover, these industries are export-driven, thus
higher costs adversely affect their competitiveness in the world market.
• In the model, the effect on the CPI, and therefore on the real exchange rate is generally very
small. The South African Reserve Bank warned against inflationary effects of higher electricity
prices, but we did not find significant effects in this regard.
References
[1] Bhorat, H. and Oosthuizen, M. (2003). Differential impact of inflation on poor South African
households. DPRU working paper 03/73. February. Development Policy Research Unit, Univer-
sity of Cape Town, Cape Town.
[2] De Wet, T.J. (2003). The effect of a tax on coal in South Africa: A CGE analysis, Ph.D. Thesis,
University of Pretoria, http://upetd.up.ac.za/thesis/available/etd-06302004-143319.
[3] Department of Minerals and Energy (DME). (2005). Price Report. DME, Pretoria.
[4] Department of Minerals and Energy (DME). (2006). Digest of South African Energy Statistics.
DME, Pretoria.