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Rising electricity tariffs – a threat to regional inflation targets

Feb 2014

THE RISING cost of electricity in SADC is likely to have far-reaching effects on southern Africa’s regional integration programme.

The cost of electricity has risen during the past few months or is expected to increase this year in several Member States where the power utilities have applied for regulatory approvals to hike tariffs.

Some of the countries include Botswana, Namibia, South Africa, United Republic of Tanzania, Zambia and Zimbabwe.

Eskom of South Africa announced it will hike electricity tariffs in April if its application is approved by the National Energy Regulator of South Africa (Nersa). The regulator was expected to make an announcement in February.

The Energy Regulation Board (ERB) announced in December 2013 that it had approved a 26-percent hike in electricity tariffs following an application by the Zambia Electricity Supply Company (ZESCO).

ERB executive director Langiwe Lungu said average increases for 2014 and 2016 have already been pegged at 31 and 34 percent, respectively.

A 40-percent electricity tariff hike took effect on 1 January in Tanzania, with the cost of power to domestic consumers adjusted upwards by between 39 and 67 percent and that for large-scale commercial users was increased by between 37 and 55 percent.

The Energy and Water Utilities Regulatory Authority (EWURA) attributed the hike to viability problems at the Tanzania Electric Supply Company (Tanesco).

“The proposed tariff adjustment will enable Tanesco to meet its operational costs and capital investment programme, demonstrate its bankability to donors and increase capacity needed to meet system peak demand,”said Felix Ngalamgosi, EWURA director of regulatory economics.

The Zimbabwe Electricity Transmission and Distribution Company (ZETDC) has similarly applied to the Zimbabwe Energy Regulatory Authority seeking to review its tariffs this year to boost revenue and improve operational efficiencies.

Other regional power utilities have also increased tariffs during the past nine months.

The Botswana Power Corporation and the Electricity Control Board of Namibia hiked their tariffs by 13 and 10 percent in June and July last year, respectively.

The issue of cost-reflective energy tariffs in southern Africa has created some interesting debates whenever power utilities announce plans to increase their tariffs.

Consumers argue that a rise in electricity tariffs will affect the cost of production and, by extension, the cost of living as business passes on the higher costs.

On the other hand, power utilities argue that raising the electricity tariffs will attract investors to the energy sector.

In terms of the impact of the rising electricity charges on SADC, the biggest impact is expected to come from regional economic powerhouse South Africa, which acts as the manufacturing hub for the region.

South Africa has historically enjoyed low tariffs on the back of an agreement with Mozambique that enabled Pretoria to draw cheap power from Cahora Bassa Dam.

The low South African power tariffs have benefitted the country’s manufacturing sector which has been able to produce goods cheaply that it has supplied to the rest of the region.

The rising cost of electricity in South Africa will, therefore, significantly affect the economies of several SADC Member States that import from the country.

This would, among other things, increase pressure on prices of products and services to rise in most countries, especially members of the Southern African Customs Union (SACU) whose economies are intricately linked to South Africa.

SACU operates as a customs union of South Africa, Botswana, Lesotho, Namibia and Swaziland under a renewable agreement, and is governed at present by an agreement negotiated in 2002.

Rising inflation will derail SADC’s programme on macroeconomic convergence under which Member States have agreed that in order to achieve and maintain macroeconomic stability, they need to converge on stability-oriented economic policies implemented through a sound institutional structure and framework.

Such policies include, but are not limited to restricting inflation to low and stable levels; maintaining a prudent fiscal stance based on the avoidance of large fiscal deficits; avoidance of large financial imbalances in the economy; and minimising market distortions.

Among other targets, the SADC countries have agreed to have the inflation rate restricted to around three percent by 2018.

This is, however, unlikely to be achieved unless inflationary pressures from such key sectors as energy are contained.

Rising electricity costs will also derail progress towards attaining food security and eradicating poverty in southern Africa.

High electricity charges are expected to negatively impact agriculture and mining, which are some of the largest users of power.

SOUTHERN AFRICA TODAY, February 2014 (Page 8,9) Full PDF  click here