Elsevier

Energy

Volume 64, 1 January 2014, Pages 524-532
Energy

Differential electricity pricing and energy efficiency in South Africa

https://doi.org/10.1016/j.energy.2013.11.047Get rights and content

Highlights

  • SA's primary energy use per unit of GDP is amongst the highest in the world.

  • SA industrial electricity efficiency is considerably lower than the global average.

  • A differential electricity pricing policy which targets electricity intensive activities.

  • Differential tariffs raise the cost of energy inefficiency and induces energy saving.

  • Highlights importance of energy demand modelling in electricity supply planning.

Abstract

By international standards the economy of South Africa is extremely energy intensive with only a few countries having higher intensities. SA's primary energy use per unit of GDP is amongst the highest in the world. The high energy and electricity intensity of the economy partly reflects SA's resource endowments (in particular the abundance of coal) but is also a function of the historical under-pricing of coal and electricity by the authorities. South African mining & industrial electricity efficiency is particularly concerning and considerably lower than the global average. This paper sets out to fill a significant gap in the South African energy literature by highlighting the importance of incorporating electricity demand factors as part of the country's energy policy and electricity planning horizon. The paper focuses its attention on modelling the electricity consumption of SA's industrial and mining sectors given these account for the lion's share of electricity demand. A differential electricity pricing policy which targets electricity intensive industrial and mining activities (as practised in China since 2004) is viewed by the author to be a superior policy to blanket electricity price increases administered by authorities in an effort to encourage electricity savings and improve energy efficiency in South Africa.

Introduction

By international standards the economy of South African is extremely energy intensive with just a handful of countries notably Iceland, Russia and China having higher intensities. South Africa's primary energy use per unit of GDP is amongst the highest in the world standing at 0.13 toe (tonnes of oil equivalent) per thousand 2005 US dollars of GDP in 2010 calculated using purchasing power parities. This compares with values of other energy intensive economies like Iceland (0.25), Russia (0.22) and China (0.16) and averages of 0.09 and 0.15 respectively for OECD and non-OECD countries. According to energy statistics published by the [23] there has been a reduction in South Africa's energy use per unit of GDP in recent years but this compares unfavourably with larger average reductions for both OECD and non-OECD countries.

The high energy intensity (and in the case of this paper specifically the electricity intensity) of the economy partly reflects South Africa's natural resource endowments in particular the local abundance of coal and other mineral resources but is also a function of the domestic under-pricing of coal and electricity by the authorities for a long period of time. Historically, the country has followed a heavily capital and electricity-intensive development trajectory largely based on the use of coal. In 1991, Eskom (the national electricity provider) proposed a price agreement with government to reduce the real price of electricity to benefit electricity-intensive activities within South Africa and place them in a stronger position to compete on international markets.

Given the country's history of low and stable electricity prices, South African electricity efficiency is substantially lower on average than in other countries and improvements to date have been small by international standards. Although under-emphasised in the IRP (Integrated Resource Plan) which sets out South Africa's plan for electricity generation over the next 20 years, one of the main triggers (identified by market commentators) to encourage improvements in South Africa's electricity efficiency is to allow energy prices to rise to fully cover operating and capital costs and to properly value electricity production, transmission and distribution externalities. Related research by Ref. [26] in the case of China has indicated that artificially low electricity tariff's need to be replaced by a system that better reflects the capital costs of power generation and transmission in order to encourage local & foreign investment and efficiency improvements in power generating capacity. This paper sets out to fill a significant gap in the South African energy literature by highlighting, as in research conducted in the case of China and reported in Energy by Wang et al. (2010), the importance of incorporating electricity demand factors as part of South Africa's energy policy and electricity planning horizon. The paper focuses its attention on modelling electricity consumption for South Africa's industrial and mining sectors given these two sectors account for the lion's share of the country's electricity demand. Our research sets out to support claims in Energy by Ref. [22] that differentiated electricity price policies are required if South Africa is to create an effective energy efficiency policy. Finally, our study estimates long-run output and price elasticities of electricity demand for the various South African industrial sub-sectors similar to research by Ref. [21]. It does so however by employing different econometric techniques and by analysing a longer and more recent time period: 1989–2009 in an attempt to establish which sectors would be the best target candidates of a proposed differential electricity-pricing scheme. A differential electricity pricing policy (as that practised in China since 2004) and critically reviewed in Energy by Ref. [28] is viewed by the author to be a superior policy to blanket electricity price increases administered by authorities in an effort to encourage electricity savings and improve energy efficiency in South Africa.

The remainder of the paper is set out as follows. Section 2 provides a review of the relevant energy efficiency and energy demand literature whilst section 3 sets out the empirical methodology and data employed in the current study. Section 4 reports the econometric results of South African industrial electricity consumption. Section 5 briefly presents international experiences with industrial energy efficiency policies, Section 6 sets out our conclusions and policy recommendations.

Section snippets

Electricity efficiency and intensity

Energy efficiency according to the IEA (International Energy Agency) and the WEC (World Energy Council) involves a reduction in the energy input of a given service (such as heating/cooling, etc.) or level of economic activity. The resulting reduction in energy consumption whilst usually associated with technological changes can also come about as a result of better organisation and management or improved economic conditions in the sector under investigation. Electricity efficiency which is the

Methodology and data

In order to estimate a long-run relationship for the South African economy's industrial sectors' electricity demand we employ the following general function specification:Et=f(Qt,Pt,Zt,Xt)where Et (electricity consumption) is contemporaneously dependent on the level of Qt (real economic activity), Pt (real electricity price), other Zt (endogenous variables) such as the real price of a substitute for electricity, and Xt (exogenous variables), such as a sector-specific coefficient for autonomous

Econometric results

As a first step of the ARDL bounds testing procedure we estimate Eq. (4) for each industrial sector using OLS. As our analysis is based on annual data, we consider lag lengths of one and two. A time specific dummy which takes into account a structural break in our data series for the 1993/1994 political transition to democracy in South Africa is included whenever significant. Next we undertake a F-test on the joint significance of the lagged variables in levels. The results of the F-tests for

International experience with industrial energy efficiency policies

Previous research in Energy by Ref. [31] on energy intensity trends in 31 industrial and developing countries over the period 1950–1988 suggests that electricity intensities are likely to develop similarly to how energy intensities have developed as economic structure and end-use efficiency continue to change. According to [27] there is a wealth of experience among industrialised countries with technologies and policies to increase electricity end-use efficiency. The authors indicate that some

Conclusion

Government intervention in the form of taxes and surcharges can discourage investment in a particular target industry, reducing its share of GDP over time. The challenge to policy makers internationally is to implement these surcharges in a manner that inflicts the least damage on output and employment. The negative economic impacts associated with an increase in the price of electricity in electricity-intensive economies could be minimised if the price increases are diversified amongst

Acknowledgements

The author would like to thank Economic Research Southern Africa for financial support towards this research project.

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