The National Energy Regulator of South Africa (Nersa) on Wednesday granted state-owned utility Eskom a nominal 24,8% tariff increase for the 2010/11 financial year, raising concerns this would fuel inflation in Africa’s biggest economy.

The increase fell short of the power firm’s request of a 35% hike, but critics and analysts say the tariff hikes will have a big impact on an economy trying to recover from its first recession in nearly two decades.

Eskom was also granted nominal increases of 25,8% and 25,9% respectively for the following two financial years.

The Congress of South African Trade Unions (Cosatu) responded to the tariff news swiftly, threatening to call a strike by its nearly two million paid-up members to defend living standards.

“If no progress is made in these discussions, the federation will not shrink from mobilising its members, and the wider South African public, in strike action and protests in the streets against such a savage attack on our living standards and economic future,” Cosatu spokesperson Patrick Craven said.

Cash-strapped Eskom wanted to hike electricity prices by 35% a year for three years, to help it raise R385-billion to build more plants and avoid the blackouts that crippled the vital mining industry in 2008.  Eskom, which provides 95% of the country’s power, has been battling an electricity shortage since January 2008, due to a lack of investment in new capacity and ageing power stations.  Analysts worried the increase would fuel inflation. Data on Wednesday showed South Africa’s targeted consumer price inflation for January came in at 6,2% year-on-year in January versus 6,3% in December.

“The rate of increase is obviously less than the 35% per annum applied for by Eskom, as such it might come as a relief to some, but it is still uncomfortably high,” said Tony Twine, senior economist at Econometrix.

“It will make a sizeable dent in the operating margins of many businesses, it will add to the cost of governing the country because the government sector is a major consumer of electricity and it will add to the inflation rate.”

Power cuts
Gold producers say steep power price hikes would erode profit margins, while ferrochrome smelters fear rising costs may force them to cut output.  Tetsu Kotaki, the CEO of Hernic Ferrochrome, said the power tariff rise could harm ferrochrome producers in the long run.

“What the increase means is that in three years, electricity [prices] will double. It’s a very difficult time for South African industry. Although it may not lead to a situation of closures [of mining smelters], we will struggle,” Kotaki said.

The country’s biggest union, the National Union of Mineworkers (NUM), said the increase would hurts its members.

“It’s still a very steep increase and it will have a negative effect on the poorest of the poor and some of the people that we represent,” Lesiba Seshoka, spokesperson for the NUM said.

Trade union Solidarity said that Eskom’s approved tariff increases will lead to the loss of thousands of jobs.

“Eskom and [Nersa] are now to blame for the loss of thousands of jobs,” said spokesperson Jaco Kleynhans.

A public outcry last year forced Eskom to cut its initial request for a 45 percent rise each year for three years. — Reuters, Sapa

Article as published in Mail & Guardian