Energy intensive users: Special pricing deals and the impact of renewable energy

Electricity prices in South Africa have increased sharply in the past decade, and we are no longer one of the cheapest countries in the world. Future price hikes are likely to push us even higher. The relatively high cost of electricity is affecting energy intensive industries, and special pricing deals are being considered to alleviate the problem. Renewable energy has a significant impact on the price of electricity in many countries, and we may face a similar situation in future.

Mike Rycroft

Other countries have similar problems with high electricity prices, but for different reasons, and have adopted schemes whereby energy intensive industries (EIIs) have access to special pricing schemes. Electricity costs constitute between 15 and 50% of EII operating costs, and the viability of such industries is dependent on the cost of electricity. High electricity prices can lead to the closure of these industries, and are an obstacle to the establishment of new industries, as we have already seen in this country and others.

In many countries, the electricity price is affected strongly by the introduction of renewable energy (RE), as taxes and levies have been added to the price of electricity to support this. Special pricing schemes are based on the reduction of these levies. In this country the cost of introducing RE is included in the price paid to independent power producers (IPPs), and the impact of relatively high prices for RE is currently small as the penetration of RE is low.

Eskom has a surplus of electricity, partially due to the introduction of RE which enjoys priority dispatch. The surplus is likely to extend until at least 2021, and Eskom is in a strong position to consider selling some of this surplus off at special prices. In addition to the current surplus, the next few renewable energy independent power producers programme (REIPPP) windows are likely to lead to even more surplus generation capacity.  If this capacity is not sold, fixed costs will increase the unit price of electricity. Eskom is apparently negotiating with EIIs to take up the surplus. EIIs are supporting this initiative but it will require special pricing. Closed operations could be re-opened and new ones developed if prices were lower.

Electricity pricing policy in South Africa allows such deals and special agreements.  Section 2.7 provides for the “development and introduction of special products and prices to achieve specific goals”, while Section 5.4 notes that, “Negotiated Pricing Agreements (NPAs) have served and could potentially serve as a valuable instrument to support projects that require price certainty over many years”.

Special pricing deals however, have bad reputations after the deal with Hillside smelters, which was linked to the commodity price, caused huge financial losses for Eskom. Any special deal negotiated would have to ensure that Eskom was better off than if the surplus was not sold.

This country is not alone in feeling the effects of electricity pricing on heavy industry. Recent reports state that Denmark has had to consider reducing RE levies for its EII industries, as they were becoming non-competitive. Denmark has one of the highest electricity prices in the world, not because of the high cost of generation, but because of the numerous taxes and levies that are incorporated in the price.

The Danish public support for RE is financed by levies on electricity consumption, and it is these levies which are being reduced. This is seen as a form of state aid, which means that the lost revenue will have to come from the state, so consumers will still pay indirectly. Since the initial scheme, which granted an 85% reduction in levies, Denmark has extended the relief to other manufacturing industries and to horticultural industries as well.

Romania has introduced a similar scheme to enable companies that are both electro-intensive and exposed to international trade to remain competitive. Again the loss of income will be made up by government subsidies. The UK is also considering a scheme to exempt EIIs from green levies, or pay back a percentage of the levies. The UK scheme may result in increased levies for non EII customers.  South Africa does not have renewable energy levies that can be reduced, but the argument could be advanced that the surplus is partially due to RE, and therefore special pricing should be based on the marginal cost of operating the surplus generation plant. This would allow Eskom to recover its basic costs.

When a significant amount of renewable energy generation is incorporated in the grid, this could have a significant impact on price.  We will also be faced with levies in the form of carbon taxes in future. The concern is that these will again make electricity too expensive for EIIs. The industry and the government need to proactively ensure that concessions are in place that allow EIIs to continue to operate competitively, even if that means effective subsidies to these industries, and means following the models adopted by Denmark and other countries.

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