Sunday, October 1 2023 Sign In   |    Register

News Quick Search



Front Page
Power News
Today's News
Yesterday's News
Week of Sep 25
Week of Sep 18
Week of Sep 11
Week of Sep 04
Week of Aug 28
By Topic
By News Partner
Gas News
News Customization


Pro Plus(+)

Add on products to your professional subscription.
  • Energy Archive News

    Home > News > Power News > News Article

    Share by Email E-mail Printer Friendly Print

    ELECTRICITY - Energy crunch will not be solved by monetary policy

    May 25, 2023 - Business Day



      Energy crunch will not be solved by monetary policy

      Within SA’s energy sector are two compounding challenges: energy insecurity and the resulting inflation. As we wait on news regarding interest rates it’s worth noting that monetary policy can offer only limited reprieve to both challenges.

      Rolling power outages started more than 15 years ago because of inadequate supply. The reduction in the reliability of electricity and concurrent rise in prices has a marked influence on price stability for domestically manufactured and imported goods.

      The cost of domestically produced and/or manufactured goods is also adversely affected by not having power for six to eight hours a day. Alternative energy solutions are expensive. Earlier this year credit ratings agency Fitch released a statement saying SA’s increasing reliance on diesel generators has caused the commercial property industry’s cost of operations to "surge".

      On the other hand, the cost of imported goods is continuing to increase in rand terms due to currency depreciation. There is a confluence of factors driving the depreciation, but the inclusion of power supply shortages as a rationale for sovereign credit ratings downgrades to junk status is a powerful one. Electricity shortages have been cited in downgrades by all three major agencies — Fitch, S& P Global Ratings and Moody’s.

      Amid the shortages, prices have skyrocketed. In 2021 the National Energy Regulator of SA (Nersa) approved Eskom’s bid to raise tariffs by 15.6%, and in 2022 by 9.61%. Effective April 1 2023 tariffs were increased by another 18.65%. This means between the beginning of 2021 and today energy tariffs have gone up by more than half.

      Between 2007 and 2022 electricity tariffs increased 653%, against a 129% increase in inflation. And there’s no relief on the horizon either; Nersa recently approved a 9.74% tariff increase for 2024.

      If you have both the financial capacity and foresight, perhaps you invested in solar panels for your home or business. But cheaper and more reliable forms of electricity have not permeated supply chains, so manufacturers, construction companies and transporters are still bearing that 50%-plus Eskom tariff hike, and passing it on to consumers.

      Reserve Bank governor Lesetja Kganyago noted in March that increasing the supply of energy would enhance the effectiveness of monetary policy and its transition to the broader economy. He’s right, of course. But to take it a step further, monetary policy cannot fix inflation without interventions to strengthen energy security.

      Energy is an input for every part of the consumer price index basket. Interventions to increase energy security are a critical government mandate. Yet the amount of electricity distributed is at its lowest level since 2002.

      This is not for a lack of power plants but because of an abundance of breakdowns. Eskom has predicted a "very difficult winter, with the prospect of the power crisis worsening to include stage 8 load-shedding. This would entail taking demand for up to 8,000MW off the grid, amounting to 16 hours of outages in a 32-hour period.

      This leads me to three conclusions. The first is that the private sector is best positioned to supplement the efforts of the Reserve Bank’s monetary policy committee when it comes to price stabilisation, not government. Government’s role is to unbundle Eskom’s transmission, generation and distribution functions and allow the formation of a competitive marketplace for efficient energy transactions.

      Second, fiscal instruments such as credit guarantees and subsidies can be deployed to incentivise the private sector to invest in this space. Derisking mechanisms are key. And third, you can only raise interest rates so much before you stifle productivity, innovation and growth more broadly as the cost of capital increases precipitously.

      I was sitting in a presentation by French economist Olivier Blanchard this week, where he discussed a paper he wrote with Nobel economics prize winner Ben Bernanke. They found that contrary to what many economists thought, inflation was not initially driven by an overheated labour market. Rather, the consumer inflation surge that commenced in 2021 was largely due to the rising cost of commodities.

      In the case of the US, Blanchard noted that the increase in commodity prices couldn’t have been predicted. In the case of SA, the writing may have been on the wall for some commodities. Regardless, increasing energy security is a central part of bringing down inflation. While of the utmost importance, monetary policy can’t solve the energy dilemma.

      Dr Baskaran (@gracebaskaran), a development economist, is a bye-fellow in economics at the University of Cambridge.


    Other Articles - International


       Home  -  Feedback  -  Contact Us  -  Safe Sender  -  About Energy Central   
    Copyright © 1996-2023 by CyberTech, Inc. All rights reserved.
    Energy Central® and Energy Central Professional® are registered trademarks of CyberTech, Incorporated. Data and information is provided for informational purposes only, and is not intended for trading purposes. CyberTech does not warrant that the information or services of Energy Central will meet any specific requirements; nor will it be error free or uninterrupted; nor shall CyberTech be liable for any indirect, incidental or consequential damages (including lost data, information or profits) sustained or incurred in connection with the use of, operation of, or inability to use Energy Central. Other terms of use may apply. Membership information is confidential and subject to our privacy agreement.