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From Edison to Eskom: a look at electricity and tax policy in South Africa

28 October 2015   (0 Comments)
Posted by: Author: Lee-Ann Steenkamp
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Author: Lee-Ann Steenkamp (Research Fellow at the University of Stellenbosch Business School)

Lee-Ann Steenkamp argues that environmental taxes are unlikely to result in a change of energy usage, but that they can prompt a change in electricity supply by providing an incentive to switch to more sustainable modes of energy production. 

Over the course of the next year, I will examine a range of environmental topics that interact with our tax regime – also called 'green taxes'. I will explore a diverse range of topics, including tax incentives for renewable energy, fracking in the Karoo, the taxation of oil and gas companies, mining and carbon taxes. The first article in the series addresses the state of the electricity crisis in South Africa. 

Introduction: "Discontent is the first necessity of progress”

Thomas Alva Edison (1847 – 1931) was an American entrepreneur and inventor, an extremely hard worker and savvy businessman, who held more than a 1 000 patents for his inventions. Although most historians agree that Thomas Edison did not invent the electric light bulb, he is credited with patenting the first commercially viable one in 1879. He eventually went on to found General Electric, still one of the largest publicly traded companies in the world.

Fast-forward about a century to modern-day South Africa, which is also populated by hardworking entrepreneurs, inventors, savvy businessmen and –women and… Eskom. On Thursday 14 May, the African National Congress marched on Eskom (which, ironically, is governed by the ANC) to protest against the way that pre-paid meters were being installed in some parts of Soweto. This protest came after a previous ten-hour-long power cut in that area. 

Faced with near bankruptcy, political pressure, illegal power connections, violent protests, gross mismanagement, credit rating downgrades and a backlog of maintenance to its power stations, the power utility's future looks… well, dark. 

However, as Edison said, "discontent is the first necessity of progress.” This article will provide a brief overview of the progress of South Africa's energy policy. An optimist would say that there is light at the end of the tunnel. Unless, of course, there is load shedding.

Excerpts from South Africa's energy policy or: "Just because something doesn't do what you planned it to do, doesn't mean it's useless".

The Constitution

Section 24(b) of the Bill of Rights of the South African Constitution (Act 108 of 1996) confers the right to - 

"have the environment protected, for the benefit of present and future generations, through reasonable legislative and other measures that prevent pollution and ecological degradation; promote conservation; and secure ecologically sustainable development and use of natural resources while promoting justifiable economic and social development.”

The Constitution therefore allows for a national energy policy to be developed and implemented by the state to protect these rights and to secure ecologically sustainable development. According to the South African National Energy Development Institute (SANEDI), this is interpreted as aiming to ensure that national energy resources are adequately utilised and, consequently, that the production and distribution of energy resources is done sustainably.2

The 1998 White Paper

In 1998 the Department of Energy (known then as the Department of Minerals and Energy) released a White Paper on Energy Policy.3 The White Paper elaborates on the abovementioned constitutional rights by stating [at p3]:

"Energy should therefore be available to all citizens at an affordable cost. Energy production and distribution should not only be sustainable, but should also lead to improvement of the standard of living for all of the country’s citizens. For this to become a reality, the state should ensure that energy production and utilisation are done with maximum efficiency at all times.”

Admittedly, it was a far-sighted policy with regards to its recommendations for the electricity sector. Unfortunately, these ideological proposals were never fully realised. 

The 2007 Master Plan

In 2007, the Energy Security Master Plan – Electricity4 was released to plan for electricity supply up until 2025. Readers will remember that this was around the same time that the first round of recurring load shedding (or rolling blackouts) reared its unwelcome head.

The 2007 Master Plan acknowledged the uncertainty over the planning horizon and appraised the electricity generation, transmission and distributions sectors. One recommendation in particular caught my attention [at p58]:

"The reliability standard for power generation should be the '1 day in 10 years' standard. This means only one day blackout in 10 years will be an acceptable standard. This is consistent with the reserve margin of 19 per cent over time”.

One day of blackout in ten years? I'm not convinced that Eskom will attain this target.

The 2010 Integrated Resource Plan (IRP) for Electricity 

During the 2008 energy crisis, the Department of Energy commissioned a plan which would help to meet the country's energy demands for the next 20 years. This plan was a major step towards fulfilling South Africa's commitments to mitigating climate change as expressed at the Copenhagen climate change summit. Written during a time of crisis, it called for a doubling of the national grid and was based on ambitious growth rates.

Updated in 2013, it takes into account the impact of recent developments on demand projections and generation capacity requirements to 2030. However, Eskom apparently would not use the 2013 update for its projections because Cabinet had not signed off on it.5

The OECD Environmental Performance Review

During 2013, the Organisation for Economic Cooperation and Development (OECD) conducted its first Environmental Performance Review of South Africa.6 The OECD states [at p30] that revenue from environmentally related taxes has increased in recent years due to new taxes being introduced (for example, on electricity and cars) and increases in tax rates. It further states that, in 2011, environmentally related taxes accounted for about 2.1 per cent of gross domestic product, which is close to the OECD average. Although the OECD comments that there "is scope to further extend the use of environmentally related taxes”, I doubt whether this will influence consumer behaviour much. 

Electricity taxation in South Africa

According to the OECD [at p85], the largest source of environmentally harmful subsidies in the energy sector relates to coal and electricity. Furthermore, for a long time, relatively low electricity prices have helped to make the South African economy one of the most energy and carbon intensive in the world. Until 2011, South Africa had among the lowest electricity prices internationally, but subsequent dramatic increases have seen us climbing the chart (see figure 2 below).

South Africa imposes a variety of taxes on energy products. For example, there are duties on transport fuels and electricity, but not on coal for electricity generation or fuel for household heating. The OECD [at p80] notes that energy taxes send important price signals that influence energy use patterns. Indeed, energy taxes in South Africa accounted for 93 per cent of environmentally related tax revenue in 2011, which is more than in all OECD member countries.

Electricity levy

An electricity levy was introduced in July 2009 at a rate of 2 cents per kWh. It applied to electricity generated from non-renewable sources. From 1 April 2011 the levy was increased to 2.5 cents per kWh – some of this revenue was set aside to fund the rehabilitation of roads damaged by the haulage of coal for electricity generation. Then, in 2012, the levy was again 

increased to 3.5 cents per KWh. The additional revenue was earmarked to fund energy-efficiency initiatives such as the solar-water heater programme.7

During the 2015 Budget Speech, the Minister of Finance announced a proposed increase to 5.5 cents per KWh.8 Additional revenue will be used to broaden the energy-efficiency savings tax incentive. The Minister advised that this latest increase was a temporary measure meant to be withdrawn when the carbon tax is expected to be introduced in 2016.

In conjunction with these proposals, the Minister also proposed to reduce the diesel fuel levy refunds to 50 per cent of the general fuel levy for generation of electricity by Eskom's open-cycle gas turbines (National Treasury 2015:52). This is due to the 'perverse incentive' caused by the exemption, whereby diesel is used excessively. The change is set to become effective from 1 April 2016.

Table 1 below depicts the contribution of the electricity levy to the overall national revenue budget.

Integrated national electrification programme (INEP)

Launched in 1991, the INEP is a government initiative to provide capital subsidies to municipalities to address the electrification backlog of permanently occupied residential dwellings.9 To sustain progress in connecting poor households to electricity, government will spend R17.5 billion over the next three years on the programme (National Treasury 2015:44). 

Conclusion: 'There's a way to do it better – find it'

The unreliable electricity supply has already caused National Treasury (2015:20) to adjust its estimate in GDP growth downwards to 1 per cent for 2015. At the end of 2014, Cabinet announced that a so-called "war room” had been set up to oversee the implementation of a five-point plan to deal with the electricity crisis.10 The plan was to focus on short-term interventions by Eskom. Ultimately, the power crisis can only be resolved if Eskom itself is better managed.11

The National Energy Regulator of South Africa (NERSA) had already agreed in 2013 to increase this year's electricity to almost 13 per cent; recently, Eskom has sought to raise that to an effective 25.3 per cent. Finance Minister Nene called the electricity levy a behavioural tax to curb demand. Given that large industrial users are already being asked to cut demand by at least 20 per cent and that consumers suffer regular power outages, it is highly unlikely that an extra levy will change consumer behaviour.12 Unless it's meant to cause even more discontent and protests? 

The only positive outcome that I can envisage resulting from these rate increases is not a change in the use of electricity, but in its supply. Increased energy taxes provide an incentive for switching away from coal-based processes, which is a desirable outcome from an environmental perspective.13 Creating a workable energy policy implies a sustainable energy mix of fossil fuels, nuclear energy and renewables (such as solar, wind, water, biomass and geothermal sources). To that end, the next instalment will explore two building blocks which are key to renewable energy, namely energy innovation and energy efficiency. After all, Edison advised that 'there's a way to do it better – find it'.

Disclaimer:  the opinions expressed herein are my own and do not necessarily represent the views of Stellenbosch University or SAIT.


1  For a detailed list of developments in the discovery and application of electricity, visit http://theinventors.org/library/inventors/blelectric2.htm [last accessed 15 May 2015].

2  SANEDI. 2012. Strategic Plan 2012/13 – 2016/17. Available at: http://www.sanedi.org.za/archived/ [last accessed 17 May 2015].

3  Department of Minerals and Energy. 1998. White Paper on the Energy Policy of the Republic of South Africa. Available at: www.energy.gov.za/files/policies/whitepaper_energypolicy_1998.pdf [last accessed 15 May 2015].

4  Available at: http://www.gov.za/documents/energy-security-master-plan-electricity [last accessed 15 May 2015].

5  See Sipho Kings. 2015. Politics of power ignores reality. The Mail and Guardian Online. Available at: http://mg.co.za/article/2015-01-09-politics-of-power-ignores-reality [last accessed 15 May 2015].

6  OECD. 2013. Environmental Performance Reviews:  South Africa 2013. OECD Publishing. Available at: http://dx.doi.org/10.1787/978926202887-en. [Last accessed 19 May 2015].

7  Available at: http://www.treasury.gov.za/publications/tax%20statistics/2014/default.aspx [last accessed 18 May 2015].

8  National Treasury. 2015.  Budget Review. Available at:   http://www.treasury.gov.za/documents/national%20budget/2015/ [last accessed 20 May 2015].

9  For more policy documents regarding INEP, see http://www.energy.gov.za/files/policies/p_electricity.html [last accessed 19 May 2015].

10  The war room is a collaboration between the Departments of Energy, Cooperative Governance and Traditional Affairs, Public Enterprises, National Treasury, Economic Development, Water and Sanitation and Eskom – as well as technical officials.

11  See in this regard Joffe 'War room was never going to solve Eskom's crisis' available at:http://www.bdlive.co.za/opinion/columnists/2015/05/20/war-room-was-never-going-to-solve-eskoms-crisis [last accessed 22 May 2015].

12  I agree with the opinion expressed in 'Eskom tariff hike excessive' available at:  http://www.bdlive.co.za/opinion/editorials/2015/05/12/editorial-eskom-tariff-hike-excessive [last accessed 19 May 2015].

13  Also see in this regard Seymore, Adams, Mabugu, Van Heerden & Blignault (2010) 'The Impact of an environmental tax on electricity generation in South Africa.' Studies in Economics and Econometrics, 34(2).

This article first appeared on the September/October 2015 edition on Tax Talk.


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