From Edison to Eskom: a look at electricity and tax policy in South Africa
28 October 2015
Posted by: Author: Lee-Ann Steenkamp
Author: Lee-Ann Steenkamp (Research
Fellow at the University of Stellenbosch Business School)
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
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
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.
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.
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,
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".
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.”
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
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
"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.”
it was a far-sighted policy with regards to its recommendations for the
electricity sector. Unfortunately, these ideological proposals were never fully
The 2007 Master Plan
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.
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
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.
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
Environmental Performance Review
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
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).
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 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
to 3.5 cents per KWh. The additional revenue was earmarked to fund
energy-efficiency initiatives such as the solar-water heater programme.7
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.
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.
below depicts the contribution of the electricity levy to the overall national
Integrated national electrification
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
Conclusion: 'There's a way to do it better – find it'
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
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?
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].
2012. Strategic Plan 2012/13 – 2016/17. Available
at: http://www.sanedi.org.za/archived/ [last accessed 17 May 2015].
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].
at: http://www.gov.za/documents/energy-security-master-plan-electricity [last accessed 15 May 2015].
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].
2013. Environmental Performance
Reviews: South Africa 2013. OECD
Publishing. Available at: http://dx.doi.org/10.1787/978926202887-en. [Last accessed 19 May 2015].
at: http://www.treasury.gov.za/publications/tax%20statistics/2014/default.aspx [last accessed 18 May 2015].
Treasury. 2015. Budget Review. Available at: http://www.treasury.gov.za/documents/national%20budget/2015/ [last accessed 20 May 2015].
more policy documents regarding INEP, see http://www.energy.gov.za/files/policies/p_electricity.html [last accessed 19 May 2015].
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.
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].
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].
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.