Budget Speech 2015: A Critical Time for Energy Management in South Africa
02 March 2015
A news update from the NBI on its programmes, business leadership and issues on sustainable development.
Minister Nhlanhla Nene’s first budget was announced on the 25th February in the context of South Africa’s electricity supply demand mismatch, a mismatch that is severely curtailing growth and damaging international investor confidence. As a consequence, behind the focus on personal tax rates, sin taxes and a constrained fiscal environment, Minister Nene’s first budget speech contains measures that will drive action on energy management for South African companies.
To begin with, the budget indicates a number of significant price drivers for electricity over the next few years. These drivers of higher electricity prices include:
- The increase in the electricity levy from 3.5c/kWh to 5.5c/kWh
Although this hike is described as temporary, it is arguable that South Africa will not enter a more stable reserve margin until at least 2020. So the increased levy could be with us for some time.
- The implementation of the carbon tax from 2016
This tax will not only affect the cost of primary fossil fuel energy sources, but will also raise the price of electricity, as Eskom passes on its carbon tax bill to electricity consumers. The draft carbon tax bill will be released for public consultation later this year.
- Consistent messaging in the budget speech regarding the need for more cost-reflective electricity tariffs
In a nutshell, should the Electricity Regulator (NERSA) review current determinations and consider tariffs to not be price reflective, there could be tariff increases approved for Eskom. Given Eskom’s constrained financial position at present, and with the R23 billion provided by the state over the next three years to be far from adequate for what is needed by Eskom, there is a real possibility of electricity price increases that would assist in stabilising Eskom’s finances.
While these measures will impact financially on companies, government has also extended its commitment to support both energy efficiency and self-generation of power by companies. This process of incentivisation is to be implemented through the following:
- The proposed increase in the Section 12L energy efficiency incentive from 45c/kWh to 95c/kWh
This is a welcome boost for this incentive and responds to company concerns regarding the low rate on the existing incentive. The Minister of Finance also alerted companies in his speech that the Section 12L incentive now applies not only to energy efficiency measures and power generation for own use, but also to cogeneration. On the downside, uptake of the 12L incentive has been slow and there is considerable room to eliminate blockages and streamline its implementation so that a much larger number of companies reduce their energy consumptions and benefit from the incentive.
- The proposed implementation of further accelerated depreciation for solar power installations
This intervention would presumably build on the current three-year depreciation allowances for the production of renewables and biofuels, as previously implemented by National Treasury. This proposed measure would further increase the attractiveness of commercial rooftop solar projects.
While much has been said about tightening the fiscal belt, it is clear that government is putting in place a mixture of tariff increases, taxes and incentives in order to tighten the nation’s energy belt, with significant implications for companies.
The heartening news for industry is that the NBI’s Private Sector Energy Efficiency (PSEE) programme is excellently placed to assist companies in delivering real energy savings. The PSEE has already audited over 350 companies in South Africa (including providing fully subsidised audits for medium sized companies), helping businesses to identify and implement energy saving opportunities. Included in the 350 companies are 30 large companies who are addressing energy management strategically and with a long term perspective. Some of these companies have also recognised their leadership role in addressing the national energy challenge through company awareness raising campaigns and encouraging their customers and suppliers to take advantage of this opportunity.
In summary, the PSEE provides support to small, medium and large companies in South Africa, based on the following approach:
Figure 1: The PSEE’s Three Levels of Support, Based on Company Energy Spend
The PSEE has identified well over 1 300 possible interventions in the companies audited to date, with the average payback being marginally over 2 years. Over two thirds of the interventions identified have paybacks of less than 2 years, highlighting the massive potential for energy efficiency. Key examples of these cost-effective interventions are outlined in Table 1 below.
Table 1: Examples of Cost-Effective Interventions Identified within the PSEE
|Intervention||Average Paypack Period (Years)|
|Implementation of carbon and energy management system||0.89|
|Process design and optimisation||1.69|
|Process instrumentation and control systems||1.88|
The above interventions are complemented by the following three measures, which have emerged as the most recommended interventions within the PSEE site surveys to date. Estimated payback periods in both tables are likely to be conservative given the higher electricity prices and additional incentives mooted in the 2015 Budget Speech.
Table 2: Most Recommended Interventions within the PSEE
|Intervention||Average Paypack Period (Years)|
|Process heating and cooling||2.14|
|Use of renewable energy sources (primarily solar photovoltaic power)||6.89|
In summary, it is clear that a number of energy savings opportunities are in place in South Africa, with viable payback periods and support provided by programmes such as the PSEE. This context is key, given that the 2015 Budget Speech resonates with the need for companies to tackle energy management head on this year; and indeed next year as the carbon tax comes into force.
It is also worth noting that the PSEE has attracted a significant number of agricultural and agro-processing enterprises and some of the manufacturing sectors that government is seeking to promote and develop.
On the carbon tax
The Budget Speech was silent on the proposed alignment between National Treasury’s carbon tax process and the development of carbon budgets for large emitters by the Department of Environmental Affairs. The alignment of these two measures was specifically raised as an important issue in the 2014 Budget Speech, but has been passed over without mention in the current Budget Speech.
Rather, much more has been made of alignment between the forthcoming carbon tax and the current electricity levy, with the Budget Speech indicating that the levy will be reduced as the carbon tax comes into force. Those hoping for the complete dissolution of the electricity levy with the introduction of the carbon tax should tread wearily, however. National Treasury has previously indicated that it does not view the simultaneous application of the electricity levy and the carbon tax as a clear form of ‘double taxation’, in light of the tax-free thresholds applied in the carbon tax’s first phase of operation. Those hoping for an end to the electricity levy with the promulgation of the carbon tax in 2016 should therefore err strongly on the side of caution.
The release of the draft carbon tax bill later this year, a process confirmed by Minister Nene in his speech, will mark a critical point in the carbon tax’s development. Hopefully the bill will provide clarity in a number of unresolved areas, including the alignment of the carbon tax with carbon budgets, and exactly how the electricity levy is to be applied going forward.