The impact of increased electricity prices on consumer demand

 

 Electricity Demand and Growth

South Africa has enjoyed electricity production surplus for years due to
overinvestment in electricity generators by Eskom. This eliminated the need to
build new electricity generators and through which Eskom achieved the position
of being the world’s cheapest producer of electricity, Kohler (2008).
However, this situation has now ended and South Africa is in urgent need for
additional power capacity. Between December 2005 and May 2006 outages
were experienced in the Western Cape, in early 2007 outages were experienced
across the country and in January 2008 daily load shedding events were
experienced. The recent large-scale power outages and load-shedding events
have been contributed by a declining reserve margin (see Figure 2). An
acceptable reserve margin would be between 15% and 20%. 

Various factors contributed to the supply problem Kohler (2008) and Eskom
Annual Report (2007), which are:

Policy uncertainty, planning confusion and investment delays

This refers to the policy uncertainty and planning confusion (between 1998 and
2004) which resulted in delayed investment in new generation capacity.
Furthermore, incorrect assumptions on the planning side contributed as a 10%
reserve margin as opposed to a 15% reserve margin were considered.

Unexpected plant failures

Traditionally, Eskom conducts planned maintenance during summer when peak
demand is lower. However, during this period a significant portion of capacity
was unexpectedly out of commission. Factors contributing to this include low
coal stockpiles and low quality of coal; ageing plant having to run harder (i.e.
boiler-tube leaks), etc.

Demand growth

Since 1980, electricity grew at a compound rate of 3.7% higher than the Gross
Domestic Product (GDP) growth rate of 2.1%, while post 1989, electricity and
GDP grew at similar rates, I-net Bridge (2007). Eskom’s growth assumptions
were based on a GDP growth of 4%. This translates to power demand growth of
2.3% Kohler (2008). Actual GDP growth exceeded 4% over this period, while
electricity demand grew by 4.9% in 2007, Kohler (2008). Continuity of supply
therefore deteriorated across all parts of the electricity system, while investment
in supply did not follow this trend.

ELECTRICITY PRICING METHODS

Various types of pricing methods exist in order to facilitate DSM participation
programs. This study focuses on the differences between Real Time Pricing
(RTP) and Time of Use (TOU) pricing. The fundamental difference between
RTP and TOU is that RTP is dynamic and TOU is static (see Table 4), Abrate
(2003).
RTP is regarded a more efficient pricing method compared to TOU. However,
TOU is more widely accepted in part because it is easier and less costly to
implement, Abrate (2003). RTP pricing implementation requires investment in
sophisticated metering technology and efficient communication systems.
Technology advancements in metering technology as well as the rapid growing
internet may soon overcome the limitations associated with RTP implementation.
Energy does not yield utility in itself, but is rather desired as an input into other
processes, Abrate (2003). Hence, ignoring the possibilities of substitution
between peak and non-peak usage, demand response to higher prices typically
involve substitution to other factors of energy. The following are popular
characteristics of demand, Abrate (2003) :

• Energy is undesired in itself; energy demand is driven from demand for more
basic products (e.g. light, warm and cold space, motive power, etc.).
• Energy involves usage of durable goods; therefore, it is important to
distinguish between short-run and long run demand elasticity.
• While both techniques and results are quite variable, with good
approximation, short-run elasticity is measured around -0.2, whereas long-
run aggregate elasticity of demand is likely to be in the range of -0.4 to -0.9.
• Energy is virtually applied in all activities, but factor proportions vary widely.
This leads to the implication that price elasticity vary widely across users.
• Price elasticities can vary among different regions. This could lead to an
overstatement in the estimation of long-run price elasticities in cross-section
empirical analysis. Increase in prices of a certain region can involve

migration of industries to another region, reducing energy consumption in
the initial location, but without influence on the total energy consumption.

Abrate (2003) argue that the marginal cost of producing electricity varies
considerably over time, since demand is highly variable, whereas production is
subject to rigid short term capacity constraint. Furthermore, Abrate (2003)
states that during off-peak times, there is plenty of capacity and the cost of
producing an additional kilowatt-hour only reflects fuel and some operating and
maintenance costs, while during peak periods, the capacity constraint will be
binding and the incremental cost can increase greatly. As a result Abrate
(2003) states that the end-use consumer faces a fixed retail price, which does
not give a signal of the actual system load and demand does not play an active
role in determining prices.


The measurement of demand responsiveness based on the literature
highlighted is the effective price elasticity of demand (i.e. “how much will be
willing to change his consumption”) Abrate (2003). Hence, recently the
attention has been dedicated to the possibility of substitution between peak and
non-peak usage. The majority of these studies consider a TOU static
framework, whereas only a few works concern dynamic pricing Abrate (2003).
Earlier work according to Abrate (2003) focused on energy demand (empirical
work published in 1975).

Demand-side participation programs are therefore becoming popular. Table 4
describes various types of demand-side participation programs available,
Abrate (2003).

Source:

University of Pretoria

The impact of increased electricity prices on consumer demand

Student name: Ezzard de Lange

A research project submitted to the Gordon Institute of Business Science,
University of Pretoria, in partial fulfilment of the requirements for the degree
of
Master of Business Administration


Submission Date: 13 November 2008

Mozambique Doing Business - South Africa

2025

Link : https://repository.up.ac.za/server/api/core/bitstreams/41ab4e12-929d-45d7-9c1c-99641d5eccb6/content

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