The economic impact of electricity price increases on the potato industry in South Africa

Abstract

At the start of 2010, the National Energy Regulator of South Africa (NERSA) announced that electricity tariffs would increase at an average rate of 25 percent per year over a three year period (Njobeni, 2010). This raised fears within the economy and specifically within the agricultural sector that these increases would negatively impact the agricultural sector. Various stakeholders within the agricultural sector also raised opinions on what the true impact will be on agricultural production and market prices. The main objective of this study was to quantify the true impact of higher electricity tariffs on production and market prices within the potato industry. The study focused on the potato producing regions of the Sandveld, Limpopo and South Western Free State. On-farm data were collected in an attempt to capture the electricity consumption and costs associated with potato farming in these specific regions. An effort was also made to calculate and capture production costs in these three regions which, together with the collected electricity costs, formed the basis of the analysis. The study applied a supply response model developed by the Bureau for Food and Agricultural Policy to evaluate the impact of increased electricity tariffs on potato production and prices in South Africa. The supply response model used is a standard econometric recursive dynamic model that has the purpose to model policy analysis, iv with short, medium and long term projections on an annual baseline basis (van Tongeren et al, 2000). However, in order to conduct analysis on electricity tariff increases, this supply response model required adaptation and improvement in order to incorporate electricity costs. Before this adjustment, the model applied the producer price / fertilizer price ratio as a proxy for production costs. Since detailed production costs (including electricity costs) were acquired through this study it was now possible to alter this ratio to a producer price / production costs ratio which included the electricity costs. To illustrate the impact of the electricity price increase the electricity cost component in production cost was shocked to reflect an increase at the set rate of an average of 25 percent per annum for the 2010, 2011 and 2012 production years. The results demonstrated that these three regions will see a decrease in hectares planted over the period between 2013 and 2020 as a result of the increased electricity tariffs, but that this decrease in hectares planted will be very small. The Sandveld region had the highest impact as it was calculated that on average, over the period between 2013 and 2020, a total of 35 hectares of potato production will be lost due to this higher electricity tariff. It can further be expected that the market price in the Sandveld region would increase slightly by 52c/10kg over the same period. The South Western Free State region was least effected by the higher electricity tariffs as a mere 1.6 hectares of potato production land could be lost due to the higher electricity tariffs which will lead to an increase of around 36c/10kg in market prices over the period between 2013 and 2020. The study further introduced a cost saving technique that farmers can use to counter the higher electricity tariffs. The majority of farmers consume electricity under the Landrate and Ruraflex tariff structure. It is this Ruraflex tariff structure that farmers can use to their advantage by consuming electricity during specific periods of the day that would result in a lower c/kWh cost. By reviewing the irrigation scheduling and activities of farmers the study established that most farmers pay far too much for electricity since their peak usage are during the periods of the day where higher rates apply. The study calculated that farmers, by applying this technique, could save between R190 and R455 on electricity costs per hectare in the Sandveld region. The study concluded that the impact of higher electricity tariffs on potato production and market prices in the Sandveld, Limpopo and South Western Free State regions are of a small nature which will most likely be absorbed by the farmers. The claims by various industry participants that the potato industry would be adversely negatively impacted were unfounded in this study. Nevertheless, in the event that electricity tariffs continue to increase in the future, farmers have to their disposal a cost saving technique that will aid them in countering some of the negative effects of electricity price hikes.