The impact of changes of coal price on electricity pricing in South Africa.
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Date
2018
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Abstract
Among the basic industries in an economy is the power industry. On the other end, electricity is one of the basic public goods. The South African economy is a mixed economy, both command economy principles and the market forces play an important role. This sees the electricity prices being strictly controlled by the government. This is done to ensure smooth economic development and to maintain stable prices. Coal as a source of electricity in South Africa however has become more market oriented. The coal price which was artificially lowered during the price regulation period, increased rapidly in recent years, owing to resource cost, environmental cost and production cost. The market forces too played a role in these adjustments.
It has been insinuated that the extensive capital requirements of building thermal power stations and coal mines lead to the huge increase in the power production costs beyond the reach of the many players in the economy. However, another view is that despite these rising costs in coal prices and power production costs, the retail price of electricity has not been adjusted accordingly, which would result in many players in this industry incurring losses.
This study used the Auto Regressive Distributed Lagged (ARDL) framework and VECM Estimation Technique to test the relationship between two variables, i.e. coal price changes being an independent variable, while changes in price of electricity being the dependent variable. The study sought to analyse the impact of coal prices on the prices of electricity, with particular reference to the KwaZulu-Natal Province in South Africa. Monthly data from 2006 to 2016 were used in this study.
The study had three objectives: the first was to establish the nature of the relationship between coal price changes and electricity prices. The next objective was to determine the presence of asymmetry in the relationship. The last objective was to find the direction of causality and hence, the transmission mechanism through which coal price changes might affect electricity prices. To achieve this, the study mainly focused in using the quantitative research methods. The study makes use of time series data, which has the advantage of providing information about the economic dynamics of some of the variables. The findings of the study indicated a bidirectional positive relationship between the independent variable coal prices and the dependent variable electricity prices. Based on the findings, the following recommendations were made, the concept of analysing coal prices, which considers electricity cost that results from rising coal prices, then there is need to test the direct, indirect (regulatory) and time varying effects of relative energy prices on electricity prices. Future research could focus on constructing energy price indices on inflation.
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Masters Degree. University of KwaZulu-Natal, Durban.