1 South African Journal of Science http://www.sajs.co.za Volume 111 | Number 9/10 September/October 2015 Research Article Sectoral elasticities in South Africa: Before and after 2008 Page 1 of 7 © 2015. The Author(s). Published under a Creative Commons Attribution Licence. Sectoral electricity elasticities in South Africa: Before and after the supply crisis of 2008 AUTHORS: James Blignaut 1 Roula Inglesi-Lotz 1 Jaco P. Weideman 1 AFFILIATION: 1 Department of Economics, University of Pretoria, Pretoria, South Africa CORRESPONDENCE TO: Jaco Weideman EMAIL: jaco.weideman@outlook.com POSTAL ADDRESS: Department of Economics, Private Bag X20, Hatfield 0028, South Africa DATES: Received: 14 Mar. 2014 Revised: 28 Oct. 2014 Accepted: 27 Nov. 2014 KEYWORDS: electricity tariffs; price elasticity; electricity demand; industrial sectors; structural break HOW TO CITE: Blignaut J, Inglesi-Lotz R, Weideman JP. Sectoral electricity elasticities in South Africa: Before and after the supply crisis of 2008. S Afr J Sci. 2015;111(9/10), Art. #2014-0093, 7 pages. http://dx.doi.org/10.17159/ sajs.2015/20140093 In this paper, we estimate the price elasticity of electricity for various industrial sectors of the South African economy from 2002 to 2011. The data used include sectoral electricity consumption data and electricity tariff data, both courtesy of Eskom as well as output data based on national statistics. The most important contribution this paper makes is that it includes the period after the sharp rises in electricity tariffs in 2007/2008 following a period of load-shedding and insecurity in electricity supply. Previous studies have included data only until 2007 and, for the most part, have found statistically insignificant, positive elasticities. However, for the period post-2007, we found statistically significant and negative elasticities for 9 of the 11 sectors considered. Our results show that the majority of industrial sectors have become much more sensitive to changes in the price of electricity following 2007/2008, indicating to policymakers that tariff restructuring might influence consumer behaviour significantly. Introduction Price elasticity measures the sensitivity of consumer behaviour to price (or tariff) fluctuations. (It should be noted that electricity prices in South Africa are administratively set and hence are actually tariffs, but here we use the terms interchangeably.) Understanding such behavioural responses is of strategic and practical importance to policymakers and investors alike within the electricity sector when considering infrastructure development planning, the determination of future electricity tariffs, environmental policies, etc. Being able to determine the most likely behavioural responses to changes in prices in an industrial environment that is continuously becoming more electricity intensive 1 is the key to successful policy implementation. South Africa experienced a severe electricity supply crisis during 2007/2008 with extensive blackouts or load- shedding. The damaging consequences on the economy were vast. The National Energy Regulator of South Africa (NERSA) estimated that approximately ZAR50 billion (approximately USD5 billion) was lost during this crisis. 2 Many possible reasons have been given to explain the crisis, such as the lack of capacity for generation and reticulation of electricity 3 and the lack of research on electricity topics and energy in general 4 . Eskom (the state-owned monopolistic supplier of electricity in South Africa) argued that the rate of economic and population growth in the country increased the mismatch between demand and supply of electricity, 5 and thus, only the expansion of power generation capacity would be able to alleviate the problem. Since then, the construction of two additional power plants, Medupi and Kusile, was initiated. These plants will be fully operational only from 2018 onwards, adding an extra 9600 MW (2 x 4800 MW) to the current power generation capacity. It has also been argued 3,6 that South Africa’s historically low electricity tariffs – compared with those of the rest of the world – have been a disincentive for consumers to use energy efficiently, leading to higher electricity consumption levels. Since the crisis, Eskom and NERSA have changed the electricity tariff structure resulting in increases of up to 25% per annum from 2008 to date. Following these events, many researchers have tried to detach the behaviour of consumers and their reactions – if any – to the past and also to future changes in tariffs. 3,6-9 When these studies were published, the available data included information only up to 2007/2008 – a time when electricity tariffs were at historically low levels. 3 Hence, the data did not allow for the investigation of the possible impacts of price restructuring beyond 2007/2008 on the South African electricity market nor for any changes in elasticities. The tariff structures in the country since 2008/2009 might have altered consumer sensitivity to price fluctuations, so an in-depth analysis of this new behaviour has become imperative. From the outset it should also be noted that, given the dynamic nature of the country’s economy, it is necessary to update elasticity estimates regularly as they do change over time (see also Inglesi-Lotz 6 ). Moreover, this information is also necessary to estimate the degree of consumer sensitivity to the introduction of any carbon tax or other future price restructuring. Although we are not the first to ask these questions, this paper is unique in several ways. Firstly, it is the first to incorporate data after the electricity supply crisis in South Africa and the price restructuring of 2008/2009. Previous studies on the South African case only included information pre-energy crisis in the country and hence could not discuss the effects of the crisis and the price changes in consumer behaviour. This study is therefore not just a more updated version, but also provides more relevant and current policy suggestions. Secondly, ours is the first study conducted for South Africa with such a detailed level of disaggregation. This analysis is not only for sectoral policy implications but will also assist in thoroughly understanding similarities and differences in the behaviour of the various sectors. This understanding allows investigations into whether there are changes and whether these changes are confined purely to certain sectors or are an economy-wide trend. Literature review Several studies have been conducted on the issue of electricity prices and price elasticity in South Africa, especially before 2007/2008. The local increase in the interest in price elasticity of electricity is matched by a similar increase