The impact of electricity prices on economic growth: a case study of South Africa

Abstract

This study examines the impact of electricity prices on economic growth in South Africa using Vector Error Correction Model (VECM) and the Johansen approach to co-integration. The results confirm that a stable, long-run relationship exists between electricity prices and economic growth. The empirical results show that there is a unique negative long-run relationship between electricity prices and economic growth. We find that higher electricity prices have a negative impact on economic growth. This indicates that as electricity prices increase, aggregate output in the economy will become constricted thereby reducing gross domestic product and thus reducing economic growth in South Africa. This study recommended that the financing of Eskom’s capacity expansion can be a composition of increased user charges, private sector investment and financing from the government. The negative impact of electricity prices on economic growth are indicative of the fact that higher user charges should not be the only source of financing Eskom’s six year capital expenditure. Despite the economic advantages of increasing the price charged to customers to a cost reflective level, several sectors are vulnerable to sudden consistent increments in electricity prices. If the recommended policy mix contributes to the financing of Eskom’s capitalisation then higher user charges will not be a requirement and in the short-run the economy will be able to function along its usual business cycle.