With the high price of electricity, the vagaries of supply and the looming carbon tax, manufacturers should be considering alternative energy sources. With me now in the News Leader studio to talk strategy and cost is Duane Newman from Cova Advisory.
Duane welcome, you were at the manufacturing Indaba in KwaZulu-Natal this week, what effect are the power shortages and the energy crisis having on manufacturers in that area?
Duane Newman: Electricity is one of the big challenges for manufacturers today, I think from two angles. One is security of supply, can you actually get power? So if you are a manufacturer you can’t manufacture half a widget, you need to manufacture a full widget. And the other one is price…so these days it’s becoming more about security of supply and less about price.
BDTV: Is there much anger against Eskom? I guess there is…
DN: Yes I think there is.
BDTV: Understandably so. Well let’s talk about both of those issues. Should they be separate or should the high cost of electricity in South Africa, and the vagaries of supply, should they be dealt with separately or is there one solution for both?
DN: Most companies need to have a coordinated strategy to deal with electricity and power at a strategic level. So from 2008 until today most guys have been focusing very much on price. The debate has moved a lot more to security of supply and saying where am I going to get my power from? So if Eskom isn’t going to be the solution for me, what is the solution? Is it renewable energy, is it self-generation of power. The reality is when you start to talk about co-generation plants and manufacturing your own power, the question is do we have the skills and ultimately do we have the money to put up our own power plant?
BDTV: Yes, so if a manufacturer had come to you today, is there a one size fits all solution?
DN: No, never okay. The reality is we’ve actually been doing quite a few projects assessing, looking at companies, saying how can they solve their electricity or energy problem? Some companies have got the money so they can fund the solution if they need a technical solution, others don’t have the money so they’re actually looking at a way of how can we actually get a project funded? And the reality is projects are always competing in a large corporate say manufacturing entity, saying okay we’ve got this project we can do, which is say a manufacturing project versus an energy project. And the question is what’s priority? What gives you the best return and can we get things like a government grant or a tax incentive to help us?
BDTV: Yes…so a manufacturer comes to you and says I don’t have much money but I want to save costs on my Eskom bill and I want security of supply, what do you say to them? There’s no money…
DN: So then you’ve got other solutions…you look at them and say fine okay, can we partner you with what we call an energy services company? What will the energy services company do, it will sit with you and say fine, what do you need? They will incur the cost, and what they’ll do is, they’ll then take a percentage of the savings of whatever they’ve saved you, so that there’s a more efficient energy…
BDTV: So there’s no outright cost?
DN: So there’s no initial outright cost, they will then take a percentage of the savings, whatever they save you on that new installation of a, say, co-generation plant or whatever.
BDTV: Are there any government tax subsidies?
DN: Interesting question…government I suppose puts things in two big boxes, a cash grant where they’ll potentially give you some kind of reimbursement, so if you spend R100 they’ll give you R30 back. There’s a programme called a Manufacturing Competitiveness Enhancement programme, it’s been around for two or three years now, and they will help you…give you some sort of cost sharing grant for those costs. The other one is a programme called an Energy Efficiency Tax Incentive called Section 12L that’s contained in the Income Tax Act and that’s an energy efficiency incentive. So if you’re going to be doing anything in your production facility to actually use less power, they’ll give you 95c per kilowatt hour saved. So it could be quite a lucrative…
BDTV: So it’s obviously something which you should look at.
BDTV: What about a manufacturer who has a bit of money, is the answer solar?
DN: It depends on what he is manufacturing…say for a mining company as an example, solar, the sun shines when? During the day…so it might be useful if he’s got a plant that operates during the day, but at night?
BDTV: He could use a Tesla storage facility?
DN: Yes maybe okay, but there’s still a lot of challenges these days around storage. I think that technology is still catching up …the panel technology.
BDTV: Yes. So any company nowadays has to deal with sustainability issues such as electricity, power, looming carbon tax and water, are companies now…are Chief Executives of manufacturing companies more open to getting somebody like yourself in to give specialist advice or is sustainability still a bit of a dirty green word?
DN: Yes…if you use the word sustainability or climate change I still think it’s very much a dirty word…
BDTV: It’s a turn off?
DN: Yes I think it is, but these issues are becoming real business issues now so CEOs are realising it’s not really about saving the planet, it’s really about the survival of their company. It’s also things like…look about the carbon tax. Carbon tax is coming and the reality is, can the country afford… can a manufacturer today who’s got increasing electricity prices afford a carbon tax? Our view is not.
BDTV: Well it is something which is happening and which tax legislation isn’t out but there are promises or threats in that line.
DN: Yes that’s right.
BDTV: But it is so important for companies to see this not as a green issue but these are key risks and key opportunities to business. Thanks so much for coming in today Duane.