23th January 2023
To All Customers:
PRICE ADJUSTMENT: 1 MARCH 2023/LOADSHEDDING
Unfortunately, we find ourselves in a situation where the unprecedented load shedding being experienced requires that we now urgently increase our selling prices to offset the additional operating costs being incurred due to this issue.
Our manufactured cost of product does not cater for a situation where significant available manufacturing hours are being lost on a continual basis to load shedding. To operate in these hours requires the use of very expensive power generation from diesel generators. If we do not operate in these hours we then risk not meeting customer demands and so order fulfilment rates fall.
To provide power to our manufacturing facilities during these hours has to be done primarily by way of expensive diesel generation. As a comparison, our current average price per Kwh from City Power and with a mix of installed PV (solar) is cR1.85/kwh whereas, by comparison, our calculated cost of a Kwh from diesel generation is in the region of R10(+440%).
Electricity makes up a significant portion of our overall product cost. Load shedding also can affect supply – if we do not implement diesel generators in load shedding, we don’t product and that affects service and fulfilment rates to our customers which we strive to avoid, but at a significant additional cost.
We have made various assumptions about how many hours we will continue to lose to load shedding in the period ahead and from these assumptions we have revised our forecast overall expected electricity cost/kwh. With these assumptions we find ourselves in a situation where we must now urgently increase prices by 9.50%, effective 1 March 2023. This is urgently necessary to offset the higher costs already incurred and given it is now clear that load shedding is not a temporary issue and in such a scenario we cannot continue to absorb significant excess costs of diesel generator power costs – they can only be absorbed if load shedding is very infrequent and of few hours (Stage 1-Stage 2 infrequently) which is no longer the situation. Eskom provided a briefing update a few days ago and the outlook is that significant load shedding is here for the foreseeable future.
Additionally, without implementing this increase, supply to our customers is then at risk as we will not be able to manufacture when load shedding hours are active as we would not recover the higher costs. Thus, the price increase is required to ensure we can sustainably supply all our customers in what has become, since mid-year last year, a rapidly worsening load shedding situation and we also foresee a possibility of it worsening further.
Obviously, this is far from ideal, but the hard reality is that load shedding is now fast becoming the new driver of inflation in South Africa, irrespective of industry.
In relation to this situation and the forecast 19%+ Eskom increase at mid-year we are also in the process of investing in additional PV(solar) generation capacity to add capacity to our current PV system – we will do this as quickly as possible but the speed at which it can be done is limited by our ability to fund the project quickly and efficiently. When implemented, this project will significantly assist in ensuring we can operate, even in continuous load shedding, at a lower cost/kwh electricity rate than diesel only and to ensure we can sustainably supply all customers in a high hour’s load shedding environment that is fast becoming a continuous everyday scenario. We are thus prioritizing this project.
While, the load shedding situation is well known, we have attached some Annexures showing how rapidly the current load shedding situation has developed and now become entrenched, and the extent of the problem when compared with prior years.
If our assumptions around how many hours are forecast to be lost to load shedding prove to be incorrect we will revise pricing accordingly. We will review the issue quarterly.
Should you wish to discuss the underlying detail around this situation please feel free to ask your Account Manager to set up a meeting with us where we will share further detail.
The Pennyware Team