Rising input costs – you’re not alone
As a tourism business owner, you may wonder if you alone are feeling the bite of rising costs – electricity, water and fuel among them. According to the TBCSA Tourism Business Index for the first quarter of 2016, the cost of inputs contributed a whopping 56% to tourism business performance – sadly negatively, not positively. This trend was also forecast to continue into the second quarter, and the rising cost of electricity was mentioned separately as an additional factor that would negatively affect business performance.
Although the issues of high overheads were soon overshadowed by economic uncertainty, unrest at universities and immigration and visa headaches, the high cost of doing business continues to affect the bottom line.
Electricity tariff hikes are here to stay
In 2012, NERSA, the regulator responsible for approving electrify tariff hikes, approved an 8% increase in electricity until 2018. This 8% increase can and should be factored into a business’s budget. But, Eskom can also submit applications for annual electricity tariff hikes over and above this 8% to fund its shortfalls. In 2016, NERSA granted Eskom an additional 1.4% tariff hike, so the total increase from Eskom for 2016/2017 is actually 9.4%.
This 9.4% tariff hike is for consumers who get their electricity supplied directly by Eskom. In Cape Town, consumers get their electricity from the City, and are also subject to electricity tariff hikes. In 2016, NERSA approved an additional 7.6% increase for municipalities in 2016/2017, with the increase effective from July 2016. The City of Cape Town passed the cost onto consumers, and the cost of electricity delivery in Cape Town increased by 7.78% on 1 July 2016.
Electricity tariff hikes could be higher
What is important to note is that Eskom consistently submits applications for much higher tariff hikes than NERSA eventually approves, and although Finance Minister Pravin Gordhan may assure South Africans in his budget speech that tariff increases would only be approved if they are necessary, there are no assurances that there won’t be further electricity tariff hikes or that they won’t be much higher.
The real impact of electricity hikes on tourism businesses
In an accommodation establishment, it’s difficult to accurately know how electricity tariff hikes have affected the business’ bottom line because electricity usage varies with occupancy.
You expect to use a certain amount of electricity per guest through the electricity they use in rooms, laundry and meal preparation among other things.
So instead of looking at the total electricity consumption of the business, it’s better to look at how much electricity is used to service each guest per day – something we call the “electricity consumption per bednight”.
Even though the electricity consumption per bednight for each month changes seasonally, many businesses find that there are similarities in electricity consumption year-on-year. However, we expect the cost of electricity per bednight to increase every year since the cost of electricity increases every year. So unless an accommodation establishment is willing to invest in electricity saving behaviours and interventions, rising costs of electricity will continue to affect the business’s profit.
Reversing the impacts of electricity hikes
It may sound difficult to believe, but putting in place technology and behaviour to improve electricity efficiency in your business can not only relieve the costs of rising electricity prices, but also result in an overall saving.
Here’s a story from the Peninsula All-Suite Hotel. In mid-2013 the business went on a big drive to improve electricity efficiency. The graph below shows that monthly electricity consumption from June 2013 onwards (the red and green lines) is lower than that in 2012. Happy days – their actions are working!
Now the question is whether the actions have resulted in any reductions in electricity costs. Yes they have! As you can see in the graph below, costs per bednight from June 2013 are lower than the year before. For many businesses the target would be just to offset the electricity tariff hikes but the Peninsula-All Suites Hotel has managed to reduce their electricity costs per bednight, proving that resource efficiency can result in cost savings.
So we’ve established that the hotel is saving on electricity costs. Let’s take this one step further to find out how much the Peninsula-All Suites Hotel would have saved if it was paying the same rates now as it was in 2012. The blue line is what the hotel has been paying per bednight since June 2013 when they began their electricity-saving campaign. The red line is what they would have been paying if electricity prices had not increased. During the month when electricity per bednight was at its highest – June 2013 – the hotel would have saved R3.34 per bednight if it had been paying the 2012 rate, a saving on 16.7%. The lower the electricity price increase, the higher this saving will be.
Looking to the future
To maintain levels of profitability, businesses will either have to raise rates to cover rising input costs (which can be difficult in Cape Town’s competitive tourism climate) or reduce input costs without sacrificing guests’ expectations. The business we used in our exercise is no different to many other accommodation establishments in Cape Town in that energy efficient lightbulbs are the only energy saving devices installed. But installing and using energy saving devices and introducing new ways of doing things that would save electricity and cost nothing are good ways to reduce electricity costs. Most tourism business owners probably already understand this, but have not until now felt the pressure to do anything about it. But in the light of guaranteed electricity tariff increases and the uncertainty of how high they will be, the question arises: how long can tourism businesses continue to ignore the need to become more energy efficient?
We’ve purposely not mentioned anything about responsible tourism in this blog (until now) in the hope that tourism business owners would understand first-and-foremost that making their business energy efficient is good business sense.
Help on how to make your business energy efficient
There are many ways in which an accommodation establishment can use energy efficiently. Refer to the Cape Town Responsible Tourism How-to Guide for tips on what other businesses are doing. You can also follow our blog on the Cape Town Responsible Tourism Challenge which describes what five Cape Town accommodation establishments are doing to become more energy efficient, and more responsible.