Tue, Aug 11, 2015
The chronic power outages are threatening the productivity, economic performance and competitiveness of the country
It is much darker than usual on Kloof Street in Cape Town, popular for its restaurants, cafés, coffee shops and trendy bars. The street and traffic lights are off, and most restaurants, residences, and shop windows ooze darkness. Somewhere in the background a diesel generator grumbles as a pedestrian walks by, wearing a head torch.
It is the second power outage in 10 hours. The first time the power went off today was around lunch hour, a busy time for most Kloof Street establishments. This second outage, which will last from 6pm to 8.30pm, means more bad news for the hospitality industry. This, after all, is when one typically goes out for supper. It has to be noted that today is worse than normal. Usually the power goes off just once.
The situation is not much different from January 2008, which marked the beginning of the Rainbow Nation’s energy crisis. Like today, the problems back then were a direct result of the inability of Eskom, South Africa’s largest power producer, to meet the nation’s energy demand. Culprits include substandard long-term planning by Eskom management, lack of investment in and poor maintenance of the grid, dilapidated infrastructure and shortfalls in corporate governance.
To manage the situation, the government has introduced a strategy of rolling power outages on a rotating schedule, known as load shedding. The objective is to ease the pressure on the grid and ultimately to prevent its collapse. Whenever a discrepancy between power demand and supply occurs, load shedding is implemented. Depending on the size of the gap, the power goes off once, twice or even three times a day.
The outages of 2008 subsided more or less half way through that year, up until January 2015. Whilst they are a nuisance to the general public, energy dependent businesses – from restaurants and supermarkets to agriculture and mining – regard the outages as a threat to their survival.
The Cape Town branch of the Federated Hospitality Association of South Africa, for instance, has urged the government to provide adequate energy security interventions to help smaller food and hotel businesses. According to chairman Rob Kucera, smaller enterprises often lack the reserves to absorb the costs associated with losses of production, profit and produce that result from load shedding.
“Our concern is that small businesses in the hospitality sector already face the uncertainty of seasonal revenue fluctuations, and will now need to contend with the added insecurity of load shedding,” he said during a business meeting in Cape Town, held in March this year. “While government has reiterated its call to support and grow this sector, we cannot over emphasise the threat continued load shedding has and will have on the survival of these businesses.”
The tourism and hospitality industry is not the only sector affected. Manufacturing activity has recently plunged to a four-year low. The Kagiso Purchasing Managers’ Index (PMI), which tracks the productivity of the country’s manufacturing industry, dropped to 45.4 points in April, from 47.9 points in March, before creeping back up to 50.8 in May. Any score below 50 points signals a contraction and load shedding was named as one of the main culprits, with May’s rally only possible because outages occurred at more favourable times of day.
Then there is retail. Many supermarkets have seen their operational costs rise, among other things because of the purchase of new generators and the extensive use of existing ones. Then there is the loss of production and increased waste. While presenting his company’s latest half-year results, Whitey Basson, chief executive of Shoprite, South Africa’s largest supermarket chain, said that R8 million ($650,000) had been spent in December 2014 alone to run existing diesel generators. New generators accounted for another R160 million ($13m).
Ian Moir, CEO of food and clothing chain Woolworths, confirms that the energy crisis is a problem for his business and the South African economy. “For me, the big thing with load shedding is not per se the practical day-to-day impact of each and every power cut,” he says. “On an operational level, our stores have generators. We got those a long time ago to protect ourselves, and as a result we are less affected than those who can’t afford generators.”
Moir’s bigger worries centre on what load shedding is doing to the economy. “The electricity crisis is constraining growth materially, and will do so for the next three years,” he asserts. “We could have had a much more robust economy if it were not for this issue.”
Recent figures by Statistics South Africa (Statsa) reflect Moir’s assessment. The data shows that South Africa’s Gross Domestic Product grew by only 1.3% in the first three months of this year, substantially below the 4.1% growth measured during the quarter immediately before.
Two months before the release of these figures, Lynne Brown, Minister of Public Enterprises in the Western Cape province of South Africa, revealed that the unstable electricity supply is costing the private sector up to R89 billion ($7.2bn) each and every month in lost production, revenue, and wastage.
One of the main concerns is that seven years have passed since the energy crisis came to light, and not much has improved despite the billions that have been thrown at the matter.
Take Medupi and Kusile. The costs of these two coal-fired power plants, each with a planned capacity of 4,500MW, have escalated dramatically since 2008.
Medupi’s price tag went from R69 billion to R154 billion ($5.6bn to $12.4bn), whilst Kusile saw its costs rise from R80 billion to R172 billion ($6.5bn to $13.9bn) with construction on both projects running many years behind schedule.
Both power stations should have been online in 2011, but so far only one of Medupi’s six 800MW units is producing electricity. It has been doing so since March this year, an event that was hailed as a victory by the governing party.
This has left energy consumers frustrated and out of pocket: to finance the two new plants as well as other plans, energy tariffs have gone up by an average of 25% per year, cutting into people’s spending power and profit margins.
The government has in the meantime embarked on a new journey to solve its energy woes. In May this year, the department of energy revealed that it intends to start the procurement process for six nuclear power pants, which will have a joint capacity of 9,600MW. “We expect to present the outcome of this procurement process to cabinet by year-end,” Energy Minister Tina Joemat-Pettersson told the South African Parliament. She added that the costs of the plans would amount to between R400 billion and R1 trillion ($32bn to $81bn), and that the procurement exercise “would be carried out in a fair and transparent manner.”
Most South Africans say they know who will win the bid: last year, a nuclear strategic partnership was signed with Russia, after which Pretoria and Beijing agreed to three cooperation pacts. These will shape an extensive nuclear project-financing framework between South Africa’s Standard Bank Group, China’s Nuclear Power Technology Corporation and the Industrial and Commercial Bank of China.
The responses to South Africa’s nuclear ambitions have therefore been mixed. Whilst some are in favour of nuclear, because of the immense power generating capability of one single plant, others are not convinced. The main concern is how South Africa will finance the plans. “Numbers have been mentioned of R1.2 trillion, 10 times the cost of one Medupi. The question is simple: who will finance these deals? And more importantly, what will happen to the price of power, given that Eskom is going the route of cost-reflective tariffs?” says Johan Muller, Programme Manager for Energy & Environment at Frost & Sullivan Africa. “If the price of power hypothetically doubles, just linked to the introduction of nuclear, what will this mean for South Africa’s global competitiveness?”
Another concern is that nuclear won’t be able to solve the country’s immediate energy needs, as it takes some 20 years to build an average power plant - without the delays and hiccups experienced during the construction of Medupi and Kusile.
This doesn’t mean there is no light at the end of the tunnel. In April this year, the South African government announced the approval of 13 independent renewable energy bids. These projects, including wind and solar farms, are expected to pump over 1,100MW into the grid by the end of next year. On top of this, the governmental programme that procures green energy from private companies will be expanded by 6,300MW.
The industry and other stakeholders have welcomed both decisions. “It has been one of the best things as it shows the government’s long term commitment and determination with regards to the development of renewable energy,” says Peter Venn, CEO of wind energy developer WindLab Africa.
Whilst South Africa’s energy problems are considerable, the country is not the region’s only nation facing problems with electricity supply. The International Energy Agency (IEA) says $450bn worth of energy related investments are needed in Africa to reduce power outages by half and achieve universal electricity access.
The 2014-2015 Global Competitiveness Report by the World Economic Forum shows that most African countries are worse off than the Rainbow Nation (which is ranked 99 out of 144 countries in terms of electricity supply quality). Worse rankings are assigned to Botswana (127), Mozambique (108) and Africa’s largest economy Nigeria (141). Leading the way are some of the continent’s best performers: Morocco (48), Namibia (52) and Rwanda (92).
(Image Credit: Afrocentric Confessions)
Miriam Mannak focusses on politics, economics, business, human and social development, gender-based issues, humanitarian topics, and nature conservation. Over the past decade and a half or so, her byline has appeared in over 70 publications in South Africa, Europe, the United States, the United Arab Emirates and elsewhere. This article was first published on the International Finance Magazine.
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