The economic consequences of load shedding in South Africa and the state of the electrical grid
Perhaps one of the most pressing challenges facing the South African economy in 2015 is maintaining the structural integrity of its electricity generation network. The power system has come under severe strain due to maintenance backlogs and a failure to bring new generating capacity timeously online to match economic and social development. This has led to electricity demand at times outstripping supply. Consequently, this had led to the national parastatal supplier of electricity Eskom implementing load shedding. This involves planned rolling blackouts on a rotating schedule throughout the country to avoid total power system failure. If the system had to collapse, it would take weeks for the system to get back to supplying electricity to the grid. This in itself would be catastrophic for the country and result in hundreds of billions of rands of loss in economic activity.
Load shedding is not a new development and bears a striking resemblance to the electricity supply crisis of late 2007. Here too electricity demand outstripped available supply and threatened the stability of the national grid. The cause of that crisis has mainly been attributed to insufficient generation capacity. Problems with the supply of coal to Eskom’s coal-fired power plants, skills shortages at Eskom and an increasing demand for electricity as a consequence of economic growth have also been postulated as possible causes of the crisis. At the time, it was decided that additional power stations and generators needed to be constructed. Steps taken by Eskom to maintain their plants, increase coal supplies and plant performance improvement led to a suspension of load shedding from May 2008 onwards. Another possible reason for the suspension of load shedding could be the Global Financial Crisis of 2008 which led to an economic downturn and as a result a decrease in the demand for electricity which assisted in the stability of the electricity grid. However, South Africa still required additional sources of electricity.
The year 2012 had often been cited as the earliest possible end to power shortages. As of February 2015, the two new coal-fired power stations, Medupi and Kusile, have been wracked with construction delays and budget overruns and a single unit has still not been synchronised with the national grid. As a consequence the country is finding itself in a second bout of load shedding. The Eskom system is severely constrained and in addition to a considerable maintenance backlog (many stations were operated beyond their maintenance window to keep the lights on) the resolution of this crisis seems to be beyond the short term. Medupi and Kusile are only expected to be delivering commercial power into the grid by 2019 and 2020 which is years behind schedule. In the short to medium term it may well pay off to invest in renewable green energy such as wind and solar (of which the country has an abundance) which are relatively faster to construct and could allay some of the supply constraints.
The inability of South Africa to service its electricity needs has led to downward revisions of economic growth and investor confidence in the economy. These structural constraints were initially thought to be temporary but have become increasingly embedded into the fabric of the economy.
The current spell of load shedding started in November 2014 due to the collapse of a coal storage silo at the Majuba power plant which provides approximately 10% of South Africa’s electricity. Subsequent bouts of load shedding have ensued as a result of diesel shortages, depletion of water reserves at hydro power stations, breaking down of critical components of the system as well as generating capacity being offline due to planned maintenance. Eskom is able to produce approximately 45,000 megawatts of electricity but almost a third of its capacity is offline due to planned and unplanned maintenance. Due to the start-up of industry in late January 2015 the reserve margin (difference between actual supply and demand) has shrunk considerably and at any given time the system is severely constrained. This does not bode well for economic growth and international competitiveness of the country as access to electricity is one of the key drivers of economic activity.
The effect on the economy has been felt. As South Africa relies strongly on the exports of its precious metals to finance its current account deficit the impact of load shedding on mining operations (which are energy intensive) has led to a strong depreciation of the rand as well as a stalling of economic growth and downward revisions in growth forecasts. Several ratings agencies have also downgraded the country’s credit rating, which has had a negative impact on the outlook of the country as an investment destination. It has been suggested at the recent ‘Investing in African Mining Indaba’ held in Cape Town during 9-12 February 2015 that mining operations within the country should give more attention to solar power generation. Due to the country’s rich deposits of minerals and its abundant sunshine this may prove to be an invaluable investment and mitigate the impact of electricity supply instability. There have already been success stories in Namibia where mining operations make use of solar energy.
When load shedding occurs mining operations are shut down and in many instances it takes several hours for miners to be evacuated from the mines. This wastes productive time. Smelters and refineries take hours to restart after a break in power supply, outages in traffic management systems and traffic lights cause considerable congestion and a drop in productivity, offices reliant on internet services and technology have no option but to close, hospitals have come under increased pressure and many government administration services such as home affairs simply close as a result of load shedding. The cumulative effects of the above on the economic capacity and outlook of the country is significantly negative.
Chris Yelland, an energy expert, has estimated the cost of controlled blackouts in South Africa and highlighted the serious negative economic impact thereof. Stage 1 load shedding resulting in 10 hours of blackouts per day for 20 days a month results in losses of R20 billion per month. Using the same time parameters, Stage 2 load shedding costs the economy R40 billion per month and Stage 3 is estimated to cost the South African economy R80 billion per month. These costs, according to Yelland, to the productive economy are based on a cost of unserved energy of R100 per kWh. When one considers that the approximate GDP of South Africa in 2014 was R4 trillion approximately 1-2% of GDP could potentially be wiped out per month of load shedding.
The Independent System and Market Operator (ISMO) Bill initially proposed by the Department of Energy (DoE) to break up Eskom’s monopoly on electricity and allow for its partial privatisation has not been considered by Parliament. It was initially hoped that such a bill would lead to greater competition in the energy generation sector and encourage the entry of new electricity producers leading to greater electricity supply. However, in its form the bill would have removed the functions of Eskom’s systems operator (the entity which balances supply and demand in real time to prevent the collapse of the electricity grid as well as procuring power from Eskom power stations as well as from independent power producers (IPPs)) and house it in a separate state-owned entity. The DoE through the bill also sought to separate out the entire Eskom transmission grid and include it in the ISMO.
The original rationale for the restructuring was that it would promote competition in electricity generation as it was argued that Eskom would be unwilling to bring new private power producers into the system and even if it did the Eskom owned systems operator would likely discriminate against them. However, where Eskom is currently battling electricity grid stability this kind of restructuring and disruption caused by creating an ISMO could have dire effects. The system is severely constrained and Eskom would be hard pressed not to accept every available megawatt of power regardless of who generates it. What is required from government is a firm commitment to bring new private investors on-board. The renewable energy IPP project should provide a model as Eskom has already successfully connected 21renewable IPPs accounting for almost 500 megawatts.
In light of the above, it is perhaps informative to see how South Africa compares with the rest of the world in terms of electricity supply stability. The reliability and availability of infrastructure and the provision of utility services is a crucial component of development. The World Bank has made data available through enterprise surveys in terms of indicators measuring the reliability and provision of infrastructure services in 135 countries. The latest available data for South Africa is unfortunately only for 2007. As Eskom does not freely make such data available one may assume that under the current bout of load shedding a marked deterioration in these indicators will have been noticed.
Table 1 shows that for all countries the number of electrical outages in a typical month is 5.5 and last for approximately 2.7 hours each. This translates into a loss of 2.5% of annual sales. According to these figures South Africa does not fare too badly and in terms of number of electrical outages in a typical month fares about the same as high income countries. In terms of the duration of typical electrical outages it fares on par with East Asia and the Pacific. Losses due to electrical outages as a percentage of annual sales is 0.7%. According to this data South Africa performs better than the average of all countries and markedly better than Sub-Saharan Africa. It would be interesting to note how South Africa fares taking into account load shedding experienced.
Table 2 shows that South Africa (2007) has 18.4% of firms owning or sharing a generator. As this was before the load shedding crisis of 2007/2008 and the current round of load shedding one may assume that this figure has increased markedly. Middle East and North Africa (57.9%), Sub-Saharan Africa (45.8%) and South Asia (43.4%) fare the worst in terms of percentage of firms making use of a generator. These three blocs account for the greatest proportion of electricity from a generator with South Africa having amongst the lowest proportion of electricity from a generator. Only 20.8% of firms in 2007 identified electricity as a major constraint in South Africa but with several ratings agencies, banks and economists identifying electricity provision as one of the key structural constraints in South Africa’s economic development as of 2015 this has only surely increased. On all three of these indicators South Africa has fared considerably better than Sub-Saharan Africa and other developing nations.
According to Statistics South Africa, Eskom produces approximately 95% of South Africa’s electricity. Table 3 shows the current electricity production figures for South Africa. Between 2013 and 2014 the amount of electricity produced by Eskom has decreased by 1.82% whilst that produced by independent power producers has increased by 8.51%. This highlights the potential for strong growth outside of Eskom. Electricity Imports have also sharply increased by 18.55% as Eskom continues to struggle to match supply and demand. This is reinforced by a slight reduction in the amount of electricity exported which has decreased by 0.67%. Comparing 2013 and 2014 one notices that the amount of electricity available for distribution in South Africa has not grown and indeed for all producers has declined by almost 1%. This does not bode well for an economy continuing to struggle with economic growth.
There is no doubt that there will be trying times ahead for the South African economy as Eskom and Government grapple with the severe electricity provision shortages and stability of the electricity network. New coal-fired power stations have been plagued with delays and budget overruns. A severe lack of maintenance of the power generation and transmission system has resulted in system downtime and a shortage of electricity supply leading to load shedding. This has all introduced an additional element of unpredictability in the economy and many industries are finding it hard to plan around load shedding schedules as the integrity of the electricity supply system could change at a moment’s notice. What is clear is that further investment in and regular maintenance of the system needs to occur with a strong emphasis on alternative sources of energy. Renewable energy such as solar and wind could form the basis of a new energy mix (as outlined in the Integrated Resource Plan) and take considerably less time than new coal-fired power stations to come online and be integrated with the system. This at least could provide for some certainty and stability in the medium term.
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TRALAC is supported by USAID/Southern Africa