Capital Markets Corporate Public Policy

September 22, 2015

Energy and growth in Africa: Why aren’t we being shed?


The holiday is over
The load shedding holiday is over. Maintenance work at the Cahora Bassa hydroelectric scheme means that 650MW is being withdrawn from the grid and that phased load shedding will once again become part of our daily reality. The month long hiatus which offered households and enterprise a reprieve from the costly shedding has come to an end and highlights just how tight our energy supply really is. 650MW, according to experts, is a little more than a town like Kimberly would usually demand. South Africa’s total nominal capacity is 42 090MW.

Compounding the concern is the recent introduction of one of the units of the Medupi Power Station, adding 794 MW to the national grid. While this is cause for celebration (despite the cost and time overruns) understanding why we are about to enter a period of load shedding, despite the introduction of this new power, is important.

A decline in demand
The answer lies in the significant decline in demand for power. While some of the decline can be attributed to the increased use of renewables, which is welcomed, it is really a reduction in demand by our heavy power consumers (mining and manufacturing ) that has resulted in the prolonged periods of energy supply over much of the last quarter. Data from Eskom estimates the reduction in demand this year to be as much as 7% down on 2014. That the lights have been on for so long should be worrying.

Long term solutions to South Africa’s energy challenges are understood. South Africa, through the intergrated resource plan, should enjoy a healthy mix of energy supplied to the grid. While the long term is secure, it is the short to medium term we need to focus on.

The depreciation of the Rand has made our exports more affordable and our products more attractive to the international market. This is supported by recent data from the Reserve Bank’s Quarterly bulletin released this week. However, exporters looking to meet the demand will need a

constant power supply over the short to medium term. Markets are cyclical by nature and every effort must be made to ensure that we have the power capacity to take advantage of the next period of growth in order not to be left on the periphery, sighing “if only”.

Government has a role to play
Government has a critical role to play in this regard. Policy decisions need to promote the provision of power to the grid. As such, independent power producers, Powerships and other sources of available power must be engaged through policy instruments that will incentivise them to produce power and sell it into the grid. Tools at the government’s immediate disposal include fiscal benefits such a reduced taxes and tax breaks for energy producers supplying the grid. Getting as much power as quickly as possible to the grid and subsequently our manufacturers should be our primary concern.

Switching off
The latest economic data shows that South Africa’s economy shrank by 1.3% in the second quarter of 2015. Energy supply shortages and load shedding were identified as being major contributors to the problem. This is consistent with the message from President Zuma who in August, during his mid-year State of the Nation Address, admitted that the energy shortages had reduced our GDP growth by 1 percentage point. A prominent economist puts the figure closer to 1.2%.

The sustained constraint of supply begins to create a circle of economic decline where opportunities simply cannot be realised. It is imperative that policy decisions are taken to enhance our ability to capture the opportunities that the weak rand presents.