South Africa’s Power Crisis Inhibits Growth

12.23.14

South Africa’s Power Crisis Inhibits Growth

12.23.14
South Africa

By Alexia Jablonski for Global Risk Insights

Scheduled blackouts – termed “stage 3 load shedding” – were made to areas in rotation to prevent the entire system from collapsing. Severe strains on the power grid were prompted by the collapse of a coal silo at the Majuba power plant on November 1st. The power plant is managed by the Electricity Supply Commission (Eskom), the state owned utility company which produces 95 percent of South Africa’s electricity.

The beleaguered power company has for long struggled to operate with razor-thin margins between electricity supply and peak demand. In 2008, prolonged electricity shortages shut down the mining sector, costing the country billions of dollars and resulting in soaring platinum and gold prices. Eskom has asked consumers to cut down on consumption by 10 percent and tariffs have risen dramatically, up by 100 percent between 2008 and 2013.

Coupled with South Africa’s other recent economic woes, including a depreciating rand and a credit rating downgrade by Moody’s, Eskom’s troubles bode poorly for the South African economy.

Eskom’s outdated power generation system is to blame for sporadic power shortages. While it has a generation capacity of approximately 43,000MW, its plant availability is merely 75 percent. Over 90 percent of Eskom’s power comes from outdated coal-fired power stations, which emit excessive pollution and degrade nearby water reserves and farmland.

Plants are poorly maintained, with two-thirds of its baseload capacity past its “mid-life.” Back-up gas turbines, which are intended to run for three hours a day, were forced to operate for fourteen or fifteen hours continuously after the coal silo collapsed, costing the government R1.3 billion in one month and delaying energy production.

South Africa’s power system has fallen into disrepair as a result of government mismanagement and insufficient investment. During most of President Thabo Mbeki’s time in power, Eskom was forbidden from constructing any additional power stations in order to deter rivals from the private sector. This plan failed because private capital viewed investment in the utilities sector as unprofitable.

Jacob Zuma has attempted to cast the blame of endemic power shortages on South Africa’s apartheid regime, stating that Eskom has had difficulties servicing over 11 million new households since 1994 that were previously excluded under entrenched racial segregation.

However, his own administration is largely to blame for Eskom’s lack of capacity. The completion of two multibillion-dollar power plants designed to add 9,600MW to the grid – Medupi and Kusile – has been delayed by two years due to construction delays, labour strikes and cost overruns.

Recurrent power shortages threaten the prospects for South African economic growth. Companies in the mining and manufacturing sectors reported shutting down altogether during December’s load shedding due to reduced profitability. Power constraints also make South Africa less attractive to international investors and inhibit business expansion. It is estimated that electricity shortages could reduce growth by 0.5 percent, which is forecast to be 1.4 percent in 2014.

The Zuma government has introduced several proposals to enhance energy production. The Department of Energy is due to announce plans to double the amount of power derived from renewable sources. In October, the government announced that it would sell Eskom’s “non-essential assets” for R20 billion and borrow another R225 million from the open market to inject into Eskom.

These proposals are insufficient to address the country’s endemic power shortages. For one, investment is only due with the release of the budget in February, yet Eskom does not have enough capital to operate past January. Additionally, merely pumping money into Eskom or drawing from new sources of energy cannot resolve structural problems endemic to the state-owned utility company and may aggravate South Africa’s national debt, which already amounts to 50 percent of GDP.

The cabinet’s introduction of a five-point plan for reform on December 11th offers a more promising prospect for energy reform. Suggested measures include extending contracts to the private sector, substituting diesel with gas in diesel power plants, adding energy efficient technologies, harnessing waste energy, and achieving interventions in Eskom over the next 30 days.

However, it is unclear how these reforms, headed by Deputy President Cyril Ramaphosa, will be financed in the upcoming months. Partial privatization of Eskom’s operations, which could be mapped out in as little as six weeks, should be carried out before the February budget.

Despite its systemic energy crisis, South Africa remains one of the most attractive destinations for foreign investment in Africa.

Amid headlines of currency depreciation in early December, Permira, a global private equity firm, made its maiden investment in Africa by acquiring 100 percent of the equity in South African data center services company Teraco on 4th December. The previous week, Carlyle – a $203 billion global private firm – made its fifth investment in Africa by acquiring Tiger Automotive, a South African tire retailer.

Nevertheless, if South Africa’s leaders continue to eschew substantive reform in the energy sector, the country may soon lose its appeal as a regional hub of foreign investment.

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