South Africa: No End in Sight to Strained Electricity Grid

4 February 2015 FDI Team

The South African economy will continue to suffer as a result of unplanned power outages and the need for continued rolling stoppages. The crisis will deter foreign investors and may also render President Zuma’s ambitious plan for economic growth of five per cent by 2019 unachievable.  

Background

South African electricity supplier Eskom is struggling more than ever to meet demand and may even be approaching the point at which its grid begins to collapse due to the overwhelming pressure on it. Already subject to rolling stoppages, or “load shedding”, due to frequent plant breakdowns, a prolonged grid-wide shut down would have disastrous consequences for the economy. The state-run utility enjoys a near monopoly and needs to begin addressing its many pressing issues, but with a revenue shortfall of 225 billion rand ($25.4 billion) and the first of its new plants still twelve months away, electricity shortages will continue to plague South African homes and businesses.  

Comment

Of Eskom’s total installed capacity of 41,900 megawatts, around one-third – sometimes more – is offline for emergency repairs or scheduled maintenance. Power cuts have become even more regular since November 2014, when demand outstripped supply by 4,000MW.

During the attempted privatisation of Eskom in the late 1990s, maintenance was frequently deferred and no new plants were approved for construction, but the problems do not only affect Eskom’s ageing plants, a number of which are nearing the end of their 50-year operational lives. More modern plants, such as the 13-year old Majuba power station in the south of Mpumalanga province and the Koeberg nuclear plant outside Cape Town, opened in 1976, have also been affected by breakdowns and unscheduled maintenance needs. One of the two reactors at Koeberg – the only nuclear plant in Africa – has been offline since 1 February due to a technical fault. The Koeberg-1 shutdown has taken 900MW out of the grid. The reactor is expected to be briefly operational again on 7 February, before being shut down again for scheduled maintenance on 9 February that is expected to last until the end of May.   

Eskom’s woes also affect neighbouring countries under the auspices of the Southern African Power Pool (SAPP). Comprising the continental members of the Southern African Development Community (SADC), the SAPP was established in 1995 and has created a common power grid and a common market for electricity among the member states. Indeed, Namibia, which usually imports around 60 per cent of its electricity from its SADC neighbours, is now exporting 200MW to South Africa. Eskom has called upon its SAPP partners to introduce their own load shedding arrangements to compensate for the reduced flows from the South African utility. 

While Eskom is still making a profit, the amount of electricity that it can produce has steadily declined since the situation of oversupply that existed in the early 1990s. The expansion of the grid to include areas that did not have access to it during the apartheid era, cost overruns in the construction of new plants and the very high cost of its diesel-fuelled plants have all contributed to the utility’s R225 billion budgetary shortfall. Eskom reported a net profit of R9.3 billion ($1.05 billion) for the six months to 30 September, a drop of 24 per cent from the R12.2 billion ($1.37 billion) for the same period in 2013. Eskom’s profit for the full financial year (1 April to 31 March), is expected to be R0.5 billion.

In a September 2014 rescue package, the government announced that it would inject R20 billion ($2.25 billion) into Eskom. In a January 2015 update, it was announced that the utility would receive the first R10 billion ($1.12 billion) by June 2015, to be funded by the sale of as-yet unspecified state assets. Unfortunately for Eskom, it is likely to find itself competing for funding with two other loss-making state-owned entities, South African Airways and the South African Post Office. 

The tariffs charged by Eskom, which supplies 95 per cent of the power generated in South Africa, are set by the National Energy Regulator, which has capped increases at eight per cent for the five years to April 2018. That figure is less than half the amount that Eskom had requested, but tariff increases of the magnitude required would be politically unthinkable. Thus, Eskom must rely on sales revenue to fund the maintenance of its existing plants and the construction of new ones. New power stations are currently under construction at Medupi, Kusile and Ingula. When fully completed 2020-21, they are expected to add 17,380MW to installed capacity. In the meantime, however, load shedding looks set to be a regular feature of life in South Africa.

Since it was first introduced in 2008, load shedding is estimated to have cost the South African economy some R300 billion ($33.7 billion) and an estimated million jobs, in an economy experiencing an unemployment rate of almost 25 percent and which has frequently failed to achieve even a modest growth target of two per cent per annum. The electricity situation will do nothing to attract foreign investors to sub-Saharan Africa’s second-largest economy. It will also make President Jacob Zuma’s hope of achieving five per cent economic growth by 2019 that much harder to achieve. Bank of America-Merrill Lynch, for instance, has estimated that three months of outages could shave as much as one percentage point off the economic growth rate.[1]

More positively, there is an increasing uptake of solar power as many South Africans look to utilise their country’s abundant sunshine for energy purposes. In the short-term, however, sales of diesel generators have soared.   

If the no longer quite-so-unthinkable were to happen and the grid were to collapse completely, it would take weeks to restart, using Eskom’s so-called “black start” procedure. In the meantime, the implications for everything from the economy to crime rates are all dire and would cost the political establishment, particularly the ruling African National Congress, dearly at the 2019 general elections. 

Leighton G. Luke
Manager
Indian Ocean Research Programme




[1] ‘Matt Sharratt: The Real Cost to GDP of Eskom’s Load Shedding’, BizNews.com, 15 January 2015. <http://www.biznews.com/video/2015/01/15/matt-sharratt-real-cost-gdp-eskoms-load-shedding/>.

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