Short on energy, South Africa works in the dark

Short on energy, South Africa works in the dark

The South African public electricity utility Eskom is in a perceived crisis, threatening to constrain the local economy. Strong financial indicators from recent months, however, show the South African economy continues to perform well in the dark. 

In March 2015, the South African taxpayer-owned electricity utility Eskom only had to impose load shedding for two days. Despite this, the general perception is that the utility remains in crisis, constraining  the South African economy.

Data from February and March, however, shows that the South African economy continues to perform well in the dark. This is reflected in financial markets, with the Johannesburg Stock Exchange index setting a record high in late February, and capital market yields rallying by more than 40 basis points.

South Africa’s strained feelings regarding its energy shortage were on display at the Fossil Fuel Foundation’s Second Electricity conference entitled: “Electricity, the Economy, War Room…Is there Hope at Last?” The key point of the conference was made by Eskom’s Steve Lennon, the executive responsible for sustainability.

Lennon indicated that South Africa was not alone in facing power shortages, but other countries seemed to be coping better with the challenges. Furthermore, Lennon stated that “Electricity constraints are suppressing growth in the economy – but we can change our paradigm to one which seeks to grow the economy in spite of these constraints.”

According to World Bank data, the median number of power outages per month for the period 2006 to 2010 in Bangladesh was 100, but it still managed to grow at an annual average growth rate of 6.2%. Nigeria experienced 25 power interruptions a month and grew by 7.2% per year over that period, but South Africa, which had less than one interruption a month, only posted a 3.3% per year growth rate over that period.

Last year South Africa only grew by 1.5%, when power interruptions were, on average, less than the amount experienced in the first quarter of 2015.

Power outages are not a new problem for South Africa.  The January 2008 load shedding episode focused attention on the dire need to add to generation capacity. Said incident cost the mining industry billions of rands in lost production, as the industry uses some 30% of national electricity production.

Eskom had already launched three new projects: the coal-fired 4764 MW Medupi station, the 4800 MW Kusile plant, and the 1332 MW Ingula pumped storage scheme. The first unit of Medupi was originally scheduled to be online in 2011, but delays have pushed this now to mid-2015, while the first unit of Kusile and Ingula will only be online in mid-2016 instead of the original schedule of 2014.

Adapting to Business in the Dark

Recent data shows that the South African economy is undergoing a paradigm shift by learning how to cope with being in the dark, as executives work around load shedding. This coping strategy appears to be effective, with mining production jumping 7.5% y/y in February, while manufacturing production was only 0.5% y/y lower. Both of these were better than market expectations.

Similarly, despite energy problems, South Africa’s bulk export volumes rose by 16.4% year on year (y/y) to 14.9 million tons (Mt) in February, after surging by 34.1% y/y in January to a record monthly total of 16.4 Mt. This meant that bulk export volumes grew 25% y/y in the first two months of the year, which is substantially better than the 2.6% gain in 2014.

Miners and logistics planners were not the only ones to overcome the constraint of load shedding. Motor manufacturers also boosted new vehicle exports in the first quarter.  Specifically, new vehicle exports surged by 38.5% y/y in March to 34,147 units after a 35.6% y/y jump in February to 29,760 units.

Interestingly, at the same time, the performance of Eskom’s generation plants has deteriorated in the first quarter of 2015 compared to the first quarter 2014, as unavailable capacity due to unplanned outages rose by 46.8%.

To compensate for the poor performance of its own generation capacity, Eskom is increasing its purchases from outside sources. This is reflected in the 21.5% y/y rise in electricity imports in February from Mozambique, as well as power purchased from independent power producers.

As part of efforts to rectify this issue, South Africa has so far conducted three rounds of renewable energy bids for independent power producers. The fourth round is currently stalled at the Department of Energy, but investors remain optimistic about the opportunities in the energy space.

Despite the problems at Eskom, available generation capacity, including imported power and power purchased from independent producers, will increase by 8% this year to 49,291 Megawatts (MW). Load shedding should thus be less of a problem after the winter demand peak.

While this capacity increase seeks to rectify this problem, South Africa remains in the dark as to whether this strategy will actually succeed.

About Author

Helmo Preuss

Helmo was the chief economist at Oasis Asset Management and former Economics Editor at a real-time financial news service. He holds degrees in Economics, Economic History and Computer Science.