Has government seen the light?

At long last, the South African government appears to be prepared to abandon euphemisms to cover up the country’s dire power situation and actually try to tackle the problem. Private companies will now be allowed to generate power from any source. But that is hardly the end of the problems, writes Tom Nevin.

South Africans at work, at home, at work and on the move are doing so much of the time in government-enforced darkness. While long-suffering consumers call the on-off power supply a crisis, the state-owned utility Eskom and its parent, the Department of Energy, admit there’s a problem with keeping the lights on, but stop short of using the c-word.

Not surprisingly South Africans are fed up with the ways they are being kept in the dark, in more ways than one.

Literally speaking, the country must undergo lengthy periods of “load shedding”, the industry’s euphemism for crisis conservation of electricity, and figuratively by being economical with the full facts of why Eskom is in so much trouble.

Interestingly, the ‘crisis’ or ‘problem’ eased quite significantly over the year-end festive season as many of the big electricity industrial consumers closed down.

The government, however, might be seeing the light. It is making changes to its long-held policy of not allowing private companies to generate electricity, apart from that produced from renewable resources.

The Department of Energy has called for the registration of companies interested in building South Africa’s first independent base load coal-fired power station, resulting in South Africa’s leading coal-mining companies teaming up with global independent power producers (IPPs).

About 95% of all South African power supply is produced through coal-fired generation and that level will remain for the foreseeable future. Construction on a third new coal-burning power station with the working title of “Coal 3” is due to start this year.

According to economist Mike Schüssler, the current energy crisis has cost the energy industry R6bn ($600m) so far, “South Africa is likely to have electricity shortages for the next three to five years and possibly longer for big projects,” he says. “The costs are enormous: in money, direct economic growth and perceptions, too. Technology innovations will also be affected, and while the whole economy will be affected, the two major industries where growth will decline are energy-hungry manufacturing and mining.”

He notes, for example, that local heavy industry and especially the smelters or refineries of chrome, gold, platinum, steel and aluminium are no longer a viable option for new or supplementary investment without energy saving.

“This industry was a great earner, and part and parcel of the government beneficiation policy which is now no longer possible – probably for the next decade,” says Schüssler.

Avoiding a total collapse
In early December 2014, Eskom was forced to implement load shedding, which it described as “urgent measures taken to avoid a total collapse of the national grid”. ‘Load shedding’ – the energy industry euphemism referred to earlier – describes great swathes of residential, commercial and industrial areas being excluded from the grid for a number of hours. This eases the demand pressure on the national grid when consumption threatens to overtake the grid’s 38,000MW capacity.

The effect of the outages on the economy was severe with the rand falling to a record low of R11.39:$1. The switch-offs, the most extensive since 2008, shut down gold and platinum mines at a cost of millions of rands a day. While some smaller parcels of new generative capacity are being commissioned, nothing like enough energy to satisfy demand is likely to be on stream for some years to come. Construction of a new coal-fired power station, the 4800MW Medupi, is three years behind schedule and probably won’t contribute much before the end of 2015.

The Steel and Engineering Industries Federation of Southern Africa chipped in with a statement to the effect that “the current power crisis is having a devastating impact on the economy, and is acting as a major deterrent for foreign investment. With no power security in place, there is a chance that investors will no longer see the country as an attractive area of interest.

“The developing economy is reliant on new investment to drive economic growth and development and this could have a long lasting negative impact on South Africa’s future,” it adds.

Some economists have calculated that South Africa has already lost 10% of GDP and will continue to lose more with no quick fix in sight.

“Already, growth prospects have declined from just over 4% potential to 2.5%,” says Schüssler. “Every year the GDP loses another 1.5% of value added to the economy and it builds up over time. So within five years South Africa will probably lose at least 7.5% of GDP or more and likely another 10% or more of potential GDP.”

Another big problem looms. Even if Eskom and the IPPs manage to start producing the mega-wattage South Africa needs to advance economically, is the distribution system capable of handling the additional capacity?

A paper commissioned by the World Bank Group and the Public-Private Infrastructure Advisory Facility, reports that Eskom’s grid constraints remain a challenge and needs to be strengthened to facilitate additional IPP connections. The utility needs to find ways of financing the upgrade, especially with regard to the deep reinforcement of the grid.

“The problem is generally not the shallow connections (the transmission connections to the nearest sub-stations that most developers are funding or constructing themselves) but rather the deep connection investments that Eskom needs to make to strengthen the transmission backbone to evacuate the new energy generated in remote areas.”

A co-author of the paper, Cape Town University Professor Anton Eberhard, is in favour of a commission of enquiry to resolve the situation. “Eskom hasn’t invested sufficiently in strengthening the backbone to evacuate power,” notes Eberhard. “It is an issue of lack of coordination in planning and Eskom not taking care in preparing for the IPPs.”