ESKOM’s projections of electricity demand over the next few years fall well short of what would be needed to generate faster economic growth, and cast doubt on the success of efforts to deal with the challenges of job creation and poverty alleviation.
Eskom CEO Brian Dames said on Tuesday that, based on consultations with the power utility’s customers, he expected electricity sales to grow 1% over each of the next few years.
“That would support just over 2.5% of gross domestic product (GDP) growth,” he said at a media briefing hosted by the South African Chamber of Commerce and Industry.
This growth scenario falls well short of the Treasury’s February budget forecasts, which predicted the economy’s expansion would accelerate to 3.2% next year from 2.7% this year, and then quicken to 3.5% in 2016.
Many analysts think the estimates are optimistic, and that Eskom’s assessment of the demand outlook highlights the fact that electricity supply is one of the main constraints to economic growth.
“Energy is oxygen to the economy. It is likely that structurally South Africa can’t grow at better than 2% — electricity is a significant factor,” said Standard Bank chief economist Goolam Ballim.
He believes that power constraints are costing the economy up to half a percentage point of structural and actual growth a year, and expects expansion of only 2.1% this year, slowing to 1.9% next year — the same pace as in 2013.
Pan African Investment chief economist Iraj Abedian described the effect of electricity constraints on the economy as “severe”, saying that had the issue been addressed years ago the economy would be in much better shape.
“Manufacturing and mining companies have got used to not thinking big, not thinking expansion. Investment in these sectors is almost a non-starter because you can’t get security of access to electricity,” he said.
“The impact on the economy is manifold. Brand South Africa has suffered severely.”
A large global company scrapped plans to build an aluminium smelter at Coega in the wake of the power outages that struck the economy at the beginning of 2008, and BHP Billiton has warned that it might have to shut down large parts of its smelter at Richards Bay in KwaZulu Natal, partly because of power constraints.
Eskom has been paying large industrial users to cut back their production by 10% when supply is tight.
The utility was forced to shut down four units at its Kendal power station near Emalahleni on March 6 after heavy rain made the poor-quality coal processed by the plant on that day unusable.
Dames said there was a risk that emergency conditions could develop again before the end of April, which would trigger load shedding and raise the spectre of the kind of power outages seen six years ago, which cost the economy billions of rands.
“We’re not out of the woods if the rain continues … the system remains tight and that will be the case for the next number of years,” Dames said.
At present Eskom can generate about 41,900MW of power a day but its margins — the difference between demand and capacity — are very tight at less than 5%, compared with the international norm of 15%.
The situation will persist until Eskom’s Medupi power station comes online in the fourth quarter of this year, after delays.
Dames said the problem that had forced Kendal to shut down earlier this month was not just wet coal but also the effect of rain on the powdery, poor-quality coal, which had turned into sludge on the conveyor belts. BHP Billiton has been asked to submit a report on the quality of the coal.
Abedian said Dames’s explanation was a poor excuse, given what it implied about standards of quality control at Eskom.
Lulu Letlape, BHP Billiton SA’s vice-president for communications and external affairs, said: “BHP Billiton Energy Coal SA (Becsa) supplies high-quality coal to Eskom that meets contractual specifications. Becsa continues to engage and work with Eskom in line with the commercial arrangements between the two entities.”
Nomura International economist Peter Attard Montalto believes that power constraints will shave between 0.1 and 0.2 percentage points off quarterly economic growth, a moderate amount but considerable over time.
“The more important thing is what it does to growth potential. Arguably, growth in South Africa could be up to half a percentage point higher in the long run if you had better energy security,” said Montalto.
Coenraad Bezedenhout, executive director of the Manufacturing Circle industry body, described the reaction to this month’s load shedding as “hysterical”, and said the situation was not nearly as bad as six years ago. But he conceded: “It means that if there was a possibility that we could grow it’s not going to happen.”