How Much is Eskom Harming the ZA Economy?

ZA Confidential has not produced much recently on Eskom, because the power crisis has been well covered elsewhere. However, when our finance minister and a major financial heavyweight like the IMF warn of the impact it is having on the economy, it really is time to break our silence. So we asked a few of our experts about the Eskom crisis, its impact on industry, whether this is widely appreciated, and how long it will persist.
This is what they had to say…..

Duane Newman of Cova Advisory:
While Eskom has tried to create some predictability with the load shedding schedules, the future growth of the economy is being restrained – as business is not sure it will get power for its growth plans. Energy security has become a huge business risk and companies are looking at ways to become less dependent on Eskom in the medium to long term. The current and future price of electricity is a big issue, but based on my discussions with business it is less important than the energy security issue. I do not believe the impact on the economy has yet been quantified properly. I believe all South Africans are aware of the Eskom problem, but are unsure as to the impact on their business – now and in the future. The impending carbon tax is also creating more uncertainty. I don’t really expect things to improve anytime soon. I believe it is every South African’s responsibility to take individual action, within their own financial constraints.

Mario Pretorius, Unconventional CEO of Telemasters:
South Africans are pragmatic and adaptable. Often we get things right, like knowing what we can change (Xenophobia) and what we cannot (Eskom). The rolling blackouts are already the new normal, and are probably a distant issue after personal safety from crime and the pervasive ideology that brought us a leadership mired in the idea focusing on short term issues. Eskom cannot be fixed. The Apartheid-era power stations are reaching their retirement ages, and not even a sudden rollout of nuclear power can take up the slack in the next 10 years. The future likelihood is limited use and irregular availability, and we will sacrifice the personal use of the grid to business-first survival. Reduce, renew, re-think usage. These will be necessary for survival. If politics can be trumped, the non-payers corralled, the utility construction optimised, and the coal supply de-cadred, we may ease through. Else Africa will be the Dark Continent again.

Chris Gilmour from Barclays Africa:
The impact on the general economy is wide and various. And it affects different industries in different ways. Let’s not forget, for example, that the mining industry has effectively been “loadshed” for some years now; in fact since the 2008 crisis – and continues to be on “short rations” from Eskom. Large industries tend to have coped better than small companies in the current crisis (yes, it IS a crisis, contrary to what the ex CEO said some months ago!). Large companies have tended to buy large generators and insulated themselves from the worst ravages of load-shedding, but at a massive cost. To put that in some kind of context, (Shoprite CEO) Whitey Basson stated in his last results presentation that the fuel saving the company had made between Sep 2014 and Feb 2015 in terms of the lower USD oil price was more than gobbled up by the massive cost of running generators in their stores when they suffered rolling blackouts. (Public Enterprises Minister) Lynne Brown has made it abundantly clear that load shedding is here to stay, at least for the foreseeable future. The 3GW to which (Acting CEO) Brian Molefe refers in his statements last week seriously underplays the extent of the problem, and in my opinion trivialises it. At times this year, planned and unplanned maintenance has resulted in Eskom losing upwards of 11GW of capacity. Simple arithmetic tells you that is MUCH more than 3GW! And it doesn’t end there-the trusty diesel OCGT generators were designed to operate for only about 2 or 3 hours per day. They have been running for upwards of 14 hours per day in the current crisis. At some point in time, their operating sustainability must be compromised. Lynne Brown also made it clear that many of the small BEE operators to which much of the essential maintenance has been outsourced often don’t have the financial capability to see large projects through. Once again this imparts significant vulnerability to the grid. Medupi’s second unit only comes online in 2017 and its first only starts delivering its 800Mw in June this year. OK, so add in that 800Mw to Koeberg’s 900Mw that comes back on end May and you already have a benefit in the short term of 1 700Mw. That will certainly help, as will the 600Mw that Duvha’s unit 3 will bring back early next year once it has been repaired. Provided NOTHING GOES WRONG this winter in terms of catastrophes such as a repetition of the Majuba coal silo debacle and the Lethabo ash situation, we MAY just scrape through winter without too much load shedding. But the fragility of the grid is now so severe that I wouldn’t be putting money on it. The Ingula pumped storage system comes into operation in 2017; this doesn’t generate extra capacity but at least allows Eskom to “store” electricity during off-peak times which can then be used at peak times. Putting it all together, 2017 should herald the time when some relief is in sight. But unless the appalling raping and pillaging of Eskom (typified by BEE dentists supplying diesel etc) have been eradicated by the impressive Mr Molefe, that may also be in doubt. Also don’t forget that by 2017, Eskom’s plant will be another two years older and in an even worse state of repair. By late May, when Q1 GDP numbers are released, we will get an indication of the damage that Eskom has inflicted upon the economy. I reckon that, over the course of a full year, Eskom will cause a full 1% reduction in GDP.

Professor Raymond Parsons, North West University Business School:
The economic evidence of the damage being done to the SA economy this year by the on-going Eskom disruption is reflected across the board – from international institutions like the World Bank to the SARB, local economists and business analysts – citing dislocating power supply failures as a dominant reason ( but not the only one) for constantly revising SA growth forecasts downward. At this rate SA will be lucky to reach the expected 2% growth this year. Power cuts implemented by Eskom cost the economy between R20 billion and R80 billion per month, according to a recent Parliamentary presentation by the Department of Public Enterprises. The larger part of these costs initially fall on industry and commerce, and adversely affect production. Although many businesses have by now been able to cushion themselves against load shedding by other means, two major negative impacts still create serious business consequences. The first is the large number of medium and small businesses unable to protect themselves against power disruption, many of whom have simply quietly gone out of business. The second is the extent to which uncertainty of power supply is inhibiting large-scale private investment and is an issue dominating much decision-making in many boardrooms today. Both short and long term measures are needed to stabilise the Eskom situation. In the longer term there simply has to be a restructuring of the energy market to allow for more competition and to build more confidence in the future energy supply trajectory. Eskom tariff hikes and other actions are being met with increasing distrust and hostility. SA has outgrown the Eskom monopoly and we may require a dose of ‘Thatcher-lite’ to help us out. Getting this energy ‘mix’ right is one of SA’s biggest economic challenges over the next couple of years.

Tweets of the Day:

Ellen DeGeneres (@TheEllenShow): Where does seaweed go to look for a job? The Kelp Wanted section. #ClassicJokeFriday
Bill Murray (@BiIIMurray): You can’t buy happiness… But you can buy bacon, and that’s pretty damn close.

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