Lights might be on, for now, but a credible power plan is crucial

RECRIMINATIONS over Eskom’s recent load-shedding should not divert attention from the economic consequences of its longer-term inability to supply South Africa’s electricity needs. Inadequate electricity supply is one of the reasons the economy has grown so slowly since 2008.

Until the problem is solved, we will be unable to grow fast enough to create the new jobs needed to address unemployment.

Had economic growth since 2008 been stronger, the demand for electricity would have been higher and blackouts would have been a regular feature of South African life long before last week.

Until recently, this reality was largely hidden from public view, because Eskom pays major industrial consumers to shut down whenever capacity is severely constrained. This year, when capacity constraints were especially severe, major users were given no choice but to cut production at short notice.

This kept the lights on, but economic output is reduced whenever production capacity stands idle. The recent load-shedding only brought into the open what has been going on for several years.

South Africa is not alone in facing a problem of inadequate generating capacity. Writing recently in the Financial Times, Nick Butler noted that generating capacity in the UK may soon be inadequate for its needs.

To offset this, the UK government will recommission old power plants to provide emergency backup supply. This, Butler notes, will bring further problems, including the disincentive for private electricity providers to invest in increased supply. They fear being squeezed out of electricity markets by the government, leaving unused any new capacity they build. The temporary expedient of taking old stations out of mothballs may bring short-term relief but at the cost of future supply.

The message is that maintaining adequate electricity supply is difficult. Building new power stations is costly and it is expensive to have the idle capacity providing the reserve margins that are called on only to bridge peak demand and future growth.

Butler notes that power stations "cannot be switched on and off at will". Having adequate buffer capacity means having plant, highly skilled workers and stores of coal or gas waiting idle for emergencies.

The building of new power plants also takes time, so efficient advance planning is essential. Investment decisions must be taken early and building of new plant must be completed as swiftly as possible. South Africa has failed on both these counts. The decision to commit Eskom to building new coal-powered power stations was delayed until well after the crisis had already hit us. And constructing the new generating plants has taken much longer than it should have.

In the same way as the UK plans, Eskom prevented even worse capacity shortages by recommissioning mothballed power stations. At its mainstream power stations, dedicated mines supply coal to Eskom, usually on a cost-plus basis. But the recommissioned stations were initially mothballed because the coal fields where they were built are exhausted. Coal must therefore now be transported great distances to these power stations, often by road. This is very expensive and requires efficient logistical planning.

The damage caused to roads by heavy coal trucks is immense. Eskom must also compete with other consumers, including exporters, to buy the coal it needs for these stations. These are much greater problems for Eskom than the immediate challenge of wet coal that we have heard so much about lately.

Mismanagement of electricity supply further affected economic activity because Eskom dramatically increased electricity prices to raise the funds for building new capacity. This had severe negative consequences for large electricity users such as the mines, many of which are now losing money.

Electricity bills now absorb a much larger proportion of consumers’ monthly budgets, leaving less for spending elsewhere. Demand for goods consumers would otherwise have purchased has therefore weakened, reducing growth in industries supplying these goods.

But possibly the greatest negative economic effect is unmeasurable. It is the capital investment that has not taken place because investors fear the electricity they need to power new plant will not be available. Industrialists will invest only if they believe the present shortage of electricity is temporary.

As long as Eskom’s projections for bringing new capacity on stream remain subject to question, they will not commit to expanding their own production.

South Africa is the poorer for this. Moreover, investors need credible plans for new electricity supply beyond the construction of Medupi and Kusile. When these plants finally come on stream, they will not even raise Eskom’s reserve capacity to what is needed today. They certainly will not allow Eskom to close the recommissioned power stations or meet future demand growth.

A credible and affordable plan for meeting future electricity demand is urgently needed. Decisions about the optimum future mix of coal, nuclear, gas and renewables are needed now. Otherwise, in a few short years, South Africans will again be subjected to Eskom’s crisis management of compromised electricity supply and the unwelcome economic penalties these bring in their wake.

By Gavin Keeton

Source: Business Day

Keeton is with the economics department at Rhodes University.