Since the start of the year, sentiment has soured over the intensification of load-shedding, coupled with punitive electricity tariff hikes. Given the government’s failure to show that it has the problem in hand, economists are beginning to lower their growth forecasts.
While the initial focus has fallen on the dire short-run costs of severe load-shedding — for example the North West farmer who is suing government for R1.5m after about 50,000 of his chickens succumbed to the heat — the longer-term economic implications are as worrying.
South African firms, flung into survival mode, are spending millions of rand installing solar power or buying generators, which run on expensive diesel. These are investments that would otherwise have been used to expand their operations and modernise their plants.
In other words, local companies are forfeiting the “expansionary” investment required to position their plants and operations for future growth in order to undertake “sustaining” capital investment just to ensure their basic survival in a world dominated by Eskom.
This trend produced decent aggregate fixed investment growth numbers for South Africa last year, which helped to push the country’s overall real GDP growth rate to close to 2%. That created the misleading impression that the economy has been coping quite well with load-shedding. However, longer-term growth may have been sacrificed in the process.
Take the steel and engineering sector. It has been in continuous structural decline since 2008. Both production and employment have contracted on a compound annual basis by 1.6% for the past 10 years.
Last year, despite the intensification of load-shedding, the sector grew by almost 2% year on year. But, as Tafadzwa Chibanguza, COO of the Steel & Engineering Industries Federation of Southern Africa, explains, much of this growth came from downstream, special-purpose electrical machinery and engineering-type firms, and was linked to the mining sector’s need to undertake sustaining capital investment to maintain their existing operations.
Companies are sacrificing investment in the long-term expansion of their operations to solve the immediate crisis … This will contribute to the continued structural decline of the sector
— Tafadzwa Chibanguza
In other words, this may have involved, say, building a renewable energy project on an existing mine, but it was not related to the expansion of the mine.
These small engineering firms were able to sustain their output despite increasingly frequent bouts of load-shedding by installing generators or using solar power, though the cost of running diesel-generated power is three to four times greater than using Eskom-generated power.
By contrast, the output of the large, heavy, energy-intensive upstream foundries and steel mills, which by their nature are unable to reduce their reliance on Eskom by more than about 10%, contracted 4% year on year last year.
“Putting in a massive generator or [solar] system is expensive,” says Chibanguza. “Companies are sacrificing investment in the long-term expansion of their operations to solve the immediate crisis. They’re in survival mode; they’re not undertaking new expansionary investment. This will contribute to the continued structural decline of the sector.”
The steel and engineering sector spends R2.2bn a year on electricity. The latest tariff increases granted to Eskom of 18.65% for 2023/2024 and 12.74% for 2024/2025 will add more than R740m to its electricity bill over the next two years.
For the large upstream energy-intensive firms that are fully exposed to Eskom, the adjustment will likely fall on jobs, because other input costs are fixed. The sector has already shed 206,000 jobs over the past 15 years — a 35% reduction of the peak of 577,000 jobs in 2008.
“We can’t operate in crisis mode continually,” says Chibanguza. “Continuing the current approach of a central Eskom monopoly will lead to more of the same slow attrition and a perpetuation of crisis-mode [decision-making]. It will only get worse if we carry on in the same way.”
The government has made bullish estimates about the extent to which Eskom’s plant performance could improve in the short term, bolstered by numerous regulatory and legislative reforms designed to expedite further private power generation. But South Africans remain highly sceptical that load-shedding will end in less than two years.
“There’s been a noticeable shift in consumer sentiment. Households are finally moving towards installing backup power at a greater speed than before, suggesting that after clinging to hope for over a decade that the government will finally find a solution, many have finally given up,” says Citi economist Gina Schoeman.
“Load-shedding affects everyone to varying degrees of discomfort, but one thing is very clear — it worsens confidence further.”
SA firms are sacrificing expansionary investment to buy generators and install solar plants to ensure their basic survival
— What it means:
The Minerals Council South Africa has also warned about the “damaging” consequences, for the economy and employment, of accelerated load-shedding and the latest electricity tariff increases.
It estimates that the mining industry’s electricity costs will increase by R13.5bn (33.7%) over the next two years, materially squeezing profit margins. (Since 2008, the price of electricity for the mining industry has increased eightfold, while the consumer price index has only doubled.)
“The adverse operating environment of unreliable and expensive electricity and a crisis in transport logistics for bulk mineral exports erode the mining sector’s global competitiveness and may very well culminate in job losses in mining,” says the council’s chief economist, Henk Langenhoven.
“Over the medium to longer term, these uncertainties bode ill for starting new mines and extending the lives of older, marginal assets.”
According to the council, the private sector has a pipeline of more than 9GWh of green energy projects. Of this, the mining sector accounts for about 7.5GWh — entailing investment worth more than R150bn. It expects these funds to be invested at a rate of about R30bn a year for the next five years, with about 1GWh of this investment completed by the end of 2023.
In 2021, fixed investment in the mining sector slipped to R96.8bn from R103.6bn the year before, having been stagnant for about six years. Langenhoven believes that some of the mines’ usual expansionary fixed investment is being displaced by investment into self-generation.
“Imagine if the full R150bn had gone into mining expansion,” he says.
According to Eskom’s 2022 integrated report, the number of mines using Eskom power has dropped over the past five years from 993 to 926. The sector’s Eskom electricity purchases also dropped (from 30,235GWh to 28,030GWh) over this period. At the same time, the cost burden rose from R26.2bn to R36.6bn — an increase of almost 40%.
The same trend of fewer users paying more for less electricity is evident across the rest of the economy.
The entire domestic economy purchased nearly 12,000GWh less electricity from Eskom in 2022 than in 2018. But due to consistently steep tariff increases, Eskom made R68bn (almost 40%) more from sales last year than it did five years ago.
The latest tariff increases will increase Eskom’s revenue by about another R82bn over the next two financial years, assuming there is no further drop in usage.
However, the utility is well into a death spiral. Usage will keep dropping because of load-shedding linked to its ageing generation fleet, but also because higher tariffs provide incentives for greater energy efficiency, expedite the shift to self-generation of alternative forms of energy, and in the most extreme cases, kill off firms entirely.
Economists are reconsidering their 2023 growth forecasts for South Africa as the downside risks associated with intense load-shedding, the possible regressive shift of Eskom to the department of mineral resources & energy under minister Gwede Mantashe and the scale of Eskom’s transmission capacity constraints have begun to crystallise.
Load-shedding affects everyone to varying degrees of discomfort, but one thing is very clear — it worsens confidence further
— Gina Schoeman
Citi’s 2023 GDP forecast is 1.2%, in line with the prevailing consensus. However, this assumes that roughly the same degree of load-shedding occurs this year as in 2022. If the number of load-shedding days doubles, its GDP forecast would drop to about 0.3%. In the unlikely event that load-shedding is halved, the GDP forecast would climb above 1.7%.
Intellidex’s Peter Attard Montalto has lowered his forecast for South Africa from 2.1% to 1.7%. Having previously assumed continual average stage 4 load-shedding throughout most of the year, he now expects more of stage 6 in the coming months, with the situation potentially worsening up to stage 8 in midwinter.
He still believes the growing momentum in embedded generation investment will surprise, even after the failure of bid window 6. The government approved less than a fifth of the available power in that bidding process, as Eskom no longer has the capacity to link it to the grid.
However, if Eskom shifts under Mantashe and is redirected towards serving “nonevidence-based energy policies and rent-extraction needs”, Attard Montalto will revise down his green investment assumptions.
Bureau for Economic Research chief economist Hugo Pienaar revised his 2023 growth forecast down to 0.9% in December. He concedes that the pace of private sector fixed investment growth may no longer be quite as robust as he was expecting over the medium term, given the grid capacity bottlenecks that have come to light. But he still believes a green investment push could drive South Africa’s growth rate to about 2% by 2025.
After all, one thing that has only become clearer for business over the past two weeks is that if you want to carry on in South Africa you have to become less reliant on Eskom — no matter what the cost.
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