Eskom’s performance has now become the make-or-break factor for the South African economy. It could also make or break the ANC. The ANC is so wedded to the idea that the state must continue to control power generation and distribution that it could end up sacrificing the economy and its government to its ideology.
The woes of Eskom are unending. We are now in yet another episode of power cuts – Stage 4 on the Eskom power-cut scale of 1 to 6. And with Eskom’s ageing fleet of power stations and the delays in the plan to allow independents to produce up to 100MW per project, the bets are that the frequency of blackouts will rise for years. .
Last week 24,000MW, that is more than half of Eskom’s 45,000 MW total power generation capacity, was out of commission.
Rolling blackouts in the second quarter of this year were a large reason for the contraction of the South African economy by 0.7 percent quarter on quarter. The economy is now smaller than it was in the last quarter of 2019, just before the Covid-19 pandemic hit, and we might not even reach a two percent growth this year.
The political bottom line is that there is little chance that there will be a substantial reduction in power cuts ahead of the 2024 national election. Worsening power cuts have to give the electorate the feeling that the ANC cannot do its job.
The ANC cannot point to energy problems elsewhere and say we are not alone, as a means of mollifying voters. Extreme heat led to warnings of blackouts in California, and in Texas the power grid nearly collapsed because of very cold weather. Europe could face energy problems in the next few months, due to its reliance on Russian gas. But our power cuts have been increasingly frequent since 2007 and are due to insufficient investment and poor maintenance over a long period, rather than rare or extreme circumstances.
The electorate is fully aware that Eskom is owned and controlled by the state, and excuses such as blaming apartheid for power cuts will not go down. As about 85 percent of the population have access to electricity and frequent cut-offs cause immense inconvenience, the political impact of the power supply mess could be large. High unemployment, Eskom’s power cuts and the price rises for electricity might be the issues that undo the ANC. Rising electricity prices at a time of power cuts could easily get people on the streets.
At this stage there is not much the government can do about the electricity supply crisis in the short to medium-term.
Eskom does not have the finances or the project management expertise for new builds. And its budget is heavily burdened with debt service and maintenance.
The Renewable Energy Independent Power Producers Programme, which allows private producers into the electricity supply market, has been delayed and cannot raise sufficient capacity to substantially reduce power costs, even over the medium term. Round five aims to have independents such as companies and municipalities produce about 2,600MW and Round six aims at 5,200MW. These are insufficient to ensure that power will always be on.
Despite the urgency to get more power on the grid, there are bureaucratic delays. The cause of the delay, according to Business Leadership South Africa’s CEO Busi Mavuso’s latest newsletter, is the insistence by the Department of Trade, Industry and Competition that the independent renewable power projects meet local content requirements. As Mavuso points out, these delays are an own goal for the country’s overall industrial development. Localisation has to come second, she writes. South Africa does not even produce many of the components that go into renewable builds. And current international supply constraints will mean that what is required for renewable projects will be more expensive when ordered.
So the economic damage from the Eskom disaster will grow. There is one direct economic hit the government will have to take soon.
The government will have to deal with Eskom’s R400 billion debt burden, which it cannot possibly service without growing bailouts. It is unlikely that the entire amount will be taken off the Eskom balance sheet, but in total Eskom debt amounts to around 5.5 percent of GDP. The National Treasury cannot have Eskom default, as most of the debt is guaranteed by the state. A default would mean a sovereign default that would have serious consequences for our financial system. Finance Minister Enoch Godongwana has said Eskom’s debt is unsustainable and a threat to the economy, but has yet to come up with a plan. Ultimately the solution with the least burden on taxpayers would be for Eskom to sell off assets and pay a lot of the debt on its own. That could be positive if it puts coal-fired plants into private hands.
With the large and growing budget deficit and demands for a Basic Income Grant, there is no space for the government to take on Eskom’s debt.
Then there is the economy-wide cost of the Eskom disaster that results from a gross misallocation of resources. As the state owned enterprise is large, employs far too many people and has experienced substantial corruption, it is a drag on productivity and hence growth. The damage from power cuts is widespread and large. Surges, when power is restored, can cause damage to machinery, IT networks and batteries. Turnover and profits are reduced, causing firms to lay off workers. And there is untold damage to investor sentiment.
What company would invest in a large project that must rely on the amounts of power only a grid can deliver?
Power cuts are the current overriding constraint on economic growth.
Determining the economic cost of power outages to the country is a tricky task as it includes damage to investor sentiment and multiple types of costs that are difficult to specify. However, Dr Francois Stofberg, senior economist at the Efficient Group, last year estimated that the economy would be 8 to 10 percent larger if there had been no power cuts. Because the effect of power cuts on economic growth is not linear due to the accumulated impact, it could be substantially higher.
The real damage comes from the lack of political impetus to deal with power cuts by urgently releasing Eskom’s stranglehold on the economy.