/ 25 June 2008

Generating your own

Next time power cuts hit South Africa, it could be because of the collective, involuntary wish for it by thousands upon thousands of business owners who have bought generators.

Almost just as painful as the should-I-shouldn’t-I agony of business owners when the crisis hit in January, is the thought, now emerging in the aftermath, that perhaps the overblown Eskom crisis has ended, turning the shiny new machine standing in the back room into a white elephant.

The headline in the morning paper announcing the end of Eskom’s load-shedding should have brought pure relief to Andy Hackland, owner of Frontier Labs in Brakenfell, Cape Town. Instead, his feelings were decidedly mixed with pangs of buyer’s remorse.

The day before he had put down a R30 000 deposit on a 80KVA diesel generator that, with installation, automatic start-up and weatherproof housing, will ultimately cost his business R200 000. “In a way, what I’ve bought is R200 000’s worth of insurance and it may be a dead loss or it may be the answer. I could have made the wrong decision, in retrospect,” says Hackland.

He says the main difficulty experienced by business owners is uncertainty: “The biggest problem is that I can’t actually go to someone and say ‘right, give me a 90% guarantee that it’s going to go one way or another’. Nobody can do that.”

In searching for answers, business owners come up against a newly supercharged generator industry that doesn’t hesitate to hype the power crisis on the one hand, and Eskom, whose PR messages are about as reliable as its current, on the other.

In a sense, Hackland’s cost-benefit analysis for buying a generator was easier for him than some other business owners because of the nature of his “hugely energy-dependent” operation. Frontier Labs, a 20-employee business, produces seedlings through micro propagation and tissue culture in a laboratory and exports 70% of its products. It needs steam to sterilise laboratory equipment, lighting and air conditioning for its growth rooms and specialised switches and timers that have to be reset after each power failure.

“I’m like a hospital. I need the surety of a generator,” he says.

In the wake of the electricity crisis, the full extent of the costs to South African business owners is still emerging. Lost productivity during the outages went way beyond just the downtime. It affects staff attitude to the core, says Hackland.

“It’s amazing how disruptive [the blackouts are to] production, not so much that you’re losing units by the hour, but one’s staff tend to get into a very negative phase. You start to get this bad attitude. Everybody kind of says ‘we won’t do our job properly, we’ll blame Eskom’.

“So if somebody doesn’t meet their target now, they say ‘ag, last month, Eskom, it’s their fault’.”
Nor is the purchase of a generator a once-off expense.

“I’m going to have to run this thing on a weekly basis. It’s like a car engine — you can’t just let it stand. You’ve got to turn it on and let it run for a while just to keep it lubricated,” says Hackland. He expects to add a further R1 000 to his R5 000 power bill a month just for maintenance.

Then there are the opportunity costs. It is a bitter experience for business owners to spend their expansion money — in many cases borrowed — on a non-productive diesel guzzler.

“We might not [have a blackout] for another eight months, in which case I could’ve spent the R200 000 on a new greenhouse and we could have made profit out of that, whereas I’m not profiting out of this machine. It’s absolutely blood money. This isn’t happy money. It’s not making us any more business,” says Hackland.

Generating costs
The direct cost of buying generators is probably just a fraction of the full costs of the power crisis to business owners, but the latest statistics from the South African Revenue Service show just how frantic the scramble for the machines had been, which in turn reflects the hurt inflicted by the power cuts.

In November last year, generatoes worth R55-million were imported into South Africa, which increased mildly to R64-million in December and R77-million in January this year.

Then, as the power crisis hit home, the figure more than doubled to R151-million in February and again almost doubled to R285-million in March, the latest figure available. That is an increase of more than 500% in just five months.

Although economists are loath to venture a total cost of the Eskom power cuts to the business community at this stage, they seem to agree that the overall cost of acquiring generators by the business community is much less disruptive than the power blackouts themselves. Together with Eskom’s warning that its problems are far from over, businesses buying generators are probably doing the rational thing.

Having to buy generators “is definitely an irritant, there’s no question about it and it’s been a material expense for some, but I’m not sure that it’s economy changing”, says Nedbank economist Dennis Dykes. “What would be economy changing is if you had continual blackouts and [back-up generators] became a significant form of power generation,” because the cost of electricity from a generator is vastly higher than from a power station.

He acknowledges, however, that the effects of having to buy generators “are probably much more devastating to the small-business sector where the resources are much more stretched and the margins are tighter”.

Some “ordinary” businesses need surprisingly large and expensive machines to keep going through a power cut, says Dykes. “You’d think ‘oh well, it’s just a little coffee shop, they’re only making a few coffees. They don’t need a very big generator.’ But in actual fact they need a massive generator, because boiling water is one of the most energy-intensive things you can do.”

Absa economist Jeff Gable says: “Even if the load-shedding of early 2008 has not been repeated more recently, business should not become complacent and the generators already purchased are unlikely to be considered ‘surplus’ for several years. Eskom has made it clear that the supply difficulties are likely to be with us for a considerable period.”

And if ever South Africa returns to being an electricity-stable country, the huge numbers of generators owned by non-essential services do not necessarily have to be written off completely.

“You would find some clever entrepreneur acting as a middleman to export [unused generators] to the rest of Africa,” says Dykes.