South Africa is an energy-intensive economy, but unbalanced because some sectors — such as manufacturing and mining — consume electricity far in excess of what they contribute to the GDP.
These imbalances make the economy vulnerable to power-supply shocks, according to a leading economist.
South Africa’s industrial sector consumes the most power relative to its contribution to GDP. Although it accounts for almost 50% of electricity demand, it contributes only about 25% towards GDP.
Mining — chiefly gold and platinum — similarly makes up just more than 15% of electricity demand, though it contributes about half that – 7.5% – to GDP. The commercial sector, by contrast, uses less than 10% of electricity supply, but contributes about 45% of GDP.
Speaking at a conference hosted by the South African Chamber of Commerce and Industry earlier this week, Dennis Dykes, chief economist at the Nedbank group, illustrated how South Africa’s energy-reliant economy is threatened by the energy-supply risks.
He conservatively estimated that 60% of manufacturing (making up 18.3% of GDP), 40% of mining (making 6.3% of GDP) and 30% of agriculture (or 3.6% of GDP) is vulnerable to “electricity shocks”, such as the proposed threefold tariff hikes of 35% by Eskom in the next three years.
He pointed out that at least 15% of South Africa’s GDP output is vulnerable. Of the 15%, at least 10% is “critically” vulnerable, meaning that factories or mines are at risk of complete closure or a significant reduction in their operations.
This inherent weakness suggests that our high growth rates before the 2009 recession will not be seen again until 2013, as electricity supply remains a constraint on growth in the foreseeable future.
Dykes points out that large industries need critical time to adapt to the rising costs of energy.
A dual tariff could be implemented by the National Energy Regulator of South Africa, he proposed.
This would mean that power supplied through old-generation capacity would be charged at the current tariffs of about 33c/kWh.
Power generated by new capacity brought on line by either Eskom or independent power producers would be charged at much higher rates of between 70c/kWh and 80c/kWh.
In time such a proposal could lead to more reasonable increases of about 20%, as opposed to the 35% proposed by Eskom.
It would also have the added effect of ensuring that independent power producers are allowed to enter the energy sector. “But key to this [dual tariff proposal] would require open access to the grid,” said Dykes.
Many private-sector players and independent power producers have called for urgent legislative change to eliminate Eskom as the sole seller and buyer of power in the country.
But Dykes expressed concern that “it may take too long for these kinds of fundamental reforms to take place”.
Given the massive reliance of industry on electricity, perhaps Anglo-American’s reported interest in buying part of Eskom’s Medupi or Kusile power stations is not as dramatic as it might appear.
Anglo chief executive Cynthia Carroll told Sake24 that the company would consider buying a stake in either power station to secure its energy supply.