High electricity costs holding SA back

By Drum Digital
18 February 2014

The South African economy is being held back badly by a crisis at the sclerotic state-owned electricity provider Eskom, experts say.

The South African economy, the biggest in Africa and a top emerging market, is being held back badly by a crisis at the sclerotic state-owned electricity provider Eskom, experts say.

They blame a range of problems linked to management weaknesses at national and company level, warn that there is little prospect of improvement soon, and suggest that nuclear and shale energy may be needed.

Power utility Eskom is under pressure to boost capacity and rejuvenate an ageing power grid after electricity shortages led to widespread blackouts in 2008. But it is struggling to meet deadlines.

Until 2005, South Africa enjoyed reliable and cheap electricity.

But the power stations built during the apartheid era are suffering frequent outages.

Investment in new plants has been too late, security of supply is under threat and tariffs have trebled in the five years from 2007, according to Anton Eberhard, a University of Cape Town professor in infrastructure reform and regulation.

Consumers are being asked to reduce their consumption of electricity during peak periods.

In a bid to head off outages, last year Eskom asked big energy users such as ferrochrome smelters to shut down for up to three months, offering to pay them for lost production.

"The limited capacity of South Africa is inhibiting the growth of the economy," said Chris Yelland, an energy analyst.

High electricity tariffs are also slowing down growth.

Eberhard, who is also a government advisor on energy concurs.

"We do face, I think, very serious challenges over the next few years," said Eberhard, agreeing that the "extent to which we can grow quickly now is constrained by inadequate electricity supply."

Eskom itself admits that the power system is "expected to be constrained for at least two years."

Its spokesman Andrew Etzinger says there's enough electricity capacity to meet the country's current demand, but "reserve margins are tight."

The power company has now embarked on massive schemes to build three coal-fired stations which will see the country's generation and transmission capacity grow by 17,000 megawatts from the current 40,000 MW.

One of the biggest coal fired power plants, Medupi, was supposed to have come on stream by the end of last year, but is now running behind schedule due to contractor bungling and labour disputes.

"The delay on the Medupi was brought about by contractor non-performance and labour disputes on site," said Etzinger, but the problems have been solved and the plant is expected to be completed by end of 2014.

The contractor has been replaced, but analysts are doubtful that the new deadline will be met.

Eskom will also connect a large number of renewable energy independent power producers to the national grid.

South Africa is looking at expanding nuclear energy production and venturing into shale gas.

President Jacob Zuma announced last week that the government expects to "conclude the procurement" of 9,600 MW of nuclear energy, but did not say by when.

Recent economic growth has been sluggish, falling to 1.9 percent forecast last year and from 3.5 percent in 2011.

The impact of electricity disruption was highlighted by a nine-day power failure at a major coal export terminal, Richards Bay early this month. It was estimated that exporters suffered losses of around $165-million.

Eskom is too large to be managed effectively.

"Some of these are structural problems, some are political problems, some are just bad management," said Yelland.

"The bottom line is Eskom is not structured appropriately."

He suggests that it be unbundled into separate generation units, while transmission should be outsourced to independent operators. Distribution will need to be managed by a smaller number of financially viable outfits.

In the coastal city of Port Elizabeth, home to one of South Africa's large industrial development zones - Coega where the mega Project Mthombo oil refinery will be built - industrialists say the only option for South Africa's growing energy crisis would be another nuclear reactor.

If that "does not happen, we might as well close" the $250-million industrial zone built 11 years ago, said Coega manager Meike Wetsch.

Under its latest electricity price schedules, power company Eskom won last year an 8.0-percent tariff increase. That makes energy prices high enough to force energy-intensive companies to reduce consumption or turn away from the country.

South Africa is one of the BRICS group of emerging economies considered to have big potential: Brazil, Russia, India, China and South Africa. - Sapa-AFP

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