South Africa’s bid to tackle energy crisis starts bearing fruit, senior emerging markets economist says

South Africa’s bid to tackle energy crisis starts bearing fruit, senior emerging markets economist says
Electricity Minister Kgosientsho Ramokgopa at an event this week receiving donated energy equipment as South Africa continues to suffer chronic planned power outages / Government of South Africa
By Elena Kachkova in Johannesburg December 1, 2023

Electricity outages in South Africa have become increasingly frequent in recent years. This year alone, state-owned power utility Eskom has implemented 334 days (as of November 30) of such rolling power outages, or load shedding, to maintain a stable grid.

The intensification of load shedding has brought growth in South Africa’s economy to a halt in 2023, but there finally appears to be some light at the end of the tunnel, according to Jason Tuvey, deputy chief emerging markets economist with Capital Economics.

Tuvey attributed an increase in generation capacity to timely repairs at existing power plants, independent power producers’ projects, and the recent installation of rooftop solar panels.

“Electricity cuts are not going to disappear overnight, but they are likely to inflict less of a drag on the economy and help to support a pick-up in GDP growth in 2024,” he predicts.

Government effort

Some of the initial efforts of President Cyril Ramaphosa’s government to tackle the energy crisis dealt with overhauling the performance of Eskom’s existing fleet of coal-burning power stations by improving the quality of coal supplied to power stations, and ensuring adequate maintenance of the plants.

Simultaneously, the government focused on transforming the electricity sector, by restructuring Eskom into three legal entities for generation, transmission, and distribution, and establishing a transmission system operator, a buyer’s office, and a trading platform.

Eskom has been permitted to implement large tariff increases in recent years in a bid to reach cost-recovery. However, the utility has been operating without a permanent CEO after the resignation of Andre de Ruyter in December 2022. Several board members have been replaced, some have resigned, and the leadership crisis at the utility shows no sign of abating.

According to Tuvey, the government has come to realise that overhauling Eskom is not only difficult but also insufficient to curtail load shedding. That, he says, may have influenced the government’s decision earlier this year to take a portion Eskom’s debt onto the sovereign balance sheet.

At the same time, plans to provide emergency power through ship-based power plants have been caught up in legal disputes. However, a recent development suggests that Turkish power generator Karpowership is to start supplying South Africa electricity in 2024, as reported by bne Intellinews.

Crucially, the ongoing energy crisis appears to have pushed officials to turn to independent power producers (IPPs) and the installation of renewables, notably solar panels, to try to ease the burden of load shedding, says Tuvey. Limits on independent power production have been scrapped and, in this year’s State of the Nation Address, Ramaphosa announced tax incentives for businesses and households to install solar panels.

Tentative signs of recovery

There are tentative signs that these efforts are beginning to bear fruit, reports Capital Economics. According to Eskom’s recently published Medium Term System Adequacy Outlook (MTSAO), generation capacity is set to rise in the coming years. That will be partly helped by Eskom delaying the scheduled decommissioning of coal-fired power plants.

Eskom is also close to returning three units at the Kusile power station to operation after being out of action for the past year. Two new units, delayed because of alleged misappropriation of funds at the corruption-plagued power plant, are due to come online in early 2024, with the final unit scheduled to start operating in early 2025.

Importantly, there is an acceleration in the procurement of new non-Eskom generation capacity. The MTSAO showed that the existing new capacity in commercial operation created under the Renewable Energy Independent Power Procurement Programme (REIPPP) amounts to just over 6.1 GW, with an additional 1.3 GW due to be connected by 2026 based on contracted plans.

To put all of this into context, South Africa’s total generation capacity currently stands at just over 60 GW, says Tuvey. And there are hopes that even more capacity can be added through the latest bid windows of REIPPP.

Alongside other initiatives by the National Energy Crisis Committee (NECOM), these measures are expected to boost capacity by 2.1 GW in 2024 and by a cumulative 13.2 GW by 2028. According to Eskom’s own estimates, the installation of rooftop solar panels has already reached 5.5 GW and is expected to rise further to 7.5 GW by 2028.

In the MTSAO, it is projected that unserved energy demand (i.e. the shortfall between supply and demand) will gradually fall in the coming years from nearly 9 GW in 2024 to as low as 0.2 GW in 2028, says Tuvey. This will happen in a situation where the performance of Eskom's power plants stays at low levels, plant shutdowns are delayed, and new generation capacity comes online as expected.

“If Eskom is able to improve plant performance too, capacity will eventually be able to meet demand even during peak periods. Indeed, there are tentative signs that Eskom is beginning to make progress on this front with its energy availability factor [EAF] starting to plateau,” the analyst points out.

EAF is the amount of electricity available as a share of the maximum amount of electricity that could be produced at maximum capacity. According to Eskom, pushing the EAF up to around 68, from just under 55 now, on a sustained basis would on its own go a long way to meeting electricity demand.

“That all being said, an outright end to loadshedding is clearly still some time away. And, even then, that rests on a lot of things going right. In particular, that there are no delays to projects already underway and that upcoming REIPPP bid windows are not pushed back nor met with weak demand,” says Tuvey.

There are also issues related to solar panels as they are not always able to generate power, although battery storage may help in that regard. In any case, as Capital Economics has warned before, the rollout of solar panels faces capacity constraints in terms of the number of qualified electricians able to install the equipment.

Additionally, purchasing solar panels may simply not be financially viable for some businesses and households. Indeed, data on imports of photovoltaic (PV) cells suggests that demand may already be waning.

Conclusion

At the very least, load shedding is likely to inflict a smaller drag on economic activity than it has done in recent years, according to the analyst. The South African Reserve Bank (SARB) has previously estimated that load shedding will shave around 2%-pts off GDP growth this year. Energy-intensive sectors, such as mining, will be the main beneficiaries from reduced power cuts. This is one reason why GDP growth is expected to pick up to 1.3% in 2024 from just 0.5% this year, although Capital Economics remains downbeat on the country’s medium-term outlook.

“So far, fears about the inflationary effects of load shedding – through hurting South Africa’s supply potential as well as the higher cost of alternative energy sources – have not materialised in a significant way,” Tuvey concludes. “And in so far as energy supplies begin to improve, that will go some way to reducing the threat from load shedding to the inflation outlook.”

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