South Africa is in trouble, economists warn

 ·16 Jan 2023

The energy supply situation in South Africa is unlikely to improve over the short term, warn economists at the Bureau for Economic Research (BER), while demand is set to pick up in the coming weeks as economic activity returns following the December break.

“Sustained load shedding at current extreme levels is the most significant downside risk and drag on South Africa’s growth prospects,” the economists said.

South Africa was thrust into all-day stage 6 load shedding on Wednesday (11 January) after Eskom suffered multiple breakdowns at its power stations. Stage 6 has continued unabated since then, hitting all sectors of the economy.

According to the BER, Eskom’s latest daily updates suggest that the power utility is no longer running its open-cycle gas turbines (OCGTs), which is likely compounding the issue. The use of OCGTs would typically allow for two stages of rolling blackouts to be eased.

However, the embattled power utility has no money to buy more diesel for the generators and is currently subsisting on an urgent lifeline of 50 million barrels secured from PetroSA late last year. This lifeline has to last until March 2023, before the new financial year kicks in.

The group applied to energy regulator Nersa for a much bigger diesel allowance for 2023 so that it could lean on its OCGTs to help the national grid.

But Nersa last week rejected Eskom’s request for an additional R16.9 billion in funding in 2023/24 (and R17.7 billion for 2024/25) to cover diesel costs to run its OCGTs and only granted R8.4 billion for this financial year.

Last year, Eskom blew R15 billion on diesel for the generators, which it has come to depend on to keep higher stages of load shedding at bay.

In its deliberations on Eskom’s application for more money, Nersa made it clear that the power utility’s dependence on the turbines was not allowed. The turbines are only supposed to be used to stabilise the grid during emergencies or periods of excessive demand – not as a stopgap for Eskom’s inefficiencies.

“The OCGTs seem to be an intervention that is used way too frequently,” the regulator’s electricity subcommittee said. “Clearly, this is not the ideal situation.”

“They are there for emergency purposes to ensure the security of supply – however, at the rate they are being used currently, we need a long-term plan because they should not be used as a standard measure, only in exceptional circumstances.”

Eskom’s massive diesel conundrum

According to the BER, by not granting Eskom the funding it needs to keep the OCGTs going, Nersa has left the utility no choice but to approach National Treasury for more money for diesel.

However, this would be left in limbo as the government already has a looming process to take over Eskom’s debt, which will go some way to ease financial pressure on the company, it said.

“As highlighted before, while we have some understanding for Treasury’s reluctance to provide out-of-budget requests for funding, the cost for the economy as a whole of not running the OCGTs is much more as it contributes to higher levels of load-shedding,” the BER said.

“Just last week, there were reports of food wastage at big retailers as generators failed and farmers in the Northern Cape are struggling to pump sufficient water to irrigate their fields during a crucial time of the year due to stage 6 load-shedding.”

Major cities have been put on high alert because of stage 6 load shedding, with untold damage being done to critical infrastructure, while the blackouts also lead to higher levels of crime. Entire industries are also being hammered, from agriculture to manufacturing and production – whole sectors having to shut down due to outages and damage to equipment.

Additional pressure on the economy will come from Nersa’s other big decision: granting Eskom a near 19% price increase for 2023.

While this is notably below the 32% requested by Eskom, the BER noted that the price hike is more than three times the expected inflation rate for 2023. The approved increase for 2024/25  is also way above the projected consumer inflation in 2024.

“This means that administered prices will continue to provide significant upward pressure on local inflation dynamics,” the group said.

Economists have warned that the price hikes will have a knock-on effect throughout the economy and will drive up inflation.

Read: Eskom price hike puts South Africa on edge

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