At a recent forecasting dinner hosted by the Investment Analysts Society of South Africa the IRR made the point that, in many respects, futures analysis of South Africa has become easier than it was five or six years ago. This is because we are seeing more and more examples of what scenario planners call predetermined elements. These are trends of definitive importance to the future that are also so deeply entrenched that they are unlikely to change in the short or medium term. They therefore allow us to develop an increasingly clear sense of how the future is likely to unfold.
In South Africa’s case Eskom and its ability – or otherwise – to meet future electricity demand has become one of these predetermined elements.
Our estimates on Eskom are as follows:
The power utility current has installed capacity of just over 40 000 megawatts. This is how much power would be available to the economy if every Eskom installation ran at maximum capacity. Because certain installations have to be taken out of commission for routine maintenance, and because others have broken down unexpectedly, actual available capacity sits at somewhat under 30 000 megawatts.
This figure now happens to be close to how much power customers need from the grid. When they seem likely to use more than that amount then Eskom has to introduce various stages of load shedding.
We also know that Eskom has invested in building new capacity mainly via the Medupi and Kusile coal fired power stations, which are expected to be fully online within the next two to three years – although they have both missed every previous deadline set for them. In total, a further 10 000 megawatts or so is thereby expected to be added to the grid. In addition, there are solid plans to add a further 2 000 to 3 000 megawatts from green and/or independent sources to the grid.
The result is that, failing any further major breakdowns, available capacity should pick up to just over 40 000 megawatts over the next decade. There are other plans in the air as well, ranging from Russian nuclear power, to the Grand Inga project, to new gas turbines, to further private sector procurement. However, most of these are so woolly and/or long term that we cannot yet incorporate them into our ten year estimates.
The question is whether the available capacity we expect South Africa will have is going to be enough. Our estimates suggest that should demand for electricity increase at 1% per annum then we can anticipate a reserve margin of some 3 000 megawatts by 2024. However, periods of 1% demand growth coincide with periods when the South African economy grew at rates of around just 2% of GDP. This despite the fact that electricity demand in South Africa has flattened out over the period around and since the global financial crisis, as low growth and limited supply came together to secure significant energy savings. Such savings cannot be expected to continue indefinitely and any sustained economic growth recovery will require expanded generating capacity.
Should demand for electricity increase at 3% per annum then the picture changes completely. This level of demand growth has in the past coincided with a South African economy averaging GDP growth of around and above 4% per annum. If this were to happen we are likely to exhaust all available capacity around the period 2018-2020. By 2024 we would face a shortfall of several thousand megawatts.
Of course there are many more variables in the electricity supply to GDP growth equation that may push us above or below the available capacity line. The nature of GDP growth is the most important of these. If we are to grow in a predominantly industrial, commodities, and manufacturing direction then pressure on the grid will be even greater. Should we grow in the direction of services – the long term trend – then demands may be less.
The role of independent producers is a further variable. Enlightened policy thinking may see these independent producers eradicate any electricity shortfall even in an economic environment with sustained levels of growth of more than 3% of GDP. However, for the most part energy policy thinking is unenlightened and prioritises State control over developing new generating capacity. We saw this again last week in the decision of the African National Congress not to endorse thinking behind the ISMO (Independent System and Market Operator) policy, which would have seen the grid taken away from Eskom and handed to a second parastatal thus opening the way to more private competitors for Eskom.
A further variable is whether we see any more catastrophic breakdowns of existing infrastructure as we saw last year at the Majuba power plant. This analysis assumes, somewhat optimistically, that we will not.
While analysts and politicians can quibble over these variables what is absolutely certain is that in the current policy climate there is no way that South Africa will have the energy to sustain growth of over 4%, or even 3%, of GDP.
That is very important from a scenario perspective. Both our upside scenarios (the Wide Road and the Narrow Road – see the first two editions of this column) require growth levels in excess of 5% of GDP. That is the level of growth at which we anticipate a steep fall in the unemployment rate, triggering a host of very positive economic and social consequences.
In the absence of such growth, we must by necessity remain in the realms of the Rocky and the Toll Road scenarios. In the Toll Road, social tensions arising from our structural youth unemployment crisis will drive significant long term political changes that see the defeat of the ANC at the polls in 2024. In the Rocky Road, those same tensions would drive the collapse of the 1994 transition as, amidst an upsurge of black nationalistic fervour, democratic institutions are eroded to the point that the governing party can rule with impunity.
Frans Cronje is the CEO if the IRR and author of A Time Travellers Guide to Our next Ten Years (Tafelberg 2014). This column was created to update the scenarios presented in that book. You can follow him at @FCronje_IRR.