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This is how Eskom throttles the economy

Reserve Bank analysis shows the effect of load shedding on economic growth, particularly on mining and manufacturing.
Image: Moneyweb

It is obvious that electricity disruptions are bad for business and the economy. Smaller businesses can counter the effects of load shedding for a few hours by using standby generators – at a cost – but large enterprises simply cannot operate without steady and adequate power.

In fact, the Reserve Bank (Sarb) noted in its latest quarterly bulletin that the prime reason for the recovery in economic activity in the second quarter (Q2) of 2019 was the absence of severe electricity disruptions that hampered output in Q1 2019. “Real gross domestic product (GDP) advanced at an annualised rate of 3.1% in the second quarter, after contracting by a similar magnitude in the previous quarter,” say the bank’s economists in their review.

The ongoing problems at Eskom have had such a huge effect on the economy that it urged the Reserve Bank to look into it closely, with an analysis showing that electricity disruptions during the three months to end March were the worst ever, barring Q2 2015.

The Reserve Bank set about devising a quantitative measure to gauge the intensity of load shedding.

The measure is based on the number of days of electricity disruptions in each quarter and the level of load shedding, with a higher stage of load shedding given a higher weighting to quantify the intensity of electricity disruptions.

For example, three days of Stage 1 load shedding equal an intensity of 3, while three days of Stage 2 load shedding equal an intensity of 6. In Q1 2008, the calculation yielded a figure of 34 when SA had three days of Stage 1 load shedding, three days of Stage 2, seven days of Stage 3 and one day of stage 4.

Incidence and intensity of electricity load shedding

    Number of days per quarter Intensity
Quarter   Stage 1 Stage 2 Stage 3 Stage 4
2008 Q1 3 3 7 1 34
2014 Q1 1 0 0 0 1
  Q2 2 0 0 0 2
  Q4 1 1 1 0 6
2015 Q1 6 5 0 0 16
  Q2 38 15 1 0 71
  Q3 12 11 0 0 34
2018 Q2 2 1 0 0 4
  Q3 1 0 0 0 1
  Q4 5 7 0 0 19
2019 Q1 1 7 2 5 41

* The table only reflects quarters in which load shedding occurred
Source: Sarb Quarterly Bulletin, September 2019

Sarb rated load shedding in Q1 2019 at an intensity of 41, due to five days of Stage 4 load shedding.

The result was that the economy shrunk by 3.1% in Q1 and recovered by 3.1% in Q2 after Eskom received a tongue-lashing from the president’s office and got its act together.

The indicator shows that SA experienced the worst intensity of load shedding in Q2 of 2015, when 38 days of Stage 1 load shedding and 15 days of Stage 2 disruptions pushed the intensity to a count of 71.

Economic growth in Q2 2015 was a negative 1.3% as measured by the real GDP, but it’s noteworthy that load shedding did not reach Stage 4 then.

The analysis of the effect of load shedding in the Quarterly Bulletin clearly states that there are lots of factors that can impact economic activity, besides the shortage of electricity. Sarb points out that the economy suffered in certain quarters when there was no load shedding as well.

It listed the various other factors that probably impacted economic growth, such as a number of long labour strikes, maintenance and safety stoppages in the mining sector and weak domestic and and global demand, as well as political and policy uncertainty, which affected business and consumer confidence.

However, there seems to be an uncanny correlation between load shedding and a declining economy. The economy posted negative growth in all the quarters in which load shedding occurred – except for Q1 in 2008 when load shedding was actually quite severe.

Paging through a few older economic reports shows that power failures were blamed for the lacklustre performance of the mining and manufacturing industries in every quarter characterised by electricity shortages.

Sarb notes in its analysis of the effect of electricity shortages on the economy that the electricity-intensive mining and manufacturing sectors have often been affected the most, with agricultural and transport sectors also affected.

All the SA mining companies blamed disruptions in electricity supply for their bad results in Q1 2019 and attributed the strong recovery in production levels in Q2 to a steady supply of electricity.

Sarb noted that the real gross value added (GVA) by the primary and secondary sector sector increased notably in Q2 2019, following several quarters of contraction. “The marked turnaround in mining output was fairly broad-based and contributed the most to overall real GDP growth in the second quarter.

“Following a sharp contraction in the first quarter of 2019, the real output of the secondary sector increased moderately in the second quarter as continuous electricity supply was restored, supported by Unit 3 of Eskom’s Medupi power station becoming operational. The real GVA by the manufacturing sector as well as the sector supplying electricity, gas and water reverted from sharp contractions to expansions,” says the bulletin.

The intensity of load shedding and analysis notes that the impact of load shedding on real GDP was also tested by using a regression model, basically to see if the calculations are of statistical importance.

The results show that as the intensity of load shedding increases, the decrease in SA’s real GDP growth is statistically significant by 0.06%.

The real GVA of all the economic sub-sectors displayed a (negative) correlation to the intensity of load shedding.

Load shedding had the biggest impact on growth in the agriculture, mining and manufacturing sectors, with statistically significant correlations.

In short, the report proves what everybody already knows: businesses cannot operate without electricity and without operating businesses the economy cannot grow.

Solving Eskom’s problems will solve a lot of other problems too.

Hopefully the managers at Eskom will read the report too.

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There is a fundamental deference between an “right” and a “commodity”. Let us list the items that are “rights” in South Africa: healthcare (mohala), water (gratis), electricity (free) and other touchy-feely stuff like safety and clean environment “guaranteed” by the constitution that the ANC, with EWC, is now set to use as a rectal swab. All these rights are “guaranteed” by the ANC who are current custodians of the constitution. There is a clear link. ANC = shortages and appalling service delivery. When the ANC guarantee something there is no guarantee apart from rampant theft, self enrichment and zero accountability and nobody brought to book for the pillage and plunder of the state coffers. Just the normal empty promise to harvest votes from the ignorant.

Now let us look at commodity goods and services: Beer, food, petrol, milk and private health. There are no shortages of these items. These are supplied by the private sector.

Now let us look at Eskom’s model: The utility was used, by the ANC to:

a. Mop up unemployed; excess cadres in need of a cushy job.
b. Buy ISP energy at a loss of about R11 billion per year thus destroying wealth of R11 billion per year for at least five years and counting
c. Supply free electricity (x kWh per month as a ‘right’)
d Supply free electricity to the likes of Soweto, debt written of periodically.
e. Supply free electricity to those with illegal connections without fear of prosecution

In light of the above, Eskom’s revenue is less than their costs. Of course. No big surprise there. They are a loss-making wealth-destroying enterprise. They take something to the value of R1 and make it into 50c worth. They appeal to the regulator for increase prices to cover their gargantuan ANC-imposed costs. The regular says “nyet” so they rely on bailouts from the taxpayer and carry on borrowing money. As one does. The latest incentive to to borrow more money R161 billion from Meridian Economics for renewables so they can dig their Grand canyon debt hole a whole lot deeper. The only reason this particular credit line is available is because it is guaranteed by the South African taxpayer i.e. the taxpayer shoulders carries the can when the renewable debacle goes belly up- as it will.

Anyone with a modicum of financial nous would realise that this business model is completely unsustainable. It was completely unsustainable more than a decade ago but the ANC embarked on a the path of grandiose wealth destruction that impoverishes South Africa.

The only solution is is privatise the whole sorry mess. The ANC simply does not have the ability to see their model is a catastrophic mess nor muster the cognitive and managerial skill to fix it. Privatise power stations, privatise the grid, privatise power sales. If an ISP wants to supply power let them supply and guarantee their product availability on an arms length commercial basis. All power generators will be ISPs (of a sort).

Do you seriously believe that privatised companies could
1 enforce payment from customers and would be able to prosecute illegal connections?
2 they could get rid of 50% of the workforce without the unions creating havoc?
3 the government would not demand BEE partners and AA employment for the private companies?
4 provide electricity cheaper or that they would not ask price increases higher than inflation?
5 would you invest your own money in the privatised Eskom?

Hun

My Magyar friend. Some serious questions need some serious answers.

1. To enforce payment and prosecute those who steal electricity requires a functioning judicial system. Private companies do not do this. This is the domain of the state. A private company can stop supplying electricity but cannot enforce debt payment. One cannot divorce the rebuilding of South Africa from a functioning state apparatus. The dysfunction of the state is the problem.
2. To get rid of surplus employees would not be the state’s problem but that of the private entity who owns and operates the power station. Private companies do this all the time on the mines and currently the banks. To remain profitable is a question of survival or bankruptcy.
3. This would probably be the case. In most instances choosing owners along the lines of colour rather than ability would be a recipe for rank inefficiency thus putting upward pressure on the price of electricity.
4. Absolutely. The efficiency and profit motive coupled with competition would drive prices down as they do globally. An example would be the Vales Point power station in Australia. Sold for scrap now churning out super cheap power and raking in the profits for the owners.
5. Remember there will be no more Eskom. There will be a number if IPPs, power distribution networks and sales companies. Would I invest in these? that would depend on the type of security and the yield. If for example Kendall Power Station (Ltd) was manged by competent management like Vales Point, was profitable, sustainable and paying 10% DY, their equity may be worth buying.
6. (My six) The alternative to fixing Eskom the right way is too ghastly to contemplate. The ANC eventaully run out of other people’s money to keep Eskom afloat. The lights go out. For a very long time. The mines and factories grind to a halt. There is no forex to purchase spares fix it. South Africa runs out of fuel. Crops waste unharvested in the fields. A hungry man is an angry man.

Richard : have you considered the extent to which IPP reduced and right now reduce load shedding? Compare IPP to generators and pumped storage.

Hi Johan

This is a bit of a loaded question as you already know the answer but the question hides a lot of relevant information. That is simply not how business works which is why Eskom is such a complete socialist-wrought shambles. Your argument ignores the fact that Eskom runs at a fraction of its capacity as they cannot maintain their infrastructure. Your argument ignores the demand elasticity of Eskom’s product and the fact that when it’s free, demand is infinite. Pricing is an incredibly important signal in markets.

What Eskom (read ANC) should have done:

Maintained their infrastructure
Priced their product to include the cost of capital replacement
Maintained a tight ship keeping a lid on costs
When demand exceeded supply then increased prices so that the supply and demand are in equilibrium
Allow competition- monopolies are disastrous
Not give away their product for free
Plan for the future demand by building capacity before it is needed

Had they done this there would be no need to destroy R11 billion per year wealth buy buying energy at a price twice that the sell it. Clearly if the demand exceeds supply the price is too low (Economics 101). Rising prices are an important signal for other producers to jump in and drive prices down again.

Suffer socialist Azania

@Richardthe Great
I kind of agree with most of your answers but I do not see how after 25 years of inaction suddenly the state apparatus would start to function effectively. You know very well that during strikes the strikers often damage property and attack, even kill, people. I simply can not see how during the transition time from state to private ownership the workers would not start strikes, even damaging power stations. They did it recently during an unofficial strike. I think it might have been Gordhan who said something about no reduction in employee numbers if Eskom is broken up.

Hun

Your points are valid. I certainly cannot repudiate them. The way I see it, the implementation of privatisation is the beginning of a journey away from destructive socialist policies towards more free-market policies. This journey also leads away from the tolerance of irresponsible, immature, unaccountable and destructive behaviour towards accountability and the improved enforcement of law and order. We cannot separate the manifestations of political-economic systems from their inherent values. In other words, if we want accountability, the respect for property rights and law and order, we have to embrace privatisation at the same time because it is privatisation that takes us away from socialism that can be identified by the opposite factors of free-market capitalism and manifest in total disregard for law and order.

We are seeing the first “green shoots” emerge from Luthuli House. The fact that unions have to adhere to the results of a secret, transparent ballot and that strikes are deemed to be unprotected if the majority did not choose to go on strike, is a major shift in the right direction. The new economic plan and the fact that the ANC disregarded the opinion of the alliance partners, is a major step in the right direction. Next, we will see the successful legal action from SARS against prominent politicians and officials. Green shoots indeed.

It’s more than just supply; it’s also price. Soweto and other areas like it don’t pay for power just because of a culture of non-paynent; it’s also because it’s unaffordable.

Meanwhile, Eskom’s exorbitant prices kill off businesses and mining ventures, but are far too low to provide it an adequate income stream.

Catch 22. Management of the worst order has brought us to this point and still Gov’t shows no sign of addressing root causes.

We are in a negative spiral here. Pretty much the same with the tax base: the more you tax the populace, the more the wealthy leave the country, and so the more you need to tax the remainder.

Will we ever learn? I guess we could expect another commission or advisory council – anything to excuse our inaction.

And it does not help that Nersa bureaucracy makes it a most unpleasant chore to install solar diesel hybrids at mines.
Solar can provide power < R1/kWh but mines use a lot of power so require a Nersa generation licence even if off grid.
One needs a PPA that Nersa approves of
An EIA in addition to the mine EIA
Permission from the DMRE
A detailed financial model that Nersa reviews
And at least 4 months of patience to wait for them.
How is it that they have the right to interfere in bilateral negotiations

and here the mines are struggling their backsides off with nersa to generate enough electricity to keep it up and running as a going concern, whilst eskom electricity is sold (do we ever receive payment for it????)to countries like bankrupt zimbabwe, municipalities that simply don’t pay, etc etc. eskom is a has been, and will implode due to the severe lack of knowledge / understanding by the anc how a company is actually successfully operated – any political interference is like spraying the doom can directly over an already half dead cockroach(eskom=cockroach in this case)

ESKOM is fulfilling the socialist function of the governing party full stop.

We all know the end result of socialism.

The financial destruction at Eskom and the dire financial status of all the other SOEs are monuments to remind us of the inevitable results of anti-capitalistic behaviour. A communalist or socialist political party can be successful only for as long as there is an abundance of resources relative to the size of the population. Communalism worked well all over Africa for thousands of years, because there was this very successful mechanism, called famine, that limited the size of the population. People should feel free to employ collectivist or socialist policies, as long as they are aware of the fact that they are also, automatically implementing this mechanism(The Malthusian Trap) to bring equilibrium between the availability of resources and the size of the population.

Free-market capitalism, with the accompanying principles of property rights and rule of law, developed naturally in communities of intelligent, hardworking people. The strong driving force behind the development of this particular social order, the motivation for its existence and popularity, is the fact that no alternative system can allocate scarce resources as efficiently. When resources are scarce, capitalism will allocate those resources in the most efficient, humane, fair, and sustainable manner. A lot of wealth and growth can be realized when an economy moves away from a collectivist society to embrace free-market capitalism. This is how societies escape the Malthusian Trap.

The biggest disaster arises when a society moves away from capitalism towards socialism. Then they employ and set the Malthusian Trap. This is where the current political system in South Africa is leading us. Eskom, not unlike PDVSA, the Venezuelan state-run oil company, became financial disasters because the socialist rulers moved away from free-market policies and abandoned the rule of law, property rights and accountability. Venezuelans sit on the largest oil deposits in the world, but they cannot extract it. Eskom was the best utility in the world, now they cannot generate electricity at an affordable price.

Eskom cannot be saved, no SOE can be saved, citizens cannot be protected against famine under ANC rule. Unless the ANC moves away from its collectivist roots to embrace free-market capitalism and enforce accountability, property rights and law and order, Eskom will drag the entire economy and 90% of the population into the Malthusian Trap.

Load shedding just before Nersa meets, then ends just after increase given=BlACKMAIL. Simple.

CR needs to crack the whip here…..don’t hold your breath.

I have also noticed the correlation and commented on it before.

Too true, Sensei. The absolute fact is that Communism has destroyed – and been kicked out of – over 50 countries. Google it if you don’t believe me. And its pink relative, Socialism, can only work (and at that, poorly) if the vast majority of a country’s citizens pay tax. Here in SA, Schussler calculated a couple of years back that only about 3.5 million people (out of now about 58 million) pay 95% of ALL taxes – that is, income, VAT, corporate, CGT and the hundred other stealth taxes imposed on us by the ANC. Socialism simply CANNOT work in South Africa. How stupid does one have to be not to see that? And as for Communism, well the mind boggles….

The 5 wealthiest capitalists on earth spend more on “social projects” through their charitable foundations, their collective creation of wealth and the employment opportunities they create, and improve more lives than the 5 most socialist countries combined.

Navigator,
Don’t fully agree. Look at all the Satellite dishes on homes in Soweto and other Areas. Wonder how many have Dstv?

When the ANC came into power they promised Free housing, Education, Electricity and water. That might have been possible if all were honest and not have stolen, corruption and State Capture. Now the ANC say they must pay.

The ANC government were also told that South Africa needs to start planning to build Power stations but this was ignored for years. So we electrified which is great and then the theft and corruption and wrong design at our new Power stations.

Still no one in jail.

WJS

The unbundling might have perverse outcomes. Say Eskom is split Transmission, Generation, Distribution.

For the playing field to be fair, Distribution should not be allowed to buy at a price that does not allow it to unfairly compete against councils. We already have cases in Peninsula where some properties on Eskom supply have a huge (about 40% of property rental) energy cost advantage because of CPT tariff vs Eskom direct tariff.

Be careful what you wish for, as I am certain Eskom has a few clever people that can manage this game very well

End of comments.

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