Loadshedding: where did it go?

Loadshedding: where did it go?

Jul 5, 2016

SA has not experienced loadshedding for some time. Eskom has certainly made a major effort to improve its maintenance and to keep the lights burning.

Several renewable energy plants have also come on line. Significant electricity price increases must also have contributed to a reduction in use.

However, the main reason for the cessation in loadshedding is that economic growth has dropped to a very low level, after it had already been on a decline since 2007. Real GDP growth for 2016 is expected to be about half a percent or less – much lower than in 2015.

The low growth is due to internal and external factors including the decline in global economic growth, and a concomitant decline in demand for commodities.

Major factories in SA – including electricity-intensive operations, such as steel plants and ferro-metals smelters – have reduced production or closed their plants in response to low demand and prices. Output in both the mining and manufacturing sector declined in the fourth quarter of 2015 and the first quarter of 2016, compared with the equivalent six-month period a year earlier. This, obviously, also had a negative effect on related economic sectors.

As a result of this decline in economic growth, the amount of electricity distributed in SA (excluding electricity sold to foreign countries), as published by Statistics SA (Stats SA), also shows a decline from 2008, with the result that electricity consumed in SA in 2015 was less than that consumed in 2007.

Electricity consumed in SA in the first four months of 2016, according to Stats SA, was 2.5% down on the consumption for the same period in 2015, as a result of a further drop in economic activity in 2016.

This reduction in demand for electricity has eliminated the need for loadshedding for quite a while, and has actually led to a small surplus in electricity supply capacity.

But SA is not yet out of the woods with regard to sufficient supply of electricity. New generating plants should have been on line in 2007 already, according to the government’s white paper on energy policy, published in December 1998. Medupi’s first unit came on line about eight years late.

There is a close relationship between real GDP and electricity consumption.

Before the late 1990s, the growth rate of electricity consumption was higher than the growth rate of real GDP. However, since the late 1990s, the situation has changed and the growth rate of real GDP is now higher than the growth rate of electricity consumption. The reason for this change is the fact that the economy became less electricity-intensive after 1997, in terms of electricity consumption per unit of real GDP.

There are various reasons for this decline in electricity intensity. As any economy matures, the secondary and tertiary sectors become more dominant, and their contribution to GDP increases relative to that of the primary sectors.

The secondary and tertiary sectors use less electricity per unit of output produced compared with that of the primary sectors. Mining, for example, is much more electricity-intensive than a factory producing finished goods.

As economies develop, they become more services based, which also contributes to a reduction in electricity intensity.

High electricity prices have also had an effect on electricity intensity through, for example, encouraging the more efficient use of electricity.

The average so-called growth margin (the real GDP growth rate less the growth rate of electricity consumption) is currently equal to about two percentage points.

While the demand for electricity is depressed, mainly due to poor economic growth in the country, this relationship between electricity consumption and real GDP also implies that insufficient electricity-supply capacity will act as a constraint on economic growth.

Electricity is often referred to as an enabler of economic growth.

When the economy starts to recover again, this constraint will soon start limiting the economic growth rate, and will lead to the country missing the opportunity to capitalise on the next commodity upturn. Loadshedding will return. It could even be necessary before then, if output from some of the large generating units is lost due to technical problems.

The relationship between electricity consumption and real GDP, as demonstrated, shows that for an average real GDP growth rate of 5% per annum, an average sustainable growth in electricity-supply capacity of 2,5% to 3% per annum will be required.

This will have to be taken into account in the development of long-term electricity plans, to enable high and sustainable economic growth. What makes this challenge even bigger is the fact that, at the same time, provision will also have to be made for the replacement of a number of old power stations, which are gradually nearing the end of their life.

By Johan Prinsloo for www.bdlive.co.za