Tag: Eskom

Eskom extinguishes independent power producers

Energy minister Mmamoloko Kubayi shocked the private power industry by announcing that all previously-negotiated power tariffs must be lowered to 77c per kWh, and has left companies reeling, reported the City Press.

The minister acceded to Eskom’s decision to only accept contracts where the cost of energy was below 77c per kWh, affecting 27 energy projects representing over R60-billion.

Mark Pickering, managing director of solar industry lobby group Sapvia, told the City Press there is no legal basis for the decision and attempts to reach out to the minister have failed due to her schedule.

“The minister drops this massive bombshell, then promptly leaves for China. After that, we are told, she is on leave for two weeks,” Pickering told the City Press.

Pickering said Eskom is clearly attempting to squash the renewable energy Independent Power Producer programme and the minister has bought Eskom’s story “hook, line, and sinker”.

The announcement of the tariff requirement follows recent news that many municipalities owe Eskom up to R12-billion, which has resulted in the provider threatening power cuts – due to unmet payment agreements.

Eskom has also been plagued by multiple scandals, including its executives being accused of corruption and mismanagement.

Source: My Broadband

‘Broke’ Eskom wants to hand out bonuses

Eskom has been given the green light to pursue up to R60bn in clawback tariffs.

On Tuesday, the Constitutional Court dismissed an application to set aside the power utility’s regulatory clearing account (RCA) adjustments, clearing the way for Eskom to recover a potential R60bn through tariffs in the next year.

RCA adjustments deal with funds that Eskom needs to recover due to a shortfall in electricity losses or a escalation in operating costs, through possible tariff hikes.

The National Energy Regulator of South Africa (Nersa) will now hold hearings as Eskom argues why it should be granted the delayed tariff hikes.

However, Eskom has also Eskom is considering paying its employees a R150-million “winter challenge” bonus for avoiding power cuts, The Sunday Times reports.

The submission comes a month after the power utility reportedly paid R4.2-billion in performance bonuses to staff, and two months after public enterprises minister Lynne Brown approved bonuses totaling R13-million for its executives, including former CEO Brian Molefe, former chief financial officer Anoj Singh and suspended acting CEO Matshela Koko.

“I cannot think of any reason to pay bonuses to Eskom employees for doing their job: keeping the lights on,” said Brown.

“And particularly not in the current economic environment. It is an operational matter and therefore not the shareholders’ call, but I would like to believe Eskom’s interim leadership will take prudent financial decisions.”

Added to the no load-shedding requirement is that there can be no fatalities and no environmental contraventions.

An Eskom HR executive has indicated that the bonuses would be spread across the company and not limited to generation staff. Should the proposal be approved, Eskom would then pay an amount of R149.8 million to be shared among 47,053 employees.

Last year the Pretoria high court ruled that Eskom’s RCA adjustments were “irrational, unfair and unlawful”. This came after a four year court battle which set aside aside Nersa’s R11.2bn RCA award for Eskom’s 2013/14 financial year.

The battle started back in 2013, when companies from the Eastern Cape, led by alloy manufacturers Borbet SA, lodged an application against the RCA.

The court case prevented Eskom from processing future RCA submissions, which meant that RCAs for the 2014/15, 2015/16 and 2016/17 financial years were put on ice until the court case ended. While the companies initially triumphed in the Pretoria high court, the Supreme Court of Appeal (SCA) reversed the ruling and ultimately the Constitutional Court dismissed the application by Borbet SA and others for leave to appeal the SCA decision.

The ruling on Tuesday means that the 2013/2014 RCA tariff adjustment remains applicable and that Nersa will now have to process the three period applications of Eskom’s RCA adjustments. The SCA judgment will stand as the final word on the matter.

Eskom has applied to Nersa for a R19bn clawback for 2014/15, and a R22bn for the 2015/2016. The 2016/2017 application is not yet public, but is reported to be R20bn. This all adds up to R61bn that Eskom will try to recover, possibly over one year, energy analyst Chris Yelland said.

He said Eskom sales only amounted to R180bn and the R60bn will try to cover the shortfall.

“In order to recover this money, it would need to increase tariffs by 33%,” Yelland explained. “That is what Eskom will ask for at Nersa, this is not to say that they will get it.”

In addition, Eskom’s leaked, latest Nersa application asks for a 20% hike, which is apart from the possible 33% they are likely to ask for in the RCA adjustment, which could potentially bring the overall tariff hike up to 53%, Yelland explained.

“Even if they get half of that, it will put immense pressure on consumers,” he said. “The ruling certainly has heralded interesting times.”

Eskom’s plummeting electricity sales and increasing tariffs mean that the power utility will be selling even less power in future, Yelland said. “Eskom is in a utility death spiral.”

Eskom said the court’s ruling affirmed Nersa’s decision to allow Eskom’s application for a tariff adjustment .

This means that Eskom is not barred from making future RCA applications for electricity price adjustments to Nersa, the state utility said.

“The ruling also clears the path for Nersa to process Eskom’s RCA submissions for the 2014/15, 2015/16 and 2016/17 financial years.”

After losing the first round, Nersa and and Eskom approached the SCA to set aside the High Court ruling, and won the case. In July the companies then took their case to the Constitutional Court, which on Tuesday dismissed the case.

The Constitutional Court dismissed Borbet’s application on the basis that the application “bears no prospects of success”.

By Yolandi Groenewald for Fin24; BusinessTech

Daylight robbery: Eskom drives up prices

The average four-person South African household should pay R290 a month for electricity, yet Eskom is charging them roughly R1,200, says a lobby group.

Now Eskom is seeking a 20% tariff increase from the National Energy Regulator of South Africa (Nersa).

Energy analysts have described Nersa, which starts its public hearings into the proposed tariff increase in Pretoria today, as the only thing preventing disaster.

Presentations by the Organisation Undoing Tax Abuse to parliament’s public enterprises portfolio committee this week reveal the power utility should be relying on its capital expenditure budget and the government and not on ordinary South Africans to float it.

Finance Minister Malusi Gigaba this month said the government was considering granting Eskom a favourable loan or possible bailout.

StatsSA yesterday released its findings of Capital Expenditure by the Public Sector 2016 report, which showed that capital expenditure by public sector institutions rose to R284-billion from R265-billion.

The report shows that capital expenditure by state institutions has increased by R1.2-trillion over the past five years. Eskom accounted for R73-billion, with the new Medupi, Kusile and Ingula power stations accounting for R70-billion.

Outa’s energy specialist Ted Blom said they revealed to parliament Eskom had a qualified audit of R3-billion in irregular expenditure without supporting documents.

“Explanations are needed as to how the R3-billion was processed without the documentation. Either there is a magic password which allowed this or there is an old chequebook lying around. Either way Eskom’s chief financial officer, Anoj Singh, must explain.”

Blom described the electricity tariffs the average four-person household was paying as “daylight robbery. There are three cost drivers to the power utility. They include the financing costs of money borrowed, their power plants and the operations.”

Only Eskom’s operations were subject to inflation, so increases should be a third of inflation, as two-thirds of costs were fixed.

He said on the assumption Eskom was efficient in 2005, and the cost of electricity for a four-person home was R160, the cost now for electricity, based on an annual escalation of a third of CPI, would be R290.

Blom said compounding Eskom’s financial problems was the building of Medupi and Kusile power stations.

Blom said Eskom recently announced that they need to borrow R325-billion over the next five years to finish off the two stations, 10 times higher than initial estimates.

He said Nersa should, and could, dramatically reduce the electricity tariff.

Nersa spokesman Charles Hlebela would only say that Eskom’s application would be considered in terms of the law.

Eskom spokesman Khulu Phasiwe said they would respond to allegations in parliament and not through the media.

By Graeme Hosken for TimesLive

Outa has been briefing Parliament’s Public Enterprises Committee along with the SACC and a group of academics, all of whom have compiled reports on state capture.

The Organisation Undoing Tax Abuse (Outa) has told Parliament that it has evidence that the load-shedding of 2008 and 2014 was “self-inflicted” by Eskom.

The lobby group has also appealed to whistleblowers working at state-owned companies to be brave and to continue coming forward with evidence of corruption and state capture.

Outa has been briefing Parliament’s Public Enterprises Committee along with the South African Council Of Churches and a group of academics, all of whom have compiled reports on state capture.

The committee is preparing for its inquiry into Eskom, which is expected to get underway next week.

Members of Parliament (MPs) have heard about the creation of a mafia-like system allowing for the seizure and control of state-owned companies to syphon off billions into a few influential pockets, with the SA Council Of Churches alleging that President Jacob Zuma is the pivot for this.

Outa’s Ted Blom, a former Eskom employee, has told the committee he has evidence Eskom may have engineered the two bouts of load shedding that hit the economy hard.

“I have evidence, and I say so very candidly, that the load shedding of 2008 and the load shedding around 2014 was self-inflicted by Eskom and it is also part of the corrupt practices.”

Blom is claiming that key producers “held Eskom hostage” triggering the 2008 crisis while maintenance was not performed between 2010 and 2014, which caused another round of load shedding.

By Gaye Davis for EWN

Eskom: we’re not broke

Eskom has lashed out at media reports that it was “broke”, saying it was confident it could keep going.

“Eskom refutes the notion that it is facing a cash crisis, and that it has only enough cash to last for the next three months,” it said in a statement.

“The company is confident that it will maintain sufficient liquidity to support its operations,” it added.

The state-owned enterprise said that it had noted weekend media reports about apparent financial problems.

However, it said that, because it was making an official announcement on its finances this coming Wednesday, “Eskom is not in a position to respond comprehensively to the specific issues raised at this stage”.

The power utility said that “external auditors have confirmed Eskom as a going concern, and as a result the company sees these reports as being inaccurate and misleading…

“It is important to reiterate that Eskom is not facing any liquidity challenges.”

The parastatal also said it wanted to highlight certain points, including that “whilst Eskom’s financial position has always been supported by significant reliance on debt and borrowings, its improved overall financial and operational performance over the last two years has led to an improved balance sheet”.

Eskom said it had “sufficient government guarantees” in order to be able to carry out its funding plan. It also had “maintained access to capital markets and raised committed funding”.

‘Eskom may not be able to pay salaries’

The Sunday Times newspaper published an article on Sunday in which it claimed that, according to financial statements it had seen, Eskom only had enough money to last approximately three months.

According to the weekly publication, Eskom has R20bn left, but has proposed to pay millions in bonuses, including to former CEO Brian Molefe and suspended acting chief executive Matshela Koko.

This week, Fin24 reported that, late last Monday, Eskom postponed its financial results presentations which had been due to take place last Tuesday.

Earlier this month, external auditors SizweNtsalubaGobodo reported the state utility to the Independent Regulatory Board of Auditors for apparent irregularities.

Koko has been on special leave since May, pending an investigation into an apparent conflict of interests, while a legal battle continues into the reinstatement and subsequent removal of Molefe.

On Sunday, the DA called on Public Enterprises Minister Lynne Brown to reject the proposed multi-million rand bonuses for the executives, past and present.

“The fact is that Eskom may not be able to pay salaries to its 49 000 employees come November,” said DA MP Natasha Mazzone in a statement.

Recent controversy

Here is a list of some recent controversies Eskom has been embroiled in.

  • Boiler tender worth R4-billion set aside

At the end of June‚ the Johannesburg High Court set aside a R4-billion tender given to Chinese firm Dongfang to replace a boiler at Mpumalanga power station Duvha.
Losing bidders‚ Murray and Roberts and General Electric‚ which had put in much cheaper bids than the Chinese firm‚ approached the Johannesburg High Court to have the tender set aside. Price was supposed to be a factor in the choice‚ Eskom had said.

  • Eskom paid Trillian R266-million without invoices

The Trillian report‚ released recently by advocate Geoff Budlender‚ SC‚ found millions were paid by Eskom to Trillian without proof any work was done for the power utility.
One invoice was for the broken boiler station that Dongfang had won a bid to fix. The boiler remains broken.
Budlender linked the Trillian company to the Guptas because their associate Salim Essa owns 60% of Trillian.

  • US firm acts

US auditing firm McKinsey has taken steps against its SA director‚ Vikas Sagar‚ after he wrote letters saying McKinsey was doing work for the company‚ something the company denies took place. The action taken against Sagar is part of a probe that is looking into Eskom contracts given to a Gupta-linked company.

  • Tegeta‚ Eskom and the Guptas

The Guptas received a R600 million pre-payment for coal from Eskom and used this money to buy the Optimum Coal mine.
Eskom said this was a pre-payment‚ but former Public Protector Thuli Madonsela said in her State of Capture report that this prepayment was irregular.

  • CEO Brian Molefe resigned‚ retired‚ rehired‚ rescinded

Molefe announced he was stepping down as Eskom CEO in November 2016 in the wake of the Tegeta incident and Madonsela report.
In May‚ he returned to Eskom as CEO‚ saying he had just retired.
After Public Enterprises Minister Lynne Brown was forced to explain his reappointment‚ she filed an affidavit saying he had never retired but had taken “unpaid leave”.
The scandal led to the Eskom board firing him at the end of May

  • Revelations in the Denton report‚ published in the Financial Mail

Eskom wasted about R200m over two years by failing to negotiate proper discounts with diesel suppliers. The company paid billions to companies without having received proper invoices‚ in many instances paying for services without evidence of having received the supplies for which it was paying.
Eskom contributed to its own financial problems‚ and contravened the Public Finance Management Act by failing to put proper controls in place.
It consistently overpaid for diesel‚ coal‚ logistics and other contracts.
Eskom employees diverted business opportunities to themselves at the expense of the utility.

Source: News24; timesLive
Image credit: National Geographic

Eskom to get R20bn boost from Chinese bank

Eskom will sign a $1.5bn (R19.78bn) loan agreement with China Development Bank on Thursday, as the state-owned utility powers ahead with its funding requirements for 2017.

Last week, new acting Eskom CEO Johnny Dladla revealed that Eskom had secured 77% of its funding requirements for the 2017/18 financial year.

He said that for the 2016/17 financial year, Eskom increased its borrowings by over R60bn.

“We remain resolute that we will fully execute the required funding for the year, albeit under challenging market conditions,” Dladla said in a statement last week.

“Our liquidity levels remain healthy and Eskom’s financial profile continues to improve and stabilise.

“Backed by the availability of the government guarantees and the stable financial profile, we do not foresee significant impediments in the execution of the remainder of the FY17/18 funding requirement,” said Dladla.

Eskom is expected to use R43.6bn of its guarantee in 2016/17 and R22bn annually over the medium term, Treasury said in its 2017 Budget Review. Eskom has a R350bn guarantee for the 2016/17 year, with an exposure of R218.2bn.

“Gross foreign borrowings are expected to account for the majority of total funding over the medium term, largely as a result of Eskom’s efforts to obtain more developmental funding from multilateral lenders,” Treasury said in the Budget Review.

The borrowings come despite the power utility being downgraded by rating agencies this year, after Moody’s, S&P and Fitch cut South Africa’s sovereign credit ratings.

By Matthew le Cordeur for News24

Darkness descends on Eskom

South Africa’s state-owned enterprises have been hit by one scandal after another signalling serious political and corporate governance failures. The largest of these, the power utility Eskom, has seen its CEO Brian Molefe resign, then return, and then be fired – all in the space of seven months. This was followed by the unexpected resignation of Eskom Chairperson Ben Ngubane. The Conversation Africa’s Sibonelo Radebe asked Owen Skae to make sense of it all.

What do you make of what’s happening at Eskom?
It’s an unholy mess. The entire basis of the departure, reappointment and subsequent firing of the Eskom CEO raises so many red flags it’s hard to know where to start. And, to cap it all, the chairman has resigned with immediate effect. That means Eskom is without a CEO and now has a stand-in chairperson.

One thing is clear. The board, the chairperson Ben Ngubane, the minister of public enterprises Lynne Brown, and Molefe failed in their duties to serve Eskom. They failed South Africa’s taxpayers who are the indirect shareholders of Eskom. And they failed the country.

To understand their duties, one has to consider the basic principles of governing state owned enterprises. Eskom is a public company and its sole shareholder is the government. The shareholder representative is the ministry of public enterprises. A shareholder compact guides the relationship between the board, the executives and the minister.

The shareholder compact is an annual agreement between Eskom’s leadership and the minister. It documents the power utility’s mandate, as well as key performance measures. It also sets out what’s expected from a good governance perspective. It’s meant to avoid the kind of mess that has visited Eskom over the past few months.

What went wrong?
A number of things.

The main one is that corporate governance rules designed to manage conflicts of interest were totally disregarded.

The country’s Companies Act spells out what a director may or may not do if they have a personal financial interest in a matter. These rules apply as much to state owned enterprises as they do to publicly listed ones. The Eskom situation suggests that directors, and Molefe in particular, disregarded this principle.

This is highlighted in the former public protector Thuli Madonsela’s “State of Capture” report which suggested that Molefe had had an improper relationship with the Guptas, a family of businessmen with close ties to President Jacob Zuma. Among other things, the report questioned the way in which the Eskom leaders collaborated with the Guptas to buy, some say hijack, a mine supplying power utility with coal.

The Eskom board and the minister also failed to apply their minds properly around Molefe’s controversial departure and return. This includes a deal to give him a pension payout of R30 million just 18 months in the job and 13 years before he is due to reach retirement age.

A good understanding of the act, as well as the codes of good corporate governance that have been developed in the country, make it clear that the board should have:

  • Called a special meeting to consider Molefe’s departure;
  • Applied its mind to the circumstances of his departure; and
  • Ensured that the necessary legal, risk and reputation issues were addressed.

Another big area of failure was the role of the board’s chairperson. Even though he has resigned, he should still be held accountable for not providing the necessary oversight at such a momentous time.

As the only shareholder, the government is also complicit. As the shareholder representative the minister of public enterprises had the responsibility of asking the board questions as part of a consultative process that’s set out in the shareholder compact.

Either the minister wasn’t properly informed or didn’t ask the questions she was entitled to ask, or a mixture of both. This raises red flags about her level of commitment to the shareholder compact.

What does it tell us about the broader political environment?
There’s just too much interference – for nefarious reasons – from outsiders in the running of state owned enterprises. Excessive power and authority is vested in too few people. I often use the analogy of being a sports coach. Imagine a situation where the coach is called to account for his actions every day, where he has no say in who is picked and is told to change the game plan. The situation becomes unmanageable.

Interference undermines the way things should be, erodes confidence and allows conflicts of interest to flourish. This is particularly true when the interference is from people who aren’t acting in the best interests of the team.

But being untouchable is also a recipe for disaster. So we have to find a middle ground. The rules of the game must be established and the parties must carry them out with integrity, competence, responsibility, accountability, fairness and transparency.

These rules of the game are clearly set out in the South African context. Nobody can claim they don’t know what they are. In the case of Eskom they’ve simply been flouted.

What do the events at Eskom tell us about state owned enterprises in South Africa?
Sadly, state owned enterprises are seen as instruments to serve an elite few rather than fulfilling their broader mandate.

On top of this they aren’t financially viable which means they’ll continue to be a drain on the fiscus. The government must consider partnerships with the private sector. This can be done by selling minority stakes as suggested by former finance minister Pravin Gordhan.

The success of the partly privatised telecommunications entity Telkom supports this view. The company has just posted handsome profits, suggesting it’s a model that could be used to turn around other state owned enterprises, including Eskom.

By Owen Skae for www.mg.co.za

In the five years to May 2016, SA’s electricity use fell 6%, leaving a substantial and growing hole in Eskom’s budget. Eskom’s response has been to try to suppress new competitors and encourage big new customers. In a single week in July, it announced:

• It was negotiating with aluminium smelters to increase electricity use. Aluminium smelting in SA is predicated on access to cheap, (but dirty) energy;

• It would not accept further independent renewable producers after the current round of tenders because of the potential effect on its revenue. The share of private renewable energy in national demand rose from 4% in 2011, to 8% in 2016;

• It was trying to expand exports to the region in light of slow domestic demand.

The first two strategies will entrench commodity dependence and promote energy intensity. Instead of fostering growth in new industries and emerging enterprises, they will reinforce Eskom’s effective partnership with huge metal refineries.

Eskom’s dilemma is rooted in the end of the commodity boom, combined with a pricing strategy that is delinked from national goals around diversification and development. The recent commodity boom was an outlier. Yet SA’s electricity investment and pricing systems built in an assumption that metal prices would defy gravity for decades.

From 2008 to 2015, huge new coal-fuelled plants were initiated, while electricity tariffs in constant rand more than doubled. Below the radar, there’s a widely held belief that Eskom’s tariff hikes mostly reflected inefficiency and corruption. That view ignores both the cost of Eskom’s new investments and the soaring price of coal during the commodity boom.

This is not to deny inefficiency at Eskom. For instance:

• Eskom links the price of electricity for the smelters to the aluminium price, so it has in effect given them about tens of billions in rebates since the commodity boom ended;

• From 2008 to 2014, while its sales fell, Eskom’s employment climbed from 35,000 to 47,000;

• From 2014-15 to 2015-16, the remuneration of Eskom directors and group executives climbed from R50m to R75m.

Eskom’s model of increasing electricity supply and tariffs together clashed with global metal prices. Today, Eskom is in the midst of investments of more than R100bn in Medupi and Kusile even as the energy-intensive industries are downsizing.

Consider the steel industry. From 2007 to 2015, SA’s steel production fell about 30%. Virtually the entire decline resulted from the closure of electric furnaces, where production dropped by about half. Climbing electricity costs encourage a shift away from energy-intensive production even as Eskom races to increase its output.

Two factors shape Eskom’s response to its new realities.

First, it seems to know only how to build big plants, whether coal or nuclear. In 2013, the update report on the Integrated Resource Plan for electricity proposed a simple answer to managing uncertain demand: look to smaller plants that would enable more flexible responses. Instead, Eskom has forged ahead with giant projects, then sought to manage demand, alternating rationing and subsidies for the refineries.

Second, Eskom faces sometimes contradictory socioeconomic demands conjoined with a single hard financial requirement: it is required by law to remain self-sufficient and creditworthy. It is also expected to get electricity to poor communities; stabilise the supply to industry; provide a market and transmission for renewable energy projects in remote areas; and drive the construction of base load plants. Meanwhile, its prices are regulated through a complex, rigid and slow process without visible strategic aims.

In these circumstances, Eskom has tended to externalise costs wherever it can and to pursue socioeconomic imperatives only when they won’t damage cash flow. It’s hard to manage Eskom. The company knows far more about electricity than anyone in the government or civil society. Faced with a policy that it doesn’t want, it can argue that the result will be a blackout. Moreover, it habitually blames regulators or government officials when things go wrong.

But SA will pay a high price if we let Eskom respond to the looming oversupply by pumping out more energy for smelters and cutting support for renewables and energy efficiency.

If SA is serious about clean development and industrialisation, it should insist that any excess supply is used to encourage new industries, not to expand existing refineries, and that future electricity investment is small, decentralised and clean.

By Dr Neva Makgetla for www.bdlive.co.za
Image credit: www.bdlive.co.za

Loadshedding: where did it go?

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

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