Economic impact of electricity supply disruption on industry
The impact of the reserve margin on the economy is assessed in terms of the likely costs of unserved energy. This increases exponentially as the unserved energy decreases.
As energy supply decreases, industry output is decreased, so are the number of exports which in turn affects the trade balance of the country and the exchange rate. Employment and income are also negatively affected, and this in turn affects consumer spending.
The inter-industry effect or “knock-on” is likely to occur between companies or industries – where they are upstream or downstream industries and form part of a supply/value chain. For example, when the output of the mining sector is reduced, or their prices rise, this has an effect on all the other industries that use their output as inputs into their own production processes. 
Figure 7: Comparison of 2007 South African Electricity Prices with other countries (source: NUS Consulting)
Impact of increased electricity prices: enabling choices for South Africans
Electricity prices in South Africa are amongst the cheapest in the world. The existence of these low prices over an extended period has resulted in the electricity crisis we now face, and in inefficient use of electricity and other resources.
Many argue that residential customers subsidize certain industries, because the market does not send out the correct price signals that reflect the true cost of electricity provision. The pricing of the goods that use this electricity is therefore also distorted. Getting the price right is important going forward, not only for well functioning markets, and efficient companies, but more importantly in addressing the current situation. Prices are needed to make both supply and demand side initiatives work – without the right prices, the incentives are just not sufficient.
Price increases, however, will have an impact on the economy, and most of this will be felt through inflationary pressures. Price hikes allow “choices” rather than forcing people to reduce consumption, and are more likely to result in those companies and individuals that are less efficient, or less productive/profitable per unit of electricity consumed, reducing their consumption levels.
Supply side impacts
The supply side impacts, which are predominantly through the Eskom’s capital expansion programme, are for the most part positive, as it represents increasing the productive capacity of the country to produce goods, and to facilitate economic activity. There are however a few negative impacts, namely the existing constraints in terms of skills and/or companies that are able to deliver the projects, and the need to import major equipment.
Economic studies by the BER helped to quantify some of the macroeconomic impacts of the R343 billion capital expansion programme. The main impact on the economy was unsurprisingly on domestic investment which was forecast to rise by 18% over that which it would have been without the expansion programme. Private investment will also benefit, through the provision of goods and certain contracted services, and the forecast is for a 5% increase from the baseline projection. GDP, employment and consumer spending are also forecast to be higher than they would have been.
On the negative side, however, the increased level of imports is forecast to put pressure on the current account, which in turn will affect CPIX, increasing it by between 1 and 2 percentage points from 2009 to 2012, and it will also negatively impact the government budget balance.
When do we see the country moving out of the difficult period?
Figure 8: South Africa's Electricity Supply Challenge
The South African electricity challenges are predicted to be alleviated over the next five to seven years until the next baseload coal-fired power stations generated additional capacity to meet the peak demand. In the short to medium term, it is expected that decisions on a third baseload power station will be made to ensure that the country does not have an electricity challenge beyond 2012. Thereafter, additional capacity will need to be brought on line commencing 2017. It is anticipated that over the next ten to 18 years the power system capacity will need to be doubled to accommodate the anticipated growth. Timeous decision-making to accommodate long and ever increasing lead times for new build is critical to ensure that a similar capacity and energy crisis is prevented.
Whilst the focus in the interim is to achieve the overall 10% demand reduction, the challenge remains to get sufficient capacity online timeously. |
