South Africa’s Power Crisis: the Final Score

30 March 2008 (Last Updated March 30th, 2008 18:30)

Earlier this year South Africa was plunged into darkness as power outages led to an emergency situation. Paul French examines the effect of the country's power crisis on important industries such as mining and what ramifications it has for the 2010 World Cup.

South Africa’s Power Crisis: the Final Score
The tourist trade of Cape Town is just one of many industries in South Africa threatened by the power crisis.

In January 2008 South Africa's government was forced to call the deepening power crisis a "national emergency".

Rolling blackouts left homes without power for up to eight hours a day. Tourists were stranded on cable cars making their way up Table Mountain. Traffic light failures triggered gridlock in cities across the country. And intensive care nurses were forced to ventilate patients manually.

Industry was hit harder still. Millions of dollars have been lost in dairy production. Winemakers, unable to keep their grapes at a constant temperature, face losing their entire harvest. Mining, the most crucial industry in South Africa, has been plagued by safety fears, tumbling production levels and mine closures.

"The unprecedented unplanned power outages must now be treated as a national electricity emergency situation that has to be addressed with urgent, vigorous and coordinated actions," Public Enterprises Minister Alec Erwin said. "We are viewing the next two years as being critical."

How had things got so bad? What could be done about it? And is it still possible for the nation that has bungled its duty to supply power to its people to host the football World Cup in 2010?

CAUSES OF THE POWER CRISIS

South Africa's energy crisis has been largely driven by the positive factors of economic growth and social integration. Demand for electricity has increased as the economy has boomed and townships that were not connected in the apartheid era have been switched on. The problems have arisen through lack of planning and investment.

Eskom, which supplies the power to South Africa's homes, workplaces and mines, is the seventh-largest electricity generator in the world. It warned the government ten years previously that it would be unable to cope with burgeoning demand by 2007 if new plants were not built.

"Since the crisis flared up, gold and platinum prices have soared and the rand has been devalued."

"We've had no significant capital injection into generation and transmission, from either the private or public sectors, for 15, maybe 20 years," says Lawrence Musaba, manager of the Southern African Power Pool, a 12-nation consortium of electricity utilities.

South African President Thabo Mbeki has since admitted that "Eskom was right and the government was wrong". But why did the warning go unheeded?

"To be fair, the then-new government a decade ago was grappling with an array of what must have seemed more important public policy interventions," says Prince Mangosuthu Buthelezi MP. "It is understandable, if not excusable, that the policymakers' radar missed the early warning."

EFFECTS: MINING

South Africa's power crisis has had a devastating effect on the country's biggest industry. At the height of the problems, mining houses Anglo Gold Ashanti, Gold Fields and Harmony were forced to evacuate all underground staff and cease production to cut electricity consumption to "minimum levels".

Although the mines have since been restored to 90% of their normal output, the power crisis has wreaked havoc on the world markets. The world's largest gold mine and the two biggest producers of platinum are based in South Africa. Since the crisis flared up, gold and platinum prices have soared and South Africa's currency, the rand, has been devalued.

"With South African production being the primary world source for platinum and ferrochrome, the disruption to smelting capacity of these by the power crisis means worldwide production forecasts for at least 2008 will not be met and shortages in world supply are a foregone conclusion," says Paul Renken, mining analyst at VSA Capital and secretary of the Association of Mining Analysts.

"Much of the southern continent of Africa relies upon Eskom for 'swing power' production when they take their power plants off line for maintenance. The fact that Eskom cannot be relied upon for that for the coming five-year period means those countries will not have a margin of power capacity either for the major industries including mining and smelting in their countries.

"Will people come to South Africa if they know that they will be going back to hotels and guest houses with no power?"

This creates opportunity, particularly for the Chinese, to buy into the region with a promise of building power plants and transmission lines in exchange for metal and coal reserves."

EFFECTS: WORLD CUP

Concern over the completion of new stadiums and infrastructure already had the football fraternity worrying about South Africa's ability to host the 2010 World Cup. The power crisis has increased those fears tenfold, with the country's ability to broadcast games and suitably accommodate thousands of fans, players and journalists from around the world called into question.

"Stadia may have all the most wonderful generators in the world to broadcast the games, but will people come to South Africa to see them if they know that they will be going back to hotels and guest houses with no power?" South Africa Tourism Services Association CEO Michael Tatalias asked. "That means no hot meals, no clean laundry and no lights."

However, Alex Vines, head of the Africa Programme at independent analysts Chatham House, believes that the government will prioritise the tournament so that it goes ahead as planned.

"The World Cup is as emotive to South Africa as the Beijing Olympics are to China," he says. "It is a statement that the first World Cup to be held in Africa is being held in South Africa. The government will make it a priority. There might be power cuts over the next few years but they will make sure there is sufficient energy to run the tournament."

EFFECTS: GROWTH

The most robust economy in Africa, South Africa wanted to use the World Cup to stimulate further growth and boost GDP 6% by 2014. However, Eskom has warned foreign investors not to come to the country until 2013 when new plants will be operational, giving them the capability to cope with an increased workload.

A decrease in foreign investment would shoot down plans for growth and the signs don't look good. Rio Tinto has already put plans for a major aluminium investment on hold and several other new mining projects have been shelved.

"Eskom has warned foreign investors not to come to the country until 2013 when new plants will be operational."

"The power crisis is stifling growth at the moment," says Chatham House's Vines. "The South African economy is dependent upon extraction. Unpredictable power supply means the mining industry is experiencing losses. It is vital that the power crisis is solved as foreign investment is essential to ensure future growth."

The problems in South Africa are compounded by the country's national reserve margin, which stands at 8% rather than the global acceptable norm of 18%.

"As demand for energy grows the low reserve margin will have a major impact on the country's economic growth," says Thomas Pearmain, Global Insight's sub-Sahara Africa energy analyst. "Eskom attributes the increasing electricity demand to its growing customer base, bullish economic growth, and a late start to the construction of new power plants. Eskom and the South African government will need to instil a drastic change in the behaviour of power users and will have to increase the awareness
of using energy more efficiently."

REMEDIES

Until South Africa's new power plants come online, the only option they have to deal with the shortfall in electricity is rationing. Minerals and energy minister Bujelwa Sonjica urged South Africans to boil less water and go to bed earlier in a bid to save energy. However, domestic supply only accounts for around 20% of South African electricity.

The majority of Eskom's supply is used up by industry, which is why the company has asked its biggest customers to reduce energy use by 10–15% over the coming years and introduced market participation contracts, which allows them to buy back unwanted electricity.

Exports will also be rationed. In 2006 6.2% of Eskom's total electricity was sold to other countries in the region. However, the power crisis has forced Eskom to pull the plug on exports, leaving countries like Mozambique, Swaziland and Lesotho, who rely in some part on Eskom for their electricity, facing power crises of their own.

"When we don't have enough capacity for domestic use, we don't sell electricity," says Eskom spokesman Sipho Neke. "There is no surplus, so there are no exports."

"Until South Africa's new power plants come online, the only option they have to deal with the shortfall in electricity is rationing."

OUTLOOK

Although the short-term picture looks bleak for South Africans, with random power outages set to continue for the foreseeable future, plans are already in place to make sure the country does not find itself in this embarrassing position again.

Eskom has budgeted around 150bn rand [$21.4bn] for its long-term expansion plans, which include returning old power stations to service, upgrades to existing power stations, new coal-fired power stations and new gas turbines.

Like Britain, South Africa is looking to nuclear energy to increase generating capacity while cutting carbon emissions. Areva and Westinghouse are bidding to build the next nuclear power station, which is expected to produce about 3,500MW. Construction is expected to cost about 120bn rand [$16bn] and should start in 2010, with the first unit commissioned in 2016.

"The next few years in South Africa should tell you how large a role nuclear power will play in the country's future," says Thomas Pearmain. "South Africa currently relies on nuclear power to provide 6% of the local electricity mix. The government has ambitions to increase this to at least 15% of the country's generation capacity by 2025 and may compel local mines to offer uranium to the state to feed the country's expanding nuclear energy programme."

South Africa also plans to build a pebble bed modular reactor [PBMR] demonstration module by early 2012, near to the existing Koeberg nuclear power station in Cape Town. If it is a success, another 20–30 PBMRs throughout the country, each supplying around 165MW, will be constructed. It is believed these reactors carry a lower risk and higher thermal efficiencies than traditional nuclear plants by using pyrolytic graphite instead of water as the neutron moderator.

One problem that South Africa has faced for years is energy efficiency. The country has vast amounts of coal in the north but, by the time it has been converted into electricity and passed over to coastal cities, a significant amount is lost in transmission.

"The importance of inter-utility co-operation, as advocated by the SAPP, will now play a larger role in the future."

To counter that, and to boost power capability before the World Cup, the government has awarded a contract to an AES-led consortium to build new independent plants near the coast. A 760MW plant near Durban and a 342MW plant near Port Elizabeth are expected to be fully operational by 2009.

The final piece of the jigsaw will come from increased cooperation between South Africa and its neighbours in the sub-Sahara region.

"It seems the importance of inter-utility co-operation, as advocated by the SAPP, will now play a larger role in the future," says Thomas Pearmain. "The entire region ran out of surplus generation in 2007, and with this in mind the SAPP has set up a 20-year generation and transmission programme.

"I believe in the near future regional power pools throughout Sub-Saharan Africa will come to play a much larger role as generating capacity grows in some countries that are able to export surplus to neighbouring countries which have high demand."