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Eskom is Currently the Biggest Threat to South Africa’s Economic Recovery

Image by Fré Sonneveld on Unsplash

The Covid-19 pandemic deeply illustrated how depressing the South African economy is, specifically its incapabilities of handling health and economic shocks. The 4.9% recovery growth recorded in 2021 after the 6.4% contraction in 2020 was jobless. Indeed, the unemployment rate has continued to rise and has recently climbed to 35.3% as of the fourth quarter of 2021 from 34.9% in the third quarter of 2021. The alarming unemployment rate combined with rising poverty and weak growth has raised the urgency of structural economic reforms. There are a lot of challenges that need to be addressed in South Africa (SA) to ensure sustainable and inclusive economic growth – tackling the Eskom problem is arguably a good starting point.

South Africa is currently facing an energy crisis and there has been widespread blackouts since 2007 whereby electricity supply falls behind demand thus planned supply interruptions are carried out (loadshedding). At the time of writing (15 May 2022), SA was alternating between stages 2 and 3 of loadshedding. This has been a result of operational failures and breakdowns at ageing and poorly maintained power stations among other reasons. These problems are largely driven by underinvestment and lack of financial sustainability in Eskom due to high debt accumulation. Despite the enormous bailouts received by Eskom to get its house in order, it has failed dismally to keep the lights on. Indeed, struggling Eskom received an additional R21.9 billion in the 2022 budget after the R69 billion allocated in the 2019 budget – these are funds that could have been used to improve other sectors of SA, such as the educational system. Therefore, the ongoing collapse of Eskom remains a deliberate sabotage to the recovery of the South African economy.

Recently, Eskom demanded a 20.5% tariff increase in a country where almost half of the population is unemployed (including discouraged job seekers), citing carbon tax, requirement to purchase energy from independent power producers, and operating expenditure as the key drivers. Even though the National Energy Regulator of South Africa (NERSA) approved a 9.6% tariff increase for Eskom customers, this is unlikely to aid in restoring the ticking-time bomb Eskom. In fact, further deterioration is expected due to mismanagement of funds and the corruption ruling the entity.

The economic costs of Eskom in South Africa are also disheartening and perfectly illustrate why Eskom should be considered the biggest threat to the recovery of this economy. According to the 2019 report published by the Council for Scientific and Industrial Research’s (CSIR) Energy Centre, constant loadshedding and tariff hikes by Eskom have elevated running costs for businesses and reduced productivity and profitability that has resulted in approximately R1 billion per stage per day loss to SA’s businesses and industries, with small and medium sized businesses in manufacturing, retail and hospitality taking the hardest hit. From 2007 to 2017, the total economic impact is estimated to be as high as R338 billion [1].

The government has made efforts to save “whatever” is left of the electricity public utility on top of the constant bailouts and tariff hikes. That includes splitting Eskom into three divisions (transmission, distribution, and generation) in attempts to put Eskom on a sustainable path. However, this has not been enough. Also, allowing private investors to build their own power plants producing up to 100MW is a step in the right direction but still, more can be done. The government needs to allow independent producers to produce more than 100MW of electricity and be able to sell excess electricity. This will likely attract investors, ease pressure on Eskom and bring the price of electricity down. We also need to start thinking of solutions that will work in the long run and that includes green energy. The improvement in renewable technologies is making green energy cheaper compared to coal.

In Eskom’s defence, they can argue that the theft of copper cables has also added to the expenditure side of Eskom. The illegal connection of electricity and electricity theft might have also compromised Eskom’s revenue. The estimated cost per year of the theft of copper cables, transformers and conductors is R2 billion per year and Eskom is expected to cover that. However, this reason alone is not enough, given the billions (R) that the government has been pumping into Eskom to compensate for the loss that has resulted due to mismanagement of funds.

Lately, the South African government has also been weighing taking on Eskom R392 billion debts. Although this might add onto SA’s already bloated debt, it might not be a bad idea. This will allow Eskom to be financially sound. Given that the Treasury is already injecting a lot of money into the entity, it might as well absorb all its debt. This might attract enough investors into the collapsing entity, allowing it to focus on adding megawatts into its grip.

[1]Wright and Calitz (2020). Setting up for the 2020’s: Addressing South Africa’s electricity crises and getting ready for the next decade. Version 1.1 CSIR: Energy Centre.

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