South Africa’s economic growth picked up in the second quarter of 2024, supported by higher consumer spending and power availability, but output declined in agriculture, mining and transport meant growth was slightly weaker than expected.
The country’s GDP expanded 0.4% in the April-June quarter. Seven of the 10 sectors tracked by Statistics South Africa registered growth in the latest three-month period, as the economy benefited from an unbroken stretch without power cuts for the first time in years. The factory activity, however, slumped in August 2024, indicating that business conditions remain highly volatile in key sectors.
International Finance will provide an in-depth analysis of the power cuts and their significant impacts on South Africa’s labour market.
What’s going on with SA’s power sector?
Haroon Bhorat, Professor of Economics and Director of the Development Policy Research Unit, University of Cape Town and Timothy Kohler, Junior Research Fellow and PhD candidate, Development Policy Research Unit, School of Economics, University of Cape Town, recently analysed the labour market effects of scheduled electricity outages in South Africa, referred to as load shedding.
They found that power outages have had negative effects on employment, as well as working hours and monthly earnings among those who remained employed. Effects on employment have been larger than effects on working hours or earnings, highlighting the threat that load shedding poses to job preservation and job creation efforts.
“These effects were not, however, the same for all firms. Workers in the energy-intensive manufacturing industry appear particularly vulnerable to losing their jobs. Also, small and large firms responded differently. Small firms tended to favour reducing working hours rather than introducing layoffs. Lastly, effects varied by load shedding intensity. Low levels of load shedding don’t affect the labour market strongly, but high levels did,” the duo observed.
Load shedding, since 2007-end, has become a consequence of frequent breakdowns at the national utility, Eskom, due to a combination of poor long-term planning, a lack of financial resources, rampant state capture and corruption, and ageing coal-fired power stations.
The year 2023 became the worst one on record for both the utility and the country, as load shedding occurred for 289 days. Eskom, however, stated in August 2024 that South Africa could have no scheduled power cuts over the next seven months if the state-owned utility’s unplanned electricity losses stay at their current level.
Eskom managed not to implement power cuts in more than 150 days, since late March, after a big improvement in the performance of its fleet of mainly coal-fired power stations. Apart from increased electricity availability at Eskom coal stations, renewable energy projects operated by independent producers have also delivered more electricity over the past year. The utility’s CEO Dan Marokane said Eskom should be able to say early 2025 when “load-shedding at the chronic level that it is behind us,” with an additional 2.5 gigawatts of generation capacity coming online in the next few months.
Despite the positives, worries remain
Eskom’s turnaround, to some extent, is praiseworthy. However, the damage already done is huge. In 2023, scheduled blackouts reached record levels and cost the already floundering economy about $90 billion and over 860,000 jobs, particularly hitting its mining and manufacturing sectors. Even at the micro level, South Africans have had to mould their lives around daily power cuts.
“Over the past five years, the worsening energy crisis has threatened the survival of businesses, including KFC, the popular American fast-food joint, and required costly fixes for companies that need a steady supply of electricity. Grocery retailer Shoprite recently reported spending $28 million in six months on diesel generators to keep its lights and refrigerators on,” Foreignpolicy.com reported.
To partially cover the shortfall in electrical output in 2023, Eskom ramped up its use of costly diesel-powered generators, further compromising its already unsustainable financial position. According to the utility, the unit cost of electricity from diesel generators is 14 times higher than the utility’s coal plants.
Eskom is now using its diesel-powered turbines to help meet surges in demand during the morning and evening peak periods. According to Eskom, it spent 1.1 billion South African rand, or roughly $60 million, on diesel in May 2024, a notable decline from the 3.1 billion rand spent in the same month in 2023.
Most notably, Eskom has brought several units of the Kusile power plant, located in the Mpumalanga province, back online. The utility was granted regulatory approval to temporarily operate those units without technologies that prevent toxic sulphur dioxide emissions. This has effectively increased Eskom’s available generating capacity by as much as 2,100 megawatts (MW), which is more than the average supply deficit throughout 2023.
In addition to Kusile, the rest of the utility’s coal fleet has remained in slightly better shape due to increased maintenance over the summer months (between October 2023 and March 2024) when electricity demand remains typically below average. Both of these have contributed to a meaningful decline in the number of unplanned outages so far in 2024.
“Meanwhile, a decrease in overall demand, owing to the weak economy and a boom in private renewable energy investments, has also helped. Eskom estimates that solar panels with a cumulative generating capacity of 5,500 MW have now been installed on the roofs of South Africa’s malls, office blocks, warehouses and households. Of that amount, roughly 2,100 MW was added in the last year alone—the vast majority of which is for self-use as the country doesn’t yet have a national feed-in policy,” Foreignpolicy.com added.
James Mackay, chief executive of the Energy Council of South Africa, a business group that is working with the government to resolve the power crisis, termed the reprieve as “a genuine shift and result of 18 months to two years of hard work.”
He reflected renewed efforts to clamp down on corruption, a fresh Eskom leadership team that has political support, an improved culture at the utility, and a stronger maintenance programme. The private sector’s involvement, partly in the form of capacity building, is also making a difference.
While the country’s electrical grid remains vulnerable, power cuts will be less severe going forward, Mackay predicted. By 2029, South Africa eyes to have a liberalised electricity sector, by ending Eskom’s century-long monopoly. The Electricity Regulation Amendment Bill, introduced in August 2024, will allow non-Eskom electricity trading for the first time and require the establishment of a fully competitive wholesale market within five years.
The government has suggested delaying coal plant shutdowns for the foreseeable future, despite the blockbuster $8.5 billion energy transition funding deal it agreed to at the COP26 climate conference in late 2021.
However, Eskom’s recent turnaround still provides an opportunity to accelerate South Africa’s green energy ambitions, to deal with the economic blow of the European Union’s impending carbon border taxes. As things stand, South Africa will be hit harder than any other nation due to its heavy reliance on coal.
President Cyril Ramaphosa wants to attract private-sector investment worth $110 billion in the next five years as South Africa leans more on its BRICS partners, while also seeking to maintain close ties to the United States, the United Kingdom, and Europe. To successfully court investors and reignite the moribund economy, South Africa needs to close the chapter on its load-shedding nightmare.
Bhorat and Kohler found that load shedding was significantly and negatively associated with employment, working hours and monthly earnings. On average, periods of load shedding were associated with a 2.6% lower chance of being employed, 1.3% fewer working hours per week (equal to about half an hour), and 1.7% lower real monthly earnings. These are large effects. The monthly earnings reductions were also driven by fewer working hours.
Low levels of load shedding (stages 1 and 2) did not have these associations. But they were markedly worse with higher levels (level 3 upwards). Stage 3 was associated with 1.9% lower employment, compared to 3.6% for stages 4 and 5 and almost 6% for stage 6.
Manufacturing, a relatively energy-intensive industry, was worst off by far. Here, load shedding was associated with nearly 17% lower manufacturing employment, about 6.5 times larger than the average of all industries. While most industries suffered from loss of working hours due to power cuts, workers in large firms were vulnerable to all outcomes. In contrast, those in small firms were only vulnerable to reductions in working hours, but not to job losses or wage cuts.
“One might expect larger firms to be less vulnerable, as they would have more resources to pay for alternative energy sources. While that’s probably true, large firms are more likely to operate in energy-intensive sectors. Our analysis suggests that small firms have tended to reduce working hours rather than laying off staff, an outcome which is not unique to South Africa,” the duo commented.
The “Electricity Regulation Amendment Act” envisages a hybrid market model, where competition, along with various pricing models will emerge and shape the sector’s health. New kinds of businesses will come up, such as traders in electricity, “prosumers” (consumers producing electricity for sale into the grid), market and system operators.
Load shedding has been devastating for South Africa’s economy, weakening the rand and contributing to inflation. South Africa’s central bank estimates that it has cut 2% from the country’s economic growth rate in 2024. In April, some 80% of public healthcare facilities said they were now affected by power cuts.
People have taken matters into their own hands. South Africa’s installed rooftop solar PV capacity increased from 983MW in March 2022 to 4,412MW in June 2023, registering a 349% increase in a little over a year. Other government data shows that in Q1 2023, the country imported five times as many batteries as it did in 2022, as consumers looked for more ways to retain power during outages.
The South African Government is actively encouraging the uptake of new rooftop solar with targeted policy, including a new rebate scheme announced in February 2024, which allows individuals who install new panels onto their homes to claim rebates equal to 25% of the cost of the panels.
The latest research from Morgan Stanley suggests that the decline in South Africa’s coal generation, coupled with the boom in private power supplies, means electricity generated from the private sector will exceed output from Eskom by 2025. This can be considered a rare silver lining, as the Ramaphosa government gears up to end the state-run utility’s market monopoly.