Suppose you had diabetes and managed it by swearing off sugar and losing a lot of weight. How would you respond if your local café owner said you had to buy more sugar so that she could meet her sales targets?
Eskom seems to think it can make similar demands on SA. From 2003 to 2016, the number of gigawatt hours required to produce R1bn of the GDP (in constant 2016 terms) fell from 90 to 67 — a 26% fall over 13 years.
Representatives of some major metals producers said they should get price subsidies to encourage higher electricity use, bolstering Eskom’s sales and revenues. But SA as a whole would pay dearly if it adopted measures to revive dependence on coal-based energy and mining exports.
Eskom should be asked to develop a new business model that takes into account our realities — in particular the rapid fall in electricity intensity, the need to reduce greenhouse gas emissions and the imperative of promoting job creation and industrial deepening.
Eskom’s sales of electricity declined more than 7% from 2011 to early 2017. For comparison, they climbed 26% from 2000 to 2007.
Falling electricity demand from 2011 was driven by the the commodity boom’s end, which led to downsizing in energy-intensive refineries; and companies’ efforts to cut electricity use in response to both soaring Eskom tariffs and climate change.
The metals refineries and Sasol were at the centre of the shift. From 2011 to 2016, they accounted for about a quarter of Eskom’s total sales. But they contributed 95% of its drop in demand as they reduced their electricity consumption 16% over the five years. In the same period, iron and steel production shrank 7% and output of nonferrous metals (including aluminium) fell 11%.
The decline in metals production was in part driven by Eskom’s extraordinary increase in its prices from 2008. As the price of electricity rose, consumers of all kinds reduced their usage. Through 2008, the GDP and electricity demand were closely correlated; thereafter, Eskom demand dropped 0.5% a year although GDP growth averaged 1.6%.
It doesn’t help that both Eskom and its regulators seem to be planning for unrealistic increases in electricity demand, which in turn risks overinvestment in generation. For the past five years, electricity demand has gone down, but all Eskom’s planning scenarios assume at least a modest increase in electricity consumption. Its low scenario anticipates 0.4% growth a year, compared with the actual annual decline of 0.9% over the past five years.
For its part, as of November 2016, the Department of Energy was still planning on a 2.5% annual increase in electricity demand. The National Energy Regulator of SA’s projections for peak demand averaged 2.1% from 2010 to 2025, although its own data show that demand shrank from 2012 to 2016. So its published projections from 2017 start 20% above actual demand in 2016.
The failure to plan for the shift towards a less electricity-intensive economy, combined with overoptimism about GDP growth, has significant (and potentially costly) implications. For instance, by 2021, if electricity use continues to shrink at the rate of the past five years, Eskom will need 20,000GWh a year — about 10% less than in its lowest scenario. Even if electricity use stops declining in 2017, SA would need 5,600GWh less than Eskom projects in its low scenario.
It would be a big mistake to try to increase electricity use by cutting prices for heavy industry. That approach would bolster dependence on uncertain commodity markets, create very little employment and aggravate climate change. Rather, Eskom needs a new business model that would promote more balanced industrialisation. Key elements would include accepting falling overall energy intensity as well as the shift away from coal-based energy. In this context, Eskom’s surplus production could be used to promote a stronger regional grid, which is a prerequisite for industrialisation in SA.
This kind of business model would require Eskom to focus its decisions on supporting economic and social development, rather than just protecting its bottom line. To be effective, that would require Eskom to be far more transparent about its income and investments as well as its sales.
The situation in the electricity industry reflects the increasing disconnect between Eskom’s 20th-century model and the realities of SA’s economy in the 21st century. Shifting to a less energy-intensive, less coal-dependent economy is not a choice but an unavoidable consequence of global economic and climate trends. Eskom needs to adapt to these realities.
• Dr Makgetla is a senior researcher with Trade & Industrial Policy Strategies.
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