The economic impact of electricity tariff hikes and load shedding

By Alan Winde, Minister of Economic Opportunities:

This week, Minister of Economic Opportunities, Alan Winde,  responded to a written parliamentary question about the economic impact of the electricity increases and load shedding. Minister Winde is highly concerned by the impact of the poor management of our state entities and the resultant failure to supply sustained electricity.

In addition to this written question, Minister Winde is set to address the National Council of Provinces on these issues during the Energy Vote Budget debate next week.

“Poor management is dashing our economic hopes and has a direct impact on our ability to create jobs. The statistics below tell us that securing energy should be one of national government’s key priorities,” said Minister Winde.

Minister’s Winde written response included:

  • The financial losses resulting from load shedding
  • The impact of the electricity increases on productivity in key sectors
  • Details on the Western Cape Government and City of Cape Town’s ‘Achieving Energy Security” game-changer

Kindly see excerpts of Minister’s written reply below:

Eskom’s proposed tariff increase, coupled with load shedding, will result in multi-billion rand losses to the economy.

Deutsche Bank analysts have suggested that the proposed 25 per cent tariff increase could cost the national economy around R10 billion to R16 billion, cutting growth by 0.2 per cent to 0.4 per cent over the medium term.

Energy expert Chris Yelland estimates the cost to the economy during stage 1 load shedding at R20 billion per month, rising to R40 billion per month for Stage 2, and R80 billion for Stage 3 load shedding.

The energy crisis is negatively impacting productivity across the economy, but particularly in some of our key sectors.

In the agricultural sector, a two-hour forced power outage easily leads to four hours down time.  Expensive machinery often has to be shut down well in advance. Both shutting down and starting up processes are complicated and time consuming.

In certain cases, irrigation may not be able to take place optimally due to load shedding, resulting in additional losses. It is also not financially viable to install standby electricity resources for all agricultural enterprises.

Western Cape Department of Agriculture study on impact on productivity

It was found that a productivity loss of one percent would lead to a 3 percent decrease in the GDP of the South African economy.  At the same time the consumer prices of primary agricultural products would increase between 0.21 percent (horticulture) to 0.33 per cent (animals).

The prices of agri-processed products would increase between 0.35 per cent (grain mill products) and 0.97 per cent (meat products).  The volume of agricultural production will decline by 1.54 per cent, agricultural and food product exports will decline by 3.12 per cent, household and labour income will decline by respectively 2.81 per cent and 2.70 per cent and more than 129 000 jobs will be lost in the South African economy.

Impact on foreign investment

South Africa’s unstable energy supply has resulted in the country ranking poorly in several global investment and trade reports.

In the 2015 Ease of Doing Business Report, the importance of electricity for both business operations and start-ups was highlighted. In terms of getting electricity, South Africa scored only 56 out of 100, leading to a ranking of 158 out of 189 economies.

Our poor performance in this area was also evident in the World Economic Forum’s Global Competitiveness Report where the quality of South Africa’s electricity infrastructure received only 3.6 out of 7, ranking the country 99 out of 144 countries.

In a survey asking firms what they considered to be the most problematic factor for doing business in South Africa, approximately 10 percent claimed an “inadequate supply of infrastructure”.

These rankings are based on large polls and surveys, and play a role in key international investment decisions.

Our response

We are crafting a strategy to respond to energy supply issues in our region. The Western Cape Government and City of Cape Town (COCT), as well as businesses in the region, have agreed to work together to come up with innovative solutions to minimise the economic impact of the current energy crisis.

This follows our two governments’ selection of Achieving Energy Security as a game changer over the next five years.

The Western Cape Government and the City of Cape Town have worked on a number of potential solutions with businesses, and we are currently holding further discussions.  These solutions include proposals on loadshedding management, Rooftop PV, energy efficiency, Independent Power Producers and Power Purchasing Agreements.