By: Rob Jeffrey

Most of South Africa’s energy needs are met by coal. Besides massive electricity generation, coal is also used as a liquid fuel by millions of lower-income households for cooking, lighting and heating.

There has, however, been a slowdown in these key industries in recent years. The mining sector, in terms of its percentage share of total gross domestic product (GDP), is now in slow relative decline, while growth in the manufacturing sector has also slowed. Since the early years of this decade, uncertainty regarding government policy relating to the mining sector and its supporting industries has discouraged fixed capital formation. South Africa remains an important producer of a number of key minerals, including, besides others, iron-ore, chrome, platinum and manganese. However, if the proper supporting infrastructure, including legislation, logistics and electricity, were in place, South Africa could have developed its mineral resources to a far greater extent.

South Africa boasts an abundant supply of all minerals, with the key exception of crude oil. Natural gas on the Cape South and West Coast and the potential of the Karoo shale-gas deposits could well resolve South Africa’s energy problems for the next one or two generations. In addition, the country is endowed with estimated coal reserves sufficient to cater for both domestic and export demand for over 100 years into the future, with a sizeable reserve beginning to be exploited in neighbouring Botswana and the Waterberg region of Limpopo.

Over 80% of electricity in South Africa is currently generated by coal-fired power stations. While this percentage must decline in the future, it is almost certain that, in the long term, it will remain relatively high. From an economic perspective, to maintain growth and improve standards of living, cleaner, less polluting fossil-fuel-fired power stations should be built. This, invariably, will mean the shifting to some 11 000 MW gas-fired power stations and, following Medupi and Kusile, at least 20 000 MW cleaner coal-fired power stations from the Waterberg to serve Gauteng, the industrial heartland of South Africa. It remains economically sensible to use gas and coal as the primary energy source, supported by a phased-in approach to environment-friendly renewables technologies that are reliable and truly cost competitive.

The introduction of a carbon tax and any major moves towards renewables in a developing country such as South Africa will increase prices and place the country at a considerable competitive disadvantage. The tax, together with the shift to renewables, could lead to a big increase in the real price of electricity to both business and households over the next 15 years. The economic impact of the price increases is insidious over time, as decreased investment and disposable income, as well as other negative impacts, filter through the economy. The impacts of the higher electricity prices on goods-producing industries, especially the mining and manufacturing sectors, are of particular concern. The mining and manufacturing industries are important contributors to the economy, representing 9% and 14% respectively of South Africa’s GDP. Their impact on the total economy, however, is far greater through their linkages with other important sectors of the economy. Importantly, these two sectors account for over 70% of the country’s exports by value. Their global competitiveness must be maintained in order to promote exports and limit imports.

The Future
There are some who say that there have been structural changes in the economy towards a more service-orientated economy and that this has led to, and will continue to result in, a declining electricity intensity for the country and sharply reduced growth in demand for electricity in the future. This may be true but these are all strong signals of a failed energy and economic policy. The decline in the rate of economic growth, the balance of payments deficit and the low increase in the rate of employment, particularly for less skilled workers and the youth, are structural problems caused by the relative decline of the country’s goods-producing industries.

The ratings agencies themselves have clearly stated that the sovereign rating of South Africa will be lowered unless the economic growth rate is raised, the balance of payments improved and employment increased. This can only happen if the rate of growth of electricity-intensive goods-producing industries, namely mining, manufacturing and agriculture, is substantially increased and given the opportunity to grow. If this does occur, then the electricity intensity in the country may well increase or at least stay constant. Energy and electricity will never again be cheap but, for higher economic growth, there has to be security of supply of electricity at globally competitive prices. Unfortunately, economic growth models based on relatively low electricity growth forecasts become self-fulfilling prophecies.

Energy, electricity and employment growth are the keys to South Africa’s future economic, social and political prosperity, sustainability and stability. Security of supply of electricity at competitive prices is a prerequisite for this to occur. At this stage of South Africa’s technological development, fossil fuels in the form of gas and coal will need to continue to play a substantial role as the country’s major energy source. While renewables will play a growing role as time goes on, and nuclear may have a role to play in providing the country’s energy requirements in the future, fossil fuels currently are the only source of energy that can provide security of supply at internationally competitive prices.

Jeffrey is MD and senior economist at independent economic consultancy Econometrix.