Johannesburb - Neal Froneman, who runs some of the world’s deepest gold mines, would like to drill even deeper. He’s being prevented from doing so by an electricity crisis that’s strangling Africa’s second-biggest economy.
South Africa has had 15 days of rolling blackouts in urban areas this year, the first since 2008. For Froneman, chief executive officer of Sibanye Gold, the nation’s largest gold producer, the situation is reaching breaking point.
“We’ve had the warning signs but we wait until it’s a crisis and it will take years and years to fix,” Froneman, 55, said of the country’s government. “We will find it very difficult to commit to deepening projects, which are energy intensive, because the cost of power’s going to be too high and we need reliability of supply.”
A lack of investment in new power plants since the end of apartheid 20 years ago even as supply was extended to an extra 7 million people has left state-owned utility Eskom with supply narrowly exceeding demand. South Africa’s economy would have been 10 percent bigger than it was in 2008 had it not been for power curbs to businesses and Eskom’s inability to commit to supplying electricity for new projects, according to Mike Schussler of economists.co.za.
In so-called load-shedding, Eskom cuts power to residents and businesses for between two and four hours at a time. The country relies on energy-intensive industries such as underground mining and the smelting of chrome and aluminum. The utility generates about 45 percent of the continent’s power.
Industrial companies such as BHP Billiton, ArcelorMittal and Sibanye are required by Eskom to cut usage by at least 10 percent during rolling blackouts and at times when supplies are low. Members of the Energy Intensive Users Group, which consume about 45 percent of the country’s power, currently use “way below” the amount of electricity they used in 2007, according to spokesman Shaun Nel.
Even after this reduction in demand, South Africa’s reserve margin was only 5.4 percent in the past year, a third of international norms.
ArcelorMittal, the world’s biggest steelmaker, has commissioned a control station at its local unit in Vanderbijlpark, south of Johannesburg, to reduce power usage in a “controlled manner,” Dennis Britz, an energy management executive at the company, said by e-mail.
Gross domestic product is forecast to grow 1.4 percent this year, the slowest since a 2009 recession, after labour strikes and power cuts curbed output. While blackouts have shaved about 0.3 percentage point off GDP growth this year, or about $940 million, the real cost is a loss of the economy’s “productive potential,” Schussler said.
“People are not investing in new projects,” he said. “Mines can’t go deeper because they can’t get power and even state-owned enterprises can’t invest in certain areas.”
The country’s economy could have created 500,000 jobs if it were not for power shortages, he said. South Africa, which has a population of about 53 million, has an unemployment rate of 25 percent.
Eskom, which produces about 95 percent of the country’s power, says it’s battling with having to upgrade aging power plants at the same time as building new generation to serve a growing middle class.
It’s also hamstrung by a government bent on keeping prices as low as possible. After being granted only half the average percentage increase in annual tariffs it sought for the five years through March 2018, Eskom was left with a R225 billion funding shortfall for the period.
The utility’s Standard & Poor’s credit rating is BBB-, the lowest investment grade, and it only avoided a downgrade to junk earlier this year after the government announced a 20 billion- rand rescue package.
To compound Eskom’s woes, work on two new coal-fired power plants, Medupi and Kusile, is behind schedule. The first unit of the 4,674-megawatt Medupi facility, which was due to be completed in 2011, will only feed power to the grid from June, more than three years late.
Still, Eskom CEO Tshediso Matona insists there’s no crisis.
“I don’t think there’s a crisis at Eskom,” he said at a press conference Dec. 8. “I think sometimes the way the company is reported upon creates a sense of crisis. There are challenges galore clearly.”
There’s “the mismatch between supply and demand, unplanned outages that are out there, finances of the company,” he said. “There are a whole range of issues, but in each one of them we have a plan.”
South Africa has “clear policies” to develop its energy industry to boost growth, President Jacob Zuma said in an interview on state-owned South African Broadcasting Corp. on Dec. 21. “We are making budgets necessary to deal with it.”
With about a quarter of Eskom’s 42,000 megawatts of installed capacity regularly undergoing maintenance in the summer months from October to March, the company is attempting to get as many units back online as quickly as possible, Matona said.
The country is experiencing more blackouts, at least in part, because Eskom reversed its previous strategy of keeping the lights on “at all costs,” such as during the soccer World Cup in 2010, when it postponed regular maintenance, he said.
Despite raising prices by an average of about five times more than inflation in each of the four years through March 2013, South Africa has cheap power relative to developed nations.
The country’s average national electricity price was $0.1 a kilowatt hour in 2011, compared with $0.12 in the U.S., $0.2 in the U.K. and $0.41 in Denmark, the most expensive, according to data compiled by Shrink That Footprint, an energy-saving blog, which assessed 17 countries.
That situation must change if the South African utility is to become financially stable, Matona said. “Eskom still sells electricity below cost,” he said. “You can’t have that situation forever without incurring financial problems for the company. We have to move towards cost-reflective tariffs.”
For now, Froneman is more concerned about getting his company’s gold ore processed by the end of the year.
“We’re building up stocks on surface and if we keep on having to switch off our mills, come the end of the year we wouldn’t have managed to get all our treatment done,” he said. “It’s incredible how we’ve got here and how run down some of our infrastructure is. It’s very scary.”
* With assistance from Andre Janse van Vuuren in Johannesburg.
Bloomberg