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SA's electricity headache here to stay - expert

NOMURA emerging markets expert Peter Attard Montalto explains why Eskom's intensive maintenance schedule may cost the economy:

Eskom's very intensive maintenance schedule announced a few months back has led to too much pressure being put on the rest of the generating capacity which has together with unplanned outages and the fact that one unit of the Koeberg nuclear power plant is out of action for refuelling.

As a result additional capacity was tripped and had to be taken out of production. We warned of the risk of such an intensive maintenance schedule back when it was announced - the power balance reserve margins (difference between peak demand and supply) was simply too low.

Eskom believes the situation will last till 20:00GMT tonight. However in order to maintain balance across the system they have had to declare a regulatory compliant emergency in order to *force* industrial users to cut power consumption by at least 10% (in other periods through this year they have only *requested* some users to make such cuts.

This is an across the board cut of heavy users like miners, car producers etc. Given how tight the system is in general at the moment they may well require these cuts to continue for a number of days and hence there will be some economic cost across the economy.

Eskom knows the panic that such a declaration of emergency would induce and hence would clearly not do it unless absolutely necessary to force a heavy users cut. Smelters have already been shut off which has happened on quite a number of occasions through this year.

Eskom has said load-shedding may be an option next though they could require additional industrial demand cuts before that. As such a repeat of 2008 mass, several weeks, rolling load-shedding across the country may well be avoided.

We should also remember that Eskom has much better demand side management protocols now. Equally seasonally demand will start to fall through December as business shuts down for Christmas. However when it ramps up again we will be back in the same position as we are now in quarter 1.

This may seem like a glitch, something temporary. However it’s an issue we have been banging the table about since 2008 and particularly this year.

New generating capacity is probably not coming on stream until end 2014 (originally scheduled for end 2012). Demand will increase as the economy recovers  (yes very slowly). Equally as we move through H1 next year out of winter and businesses return from Christmas so we will see new spikes in demand and the chances of load-shedding will be more meaningful.

This is a deep structural issue due to the underinvestment by SA in infrastructure between 1994-2001 (or really till 2008) which is now only slowly being rectified.

SA has old generating capacity, much of which is decommissioned after being moth balled or emergency gas generating capacity which is not designed to be run continuously as it is at the moment.

This story may well go away at the end of this week or even tomorrow but it will be back in the near year and is structural - holding back investment and foreign direct investment in the country.

[Whilst I've said above that we may well not see a repeat of 2008 load-shedding its worth being reminded that at that time there was a 20% sell off in the rand and a large volume of bond outflows.]

*Peter Attard Montalto is a director and emerging markets economist at Nomura. Views expressed are his own.


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