The shocking true cost of rolling blackouts — trillions, not billions

The shocking true cost of rolling blackouts — trillions, not billions

 Unsplash | Waldo Swiegers / Bloomberg via Getty Images

By Ray Hartley and Greg Mills


02 Mar 2023  1

Most economists believe last year’s rolling blackouts cost the country between R400-billion and R600-billion, but the true cost of 14 years of systemic failure runs north of R3-trillion.

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Conventional wisdom has it that “load shedding is destroying the economy.” But how damaging are rolling blackouts to the economy? Is it possible to put a number on it? And, if the number is large, what does it mean for the country’s future prospects?

The answer is not as straightforward as it might seem. Depending on who you ask, the cost of rolling blackouts for 2022 could be anywhere between R70-billion (Eskom) or R560-billion (CSIR). Or, if you factor in all of its secondary effects, you could be talking in excess of R3-trillion according to one leading economist consulted for this article.

Let’s start with the “short-term” calculations on the losses directly attributable to rolling blackouts in 2022, the country’s worst year of rolling blackouts so far. (2023 is on track to surpass this by a handsome margin.)

There is little consensus on how to arrive at a number, with a range of methods being used. But most appear to hover around the R400-billion to R600-billion mark. Here are some of them:

  • Senior Researcher at the CSIR, Monique le Roux, believes rolling blackouts in 2022 cost the economy R560-billion. She said this was arrived at using a cost of R87 a kilowatt hour. But it’s not just as straightforward as adding up the hours lost to rolling blackouts and multiplying by a single number. The price of rolling blackouts increases or decreases depending on the stage of rolling blackouts because it is easier for businesses and households to adapt to shorter outages than longer ones. So an hour of Stage 6 rolling blackouts is more costly than an hour of Stage 4 or Stage 2. Towards the end of 2022, Stage 6 began to appear more and more frequently, ramping up the rolling blackout impact exponentially.
  • According to World Bank economists Jacques Morisset and Mariano Salto writing in Business Day, rolling blackouts cost $24-billion (R411-billion) in 2022. They did an interesting exercise which looked at what rolling blackouts would cost in the eight years to 2030 and came up with the staggering number of $192-billion (R3.3-trillion) for that period. Further costs would occur should the EU introduce a carbon tax. “About a third of SA’s exports would be at risk — a potential loss of $8bn per year, or $64bn by 2030,” they said.
  • Alexander Forbes Chief Economist, Isaah Mhlanga said rolling blackouts cost South Africa R4-billion a day when it was at Stage 6. “A qualification of these numbers is that the economic impact is not linear, it can rise exponentially and the impact accumulates quickly. The point is that the cost is enormous,” he was quoted saying.
  • Dr Francois Stofberg of the Efficient Group has estimated that the country’s economy is between 8% and 10% smaller than it should be due to rolling blackouts. Using 2021 GDP figures, this meant that the economy was between R360-billion and R450-billion smaller than it ought to have been, leading to a million fewer jobs being created. These numbers were calculated in July 2022 before the massive rolling blackouts of the second half of 2022.
  • According to Bureau for Economic Research chief economist Hugo Pienaar, an hour of Stage 6 during the working day “is about R500-million”. He did this calculation using the Department of Energy and National Energy Regulators ‘Cost of Unserved Energy’ calculation which estimated losses at around R85/kilowatt hour at the time the estimation was made.
  • Eskom’s calculations use a much lower “cost of loadshedding” — R9.53 per kilowatt hour. According to a technical memorandum by Eskom’s Dr Ulrich Minaar dated April 2021: “To account for planned interruptions of longer duration, as typically found during load shedding events, Eskom commissioned an independent economic study (conducted by Nova Economics) to estimate the Cost of Loadshedding (CoLS). This study utilised econometric methods, based on historic economic, electricity usage and load shedding data and produced estimates for load shedding per economic sector as well as an overall impact on the economy. The overall impact of the Cost of Load shedding based on this study estimated the cost of Load shedding as 9.53 R/kWh.” From 2022 through to September, there were 5751 gWh of rolling blackouts which amounts to 5.751-billion kWh or R54.42-billion. Given that rolling blackouts accelerated in October, November and December — and went to higher stages including Stage 6, this figure is likely to have grown to around R70-billion for the full year.
  • The retail giant, Shoprite has just reported that in the six months to January 2023: “The Group’s additional spend on diesel to operate generators across our Supermarkets RSA store base in order to trade uninterrupted during Stages 5 and 6 amounted to R560-million.” Similar unexpected costs have no doubt been incurred by most businesses. The retailer, Woolworths, reported that it was costing R15-million a month to mitigate rolling blackouts.

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While the raw cost of rolling blackouts due to the interruption of production is high, the multiplier effect this has on the whole of society makes the true impact totally devastating.

Arriving at the true number is nearly impossible.

Pan-African Investments and Research Services CEO Iraj Abedian says there are critical differences between calculating the “short-term costs” and the “medium to long-term costs”

The calculations made by economists quoted above assume that “the nature of disruption was short-term/transitory/unexpected/exogenous.

“In this approach, the econometric estimates focus on “forgone output/income” — and that is a sound approach.”

However, these calculations ought to factor in “the non-pecuniary costs: human loss of lives, cost of impairment due to accidents, malfunctioning of healthcare instruments” among other things. This is the approach taken when estimating the cost of a sudden catastrophic event such as a hurricane or earthquake.

But Abedian believes there are costs that go beyond these estimations. These “medium-to-long-term costs are significantly higher.

“When load shedding becomes chronic and systemically orchestrated, then the above approach to the quantification of costs is problematic and indeed misleading. SA’s load shedding (power shortage) is not exogenous, nor is it unexpected or unpredictable. Technically, it is endogenous, highly expected and predictable with high degree of confidence. For 15 years, engineers and management insiders have informed us, ministers and presidents have cautioned us that we have a system that is old, ageing and facing growing unpredictability and dysfunctionality. Yet, the government has insisted to do nothing and do the wrong thing for the sake of being seen to be doing something.

“The story is well-documented and none other than President Ramaphosa has been at the centre of technical and managerial briefings for over 10 years or so. The upshot is that load shedding has turned into an endogenous and intentional policy failure over a decade or more. In the process, the economy and the society have borne the rising cost of this highly preventable outcome.”

The analogy, says Abedian, is that of a patient identified with early symptoms of curable cancer. “The physician knowingly abstains from taking the curative action, instead engaging in a blend of ideological, religious and ancestorial beliefs. By so doing, the physician enables the spread of cancer, and as the symptoms become more evident, the physician continues on the stubborn course of denying the known medical interventions.”

Calculating the true cost of this chronic failure over 15 years requires considering:

  • The many businesses that have gone broke and the tens of thousands of jobs lost, families made destitute and children’s futures made much bleaker;
  • The failure to transition to “a sustainable and balanced national energy framework” which would have created over 600,000 new jobs in the energy sector alone;
  • The effect of chronic policy failures on the structure of the economy in “loss of investor confidence, citizens’ confidence, the rising cost of restoration of the national power supply integrity leading to a growing sense of despair”. Abedian points out: “This is possibly the single largest item of cost to the socio-economic fabric of the nation. This is extremely hard technically to estimate.”
  • The condemning of a full generation of young South Africans to “face a life of low skill, low income earning, frustration and racial tensions. What is the cost of that?”
  • The loss of skills and motivation as confidence drops, with a long-term detrimental effect on entrepreneurship, job creation and investment flows.
  • The downgrading of South Africa from investment grade sovereign risk to junk status, “in no small measure” due to power shortages, rolling blackouts and policy failures. “The cost of this to the public and private sector alone exceeds R3-trillion to R5-trillion.”
  • The stress placed on the country’s democratic dispensation due to the contribution rolling blackouts have made to the failure to improve the lives of the majority of citizens.
  • The loss of confidence “and trust in that their government cares and acts in the best interest of the nation” by citizens. “Watching their government (the President, the Ministers, and the DGs) being defeated by a technical issue such as energy supply is very depressive for the nation.” ANC internal polls showed that 55% of party supporters no longer believed them even before the latest round of Eskom promises.

Says Abedian: “The emphasis has to be on socio-human costs and the systemic damages to the fabric of the society;  and not merely on financial damage — important as that one is. The failure to focus on societal damage is that it allows the politicians to pretend as if it is all about money and pecuniary damage so that they can say sorry and move on!”

Even if it was all about money, and hardware, the recovery process will take years, given the years of neglect and dithering. Repairing the governance system — the software of procurement and coal contracts — is much more difficult. It demands political change in the character of the ruling party or of the party itself. DM

 Mills and Hartley are with The Brenthurst Foundation.

Source: Daily Maverick