SOUTH AFRICA’S ELECTRICITY AND ECONOMIC DEVELOPMENT REQUIREMENTS PART 1 (Rob Jeffrey) South Africa

SOUTH AFRICA’S ELECTRICITY AND ECONOMIC DEVELOPMENT REQUIREMENTS PART 1

Rob Jeffrey Economic Risk Consultant Mobile: +27 (0) 82 469 5752 Email: rob@economicrisk.co.za Website: www.economicrisk.co.za

Copyright ©2017 Rob Jeffrey No portion of this document may be reproduced in any manner, electronic or otherwise, without written approval of Rob Jeffrey

ABSTRACT AND AUTHOR ............................................................................................................... 5 Abstract .......................................................................................................................... 5 Author: Rob Jeffrey: Economic risk consultant ........................................................ 5 EXECUTIVE SUMMARY .................................................................................................................. 6 Introduction ................................................................................................................... 6 The key issues ............................................................................................................... 6 CORRUPTION, MISINFORMATION, MYTHS MUDDY SOUTH AFRICA’S NUCLEAR DEBATE ................. 8 Introduction ................................................................................................................... 8 First Myth: Economic benefits of renewables ............................................................ 8 Second Myth: No need to increase electricity supply ................................................ 9 Third Myth: The country cannot afford major nuclear or coal power stations ........ 9 Fourth Myth: Costs of renewables are substantially less than coal and nuclear .. 10 Conclusion ................................................................................................................... 12 SOUTH AFRICA’S COAL MINING SECTOR COULD SHRINK BY 46% .................................................. 13 The necessity to reindustrialise and redevelop the mining industry...................... 13 Coal and massive pollution ........................................................................................ 14 Wind power is not cheaper than coal ........................................................................ 15 Energy and mining policy uncertainty....................................................................... 16 The future of coal and coal mining in South Africa to 2050 .................................... 17 A steady and stable coal mining industry ................................................................. 18 Growth for the country and the coal mining industry .............................................. 19 Conclusion ................................................................................................................... 19 SA ON BRINK OF VENEZUELAN-STYLE ECONOMIC DECLINE. HERE’S FIVE REASONS WHY ............. 20 Introduction ................................................................................................................. 20 Policy uncertainty........................................................................................................ 20 High electricity price increases .................................................................................. 21 Flawed electricity policy ............................................................................................. 22 Environmental Issues ................................................................................................. 23 SOUTH AFRICA: GROWTH OR STAGNATION ................................................................................. 27 Eskom’s mandate ........................................................................................................ 27 The debate around levelised cost .............................................................................. 27 Environmental impact of wind.................................................................................... 28 The energy plans of emerging countries .................................................................. 29 The economic damage of renewables ....................................................................... 29 Nuclear and coal are required to ensure SA economic growth .............................. 30 SA MUST ACT IN HER OWN BEST INTEREST AFTER G20 SUMMIT .................................................. 31 Some major causes of world economic problems ................................................... 31 Economic costs of the climate change agenda ........................................................ 31 Economic costs to South Africa ................................................................................ 32 The need for independent research and evaluation ................................................. 32 ANOTHER LOOK AT SOUTH AFRICA’S ELECTRICITY GENERATING OPTIONS ................................... 33 Introduction ................................................................................................................. 33 Literature Review......................................................................................................... 33 Modelling Issues to be considered ............................................................................ 34 Externalities and other considerations ..................................................................... 35 Summary ...................................................................................................................... 36 ONLY SOLUTION IS FOR SA TO BECOME ATTRACTIVE TO LOCAL AND FOREIGN INVESTMENT ....... 37 Confidence is low ........................................................................................................ 37 It can get worse ........................................................................................................... 37 The need for radical change ....................................................................................... 38 Economic Risk Consultant

2

The necessity to focus on growth.............................................................................. 38 PBMR’s COULD BE BUILT IN OLD POWER STATIONS DUE TO BE DECOMMISSIONED ..................... 40 Announcement of further development of PBMR’s.................................................. 40 Economic benefit of PBMR’s ...................................................................................... 40 Potential siting of PBMR’s .......................................................................................... 40 Re-evaluation of all energy technologies .................................................................. 41 Re-examine destructive environmental issues of renewables ................................ 41 SA’s FUTURE DEPENDS ON ENERGY BLEND WITH COAL AT ITS CORE ............................................ 43 The choice of energy mix is critical ........................................................................... 43 The debate about levelised costs .............................................................................. 43 Renewables and subsidies ......................................................................................... 44 Vested interests ........................................................................................................... 45 Future energy potential ............................................................................................... 45 NUCLEAR AND COAL CHEAPER AND MORE RELIABLE THAN RENEWABLES ................................... 46 Introduction ................................................................................................................. 46 Facts and fiction .......................................................................................................... 46 Truth and facts from the real world ........................................................................... 47 The overseas energy experiences ............................................................................. 47 Conclusion ................................................................................................................... 49 WE DENIGRATE COAL AS A STABLE SOURCE OF ELECTRICITY AT OUR PERIL .................................. 50 Modern Coal plants are cleaner and more efficient.................................................. 50 Limited if any impact on climate ................................................................................ 51 Cost of renewable programme and carbon tax......................................................... 51 Political and social consequences of renewables.................................................... 52 REINDUSTRIALISING SOUTH AFRICA IS AN URGENT NECESSITY .................................................... 53 Introduction ................................................................................................................. 53 Objectives and policy.................................................................................................. 53 The future ..................................................................................................................... 54 Conclusion ................................................................................................................... 55 REINDUSTRIALISE SA-CRITICAL FOR ECONOMIC GROWTH, JOBS .................................................. 56 Introduction ................................................................................................................. 56 The slowdown in Economic Growth .......................................................................... 56 Lessons from the past and the need for a new visionary ........................................ 57 Developmental strategy .............................................................................................. 58 The future ..................................................................................................................... 59 Future energy sources ................................................................................................ 61 Conclusion ................................................................................................................... 62 SOUTH AFRICA, THE CONTINENTS FORMER GOLDEN CHILD ......................................................... 64 Foreign Direct investment flows ................................................................................ 64 Slowdown in key goods-producing sectors ............................................................. 65 Foreign investors are losing confidence in the South African economy ............... 66 Measures are required to promote economic growth .............................................. 66 SOLVING ENERGY POVERTY, UNEMPLOYMENT, AND GROWTH CHALLENGES IN SOUTH AFRICA ... 68 Introduction ................................................................................................................. 68 Renewables .................................................................................................................. 68 Nuclear ......................................................................................................................... 69 Independent Power Producers ................................................................................... 70 Environmental ............................................................................................................. 70 Energy Policies in Emerging Economies .................................................................. 71 The Way Forward......................................................................................................... 72 Economic Risk Consultant

3

Conclusion ................................................................................................................... 72 THE BENEFITS AND CHALLENGES ASSOCIATED WITH COAL IN SOUTH AFRICA .............................. 75 The Cornerstone of South African Energy ................................................................ 75 The Cost and Coal Cliffs ............................................................................................. 76 Sasol and CTL ............................................................................................................. 77 South Africa’s Energy Reserves ................................................................................ 77 Challenges ................................................................................................................... 77 Clean Coal Technologies ............................................................................................ 79 Conclusions ................................................................................................................. 80 CARBON TAX HURTS GROWTH, SOCIO-POLITICAL STABILITY AND EXACERBATE UNEMPLOYMENT 82 Negative impact on the goods-producing sectors ................................................... 82 Environmental concerns ............................................................................................. 82 Passing on costs ......................................................................................................... 82 Economic impact ......................................................................................................... 83 Overseas experience................................................................................................... 83 Damage to potential growth ....................................................................................... 84 CARBON TAX, MOVE TO RENEWABLES WILL SLOW DOWN ECONOMIC GROWTH ......................... 85 Negative impact on goods-producing sectors ......................................................... 85 The electricity sectors................................................................................................. 85 European electricity supply ........................................................................................ 85 Carbon tax will increase electricity prices ................................................................ 86 Economic impacts of increasing electricity prices .................................................. 86 Impact of carbon tax and renewables........................................................................ 87 CARBON TAX, MOVE TO RENEWABLES WILL SLOW DOWN ECONOMIC GROWTH ......................... 88 Introduction ................................................................................................................. 88 The economic impact on GDP and employment ...................................................... 90 Impact due to reduction in fixed investment............................................................. 91 Price and the economic impact .................................................................................. 92 Impact due to renewables ........................................................................................... 92 The combined economic impact on GDP and employment .................................... 93 The damage to economic potential............................................................................ 93 The potential total economic impact ......................................................................... 94 The serious potential economic impact of Carbon Tax and renewables ............... 95 CONCLUDING COMMENT: THE CHOICE SOUTH AFRICA FACES-POTENTIAL GROWTH OR STAGNATION .............................................................................................................................. 98 BIBLIOGRAPHY .......................................................................................................................... 100 GLOSSARY ................................................................................................................................. 108 DISCLAIMER AND COPYRIGHT ................................................................................................... 110

Economic Risk Consultant

4

ABSTRACT AND AUTHOR Abstract The three major objectives of the country are poverty alleviation, reducing inequality and raising standards of living. These objectives can only be achieved by maintaining a high rate of economic growth, thereby reducing levels of unemployment and raising the standard of living. Electricity is a necessary but not a sufficient condition for economic growth. The necessary condition for sustainable economic growth is that there is a stable and secure supply of electricity at the lowest effective economic cost when delivered to the user. The sufficient condition requires that economic, social and political conditions must be put in place to foster and encourage domestic and foreign investment, thereby creating demand for productive and economically efficient industries. This document consists of a number of published articles by the author. They examine a number of facts which are either little known or insufficiently understood or emphasised. They cover critical issues which need to be carefully considered when making any long-term correct electricity generating sources for South Africa. The articles are based on reviewing scientific observations and peer reviewed reports written by internationally recognised scientific experts in their respective fields. A list of references appears at the end. The articles are as published except that additional charts and some data updated have been added as originally, they could not be published because of space considerations. In essence, this document is a summary of research undertaken by the author of international published scientific articles and reports. It is anticipated that the document could make an important contribution to electricity, energy policy and planning issues in South Africa.

Author: Rob Jeffrey: Economic risk consultant Rob is the former Managing Director of Econometrix and has set up his own independent Economic Risk Consultancy with a focus on economic policies and development, developing economies and on the electricity and energy needs of South Africa. He has been the author or co-author of numerous reports and papers on matters related to important national industrial, energy related and economic policy development.

Areas of specialisation include global and domestic economic trends and strategies to foster economic growth and the development of vital sectors of the economy including industry, mining, agriculture and electricity in South Africa. An important focus has been the key global and domestic trends affecting economic and industrial policy including globalisation, the implications for pricing in South Africa and the importance of major industrial projects and small business development on economic growth and employment. Rob is on the Executive Council of the Fossil Fuel Foundation and was Chairperson of the Constructional Engineers Association (CEA), the CEA representative on SEIFSA, an executive member of the Association of Steel Merchant Stockholders, as well as being active on several other councils. For more than twenty years, he has been involved in consulting to a range of government, corporate and private clients in investments, business and economic analysis, strategic planning and organisation structuring. Rob Jeffrey matriculated at St John's College, Johannesburg and graduated with a B.Sc. in Mathematical Statistics and Applied Mathematics at the University of the Witwatersrand. He won a scholarship to the University of Cambridge University and obtained an MA degree in Economics and later completed a MBL Cum Laude at the University of South Africa.

ACKNOWLEDGEMENTS This report is based on the research done by Rob Jeffrey and papers written by many international experts.

Economic Risk Consultant

5

EXECUTIVE SUMMARY Introduction This report assesses the short, medium and long-term economic requirements of the economy and makes recommendations regarding the correct energy sources for producing electricity to meet the economic and social objectives of the country. This report has considered impacts of the proposed IRP 2016. The report concludes that all three scenarios the IRP 2016 proposes will cause substantial, fundamental and irreversible structural damage to the South African economy. The findings regarding these issues constitute the written economic opinion of the author regarding the economic needs of the country and the impact of the IRP 2016 proposed base case, the associated scenarios and the resulting restructuring of the economy and industry, any potential carbon tax and other structural changes this implies. These views are expressed in the articles written and appearing in this document.

The conclusions are based on the economic assessment that the South African economy cannot afford the envisioned renewables, particularly wind energy or the carbon tax either now or soon unless there are major changes in technology. The fact remains that the three alternative proposals in the IRP 2016 consisting of a Base case, Scenario 1 and Scenario 2 will permanently damage the SA economy, each successively increasing the damage. The alternatives and proposed carbon tax are poised to take South Africa in the wrong economic direction, slowing economic growth and increasing unemployment. This will ruin South Africa economically, politically and socially for a generation. The published articles analyse several of the most critical issues involved in making decisions regarding the electricity and energy future of South Africa.

The key issues The important conclusions and recommendations include: •

There is a major structural problem in the economy where the goods-producing sectors, namely mining, manufacturing, industry, agriculture and agricultural processing are growing far too slowly compared to the services sectors, namely transport, retail, community and government services.

•

The lack of security of supply, the higher cost of electricity and the uncertainty regarding both future supply and price are major contributors to the lack of investment and slow economic growth.

•

The country cannot move from being a developing country to an industrialised country through policy changes. This is a process.

•

The slow growth in the goods-producing industries leads to slow overall economic and employment growth.

This primarily affects the less skilled in the work force.

•

The structural imbalance in sectoral economic growth will lead to continued low sustainable economic growth, low employment growth, increasing current account deficits, continued depreciation of the Rand and higher levels of inflation.

•

The complex impacts of unnecessary real price increases in electricity would result in a deterioration in the current account of the balance of payments, already at an excessively high level, and lower economic growth.

•

Renewables in the form of wind and solar suffer from great variability and are not predictable to any great extent. They only supply power approximately 25% to 35% of the time.

•

Renewables must have full back-up electricity either in the form of Combined Cycle Gas Turbine (CCGT}, open cycle gas turbine (OCGT), diesel or excess power from other sources.

Economic Risk Consultant

6

•

Many other countries including India, Bangladesh, Indonesia and China have a clear focus on continuing their industrialisation programmes. Whilst they do have substantial renewable and nuclear programmes, those countries that have fossil fuels clearly focus their major electricity generating programmes based on fossil fuel, primarily coal fired power stations. This is anticipated to continue for the near future to 2035 and potentially beyond.

The potential economic impact on investment is affected by the loss of confidence caused by various policies affecting the business investment climate in South Africa. Major factors include: •

With the correct policies and adequate and secure electricity growth, South Africa should have a potential sustainable GDP growth rate of a minimum of 4.1% per annum or more. Because of several policy issues including insufficient security of supply and non-competitive prices of electricity, the carbon tax and the switch to more costly renewables and other investment adverse policies, South Africa’s sustainable GDP is unlikely to exceed 2.8% per annum and has recently dropped to below 2.0%.

•

Renewables, carbon tax and the impact of policies will have a detrimental impact on the country’s goodsproducing industries, particularly mining, mining beneficiation, manufacturing, agriculture and its agriprocessing sectors. By 2035, this could result in a GDP of between R1.0 trillion and R1.4 trillion less than what should be achieved, whilst employment levels could be approximately 5.0 million lower than the levels that should be possible. 20 million dependents could be affected.

•

South Africa’s economic growth rate is stuck in the low region of emerging countries’ economic growth range at approximately 2.5% per annum whereas other countries classified as emerging economies have economic growth rates exceeding 4.5%. Many of the current policies affect labour and investment. There are many such policies that conflict with the key objectives of the country.

•

Driving a greener economy artificially through a carbon tax and other disincentives for business force higher prices into the system. They will not create a more labour-intensive economy. In fact, they will do exactly the opposite. Many policies discourage South Africa as a business destination and will reduce investment growth, not only in major developments, but also in smaller more labour-intensive businesses.

•

Many countries are not endowed with the natural energy and other resources that South Africa has in abundance. Clearly, a combination of rich resources and low growth indicates that something is radically wrong with the country’s political, social and economic policies and its energy and electricity generation policies.

•

Over 70% of South Africa’s exports come from the goods-producing sectors. South Africa is a well-traded economy with a high import and export component. Exports eventually pay for the high import demand in a sustainable manner.

•

The planned major move towards more expensive and variable unpredictable renewables will be just as damaging to the economy.

•

The economic realities of developing economies such as South Africa are that, for the near future, these economies require security of supply of electricity at the most cost-effective possible prices to develop their energy-intensive goods-producing industries and raise their economic growth rates in a sustainable way and thereby their standards of living in a modern competitive global economy.

Producing electricity at the lowest, efficient, cost-effective price with security of supply is the single biggest employment-generating decision policy-makers can make.

Economic Risk Consultant

7

CORRUPTION, MISINFORMATION, MYTHS MUDDY SOUTH AFRICA’S NUCLEAR DEBATE https://www.biznews.com/thought-leaders/2017/11/09/nuclear-debate-rob-jeffrey/ JOHANNESBURG — Providing an alternative view on South Africa’s raging nuclear debate, Rob Jeffrey tries to cut through the noise and provide a logical reasoning for why nuclear can play a role in the country. While Jeffrey says the scourge of corruption around a nuclear deal in South Africa should be avoided at all costs, he argues that if South Africa wants to grow its economy in future, it’s going to need more energy capacity. A key part of that capacity should come from nuclear and (cleaner) coal, says Jeffrey. He is very much going against the current tide of thinking here. Even top energy analysts like Chris Yelland have thrown their weight behind renewables rather than nuclear. But it’s always good to hear two sides of the story. – Gareth van Zyl Introduction Unfortunately, correct energy choices are being lost in a cloud of myths and misinformation. The recent statement by the former Minister of energy gives an opportunity to explore these myths more thoroughly. The Minister reported that at the end of July the combined installed generation capacity of renewable energy in South Africa provided by independent power producers (IPP’s) stood at approximately 3200MW across 58 sites. 27 of these sites were based in the Northern Cape, 13 in the Eastern Cape and nine in the Western Cape. As at December 2016 according to the CSIR renewable capacity available was approximately 1 460 MW wind, 1 474 MW solar PV and 200 MW Concentrated solar power (CSP). The difference it can be assumed was made up of small hydro and landfill gas.

First Myth: Economic benefits of renewables The first major myth is that renewable build programme has brought great economic benefit to the country. Using the figures provide by the Minister the capital build costs was estimated at approximately R200 billion. It has been estimated that 40%, or R80 billion, was sourced locally and that approximately R120 billion was spent overseas purchasing capital equipment and other expertise.

The expected annual payments would be some R30bn per year back to the project financiers. Very little on-going employment is created by windfarms once they have been completed. It is true that while there were power constraints renewables provided a temporary economic benefit. This could have been provided by coal, gas or any other power sources if available.

The long-term sustainable impact is the exact opposite. The country now has a surplus supply of electricity.

However, because power has to be purchased from these windfarms, whether required or not, it will reduce Eskom coal procurement from coal mines by some R6 billion per annum. Power from power stations utilising coal need to be closed down despite the fact that they produce electricity at a far lower cost than the power provided by these windfarms.

Read also: Are anti-nuclear activists blinded by Zupta fear? Why SA needs nuclear power – economist No exact figures are available, but it can be estimated that there would be a loss of approximately 3000 jobs in the coal mining sector and a further 13000 jobs in the economy. The total loss of employment in the economy would be approximately 16000 jobs. These job losses deprive financial support for 12000 dependents in the coal sector alone and possibly 64000 dependents in the total economy.

Direct compensation to employees would fall by about R2.5 billion, with a knock-on effect primarily in the region where such mine closures take place. Payments on social benefits need to be increased. These naturally would need to be funded by the taxpayer. Windfarms once completed in the meantime would not be providing Economic Risk Consultant

8

significant employment. This is certainly not working towards increasing employment and workers remuneration in the South African economy. It is also not in keeping with the National Development Plan (NDP) objectives and strategy. Further analysis reveals the major beneficiaries of renewables are in fact financial institutions and naturally the foreign industrial suppliers in terms of capital repayments abroad via government guaranteed index linked payment arrangements whether the electricity is required or not.

Second Myth: No need to increase electricity supply The second myth is that because South Africa now has a surplus of electricity there is no need to take any major decisions to increase electricity supply.

It certainly is true in the immediate short-term that there is no need to increase electricity supply. This is not due to good planning, it is merely due to the fact that the country is in the economic doldrums of its own political and economic planning making.

For this we must thank the politicians, and the fact that they are not setting the right economic and investment conditions for the economic growth necessary to achieve the country’s economic growth objectives, so ably set out in the NDP. However, if the NDP targets of over 5% GDP growth per annum is ever to become a sustainable reality, and if the country is to avoid becoming a failed state, it needs to be planning for the higher NDP targets. This 5% growth target needs to be achievable on a sustainable basis by at least the end of a five or six-year period. It also requires such growth to be focussed on the energy intensive goods producing, primarily mining and manufacturing sectors.

In short South Africa needs to reindustrialise. This is the only way that South Africa will ever rise again and create prosperity for all its citizens.

Read also: Rob Jeffrey: Renewables not SA’s panacea – time to put country first Electricity is the necessary condition for economic growth and such levels of growth would require a substantial and regular increase in electricity supply. That requires detailed planning and ordering the correct energy choice in the very near future. Reliable secure electricity at competitive prices is the necessity. This cannot be provided by renewables, which are intermittent, variable and unpredictable, and in the case of wind only supply power on average less than 35% of the time. Clearly, the go ahead for major power station build programmes, involving a mix of nuclear and clean coal power stations, needs to be given in the early half of next year 2018. Such power stations require at least five or six years to plan and build if South Africa is ever to stage a sustainable economic recovery.

Third Myth: The country cannot afford major nuclear or coal power stations The third great myth supported by abundant misinformation distributed by idealists and those with vested interests in the renewable industry is that the country does not need nor can it afford major nuclear and coal fired power stations. Furthermore, they advocate that the future solution lies with renewable energy which are cheaper and more affordable.

The information supplied by the minister proves otherwise. The total capital cost involved was approximately R200 billion. This works out at R62.5 billion per MW with a life of only 20 years. Estimates for the capital cost for Kusile at the end of December 2016 were put at R239 billion. The nameplate capacity for Kusile is 4800MW. This puts the cost per MW at R49.8 million per MW for a modern coal plant with a life of 30 plus years. There seems to be no clear indication of the capital cost of a nuclear plant. Most observers put the capital cost of the envisaged Economic Risk Consultant

9

fleet of 9600MW of nuclear plant (supplier unknown) at approximately one trillion Rand. Applying the same formula, this places the capital cost of nuclear power at R104.2 billion per MW for a power system with a life of at least 50 years.

However, wind has a load factor of only 35%, solar is about 26%. Coal has a load factor of 80% and nuclear 90%. These adjustments must be made and one would arrive at renewables R178 million/MW, Coal at R62 million/MW and nuclear at 116million/MW. However, the important component of life must still be included in the calculation. The real capital cost must be spread over the electricity delivered over the lifetime of each technology. Renewables have a short life of 20 years, coal approximately 30 years and nuclear greater than 50 years. The life of each could be extended somewhat. These figures dramatically alter the figures.

The final capital costs work out at 1.02/kWh for renewables, R0.24/kWh for coal and R0.26/kWh for nuclear. The answer is clear-cut coal is the cheapest and wind is the clear laggard. The true capital cost of renewables based on Overnight Capital Costs performance, the only true measure, Nuclear Coal Wind SolarPV are the highest by far. It is true that 90.0% 82.0% 35.0% 26.0% costs for renewables have dropped Real load factor 60 30 20 25 dramatically, but the true capital cost Life 0.15 0.15 0.11 0.08 or renewables based on performance, Total capital cost per nominal R/kwh 0.17 0.19 0.31 0.31 life and output, is still higher than for Totat capital cost per real R/kwh coal or nuclear. So much for the myth that South Africa cannot afford nuclear or coal or that renewables are far cheaper than other sources of power.

Clearly in the past renewables have been a very expensive option for the South African economy. When there was a shortage of electricity they certainly gave the country some economic benefit but in days of excess electricity or a properly managed supply system they prove to be expensive white elephants, paid for by the poor and creating unemployment in other sectors of the economy.

Fourth Myth: Costs of renewables are substantially less than coal and nuclear This leads to the fourth myth which is accompanied by loads of misinformation. Operating costs are low for renewables and far higher for coal and nuclear. The argument then becomes one of comparing Levelised Costs of Electricity (LCOE). This is another flaw and myth that leads to much public misinformation championed by idealists, vested financial and business interests and overseas experts with little interest in the long term sustainable economic development of the South African economy. There are numerous papers which state that LCOE is not a sound methodology to compare highly variable and interruptible any sources with electricity supplied by reliable and virtually continuous energy generating technologies.

It is estimated by the CSIR that the LCOE, which takes capital cost and all the above factors into account, for wind and solar is 62c/kWh, coal is R1.05/kWh and nuclear R1.30/kWh. Renewables apparently now becomes the clear winner. However, renewables need full back up. Again, there are convoluted methodologies to hide their true cost. A mix can alter these costs. There are more complex calculations that appear to bring renewables back as a viable option in a mix. The fact remains that, using wind as an example, renewables need 100% back up. Despite technological improvements, this leads to huge grid and integration problems, which substantially increase the real costs of renewables. The reports

Economic Risk Consultant

10

avoid the issue that the renewable industry then effectively receives a hidden subsidy from more reliable energy sources to cover these weaknesses.

A study entitled “Nuclear Energy and Renewables: System Effects in Low-carbon Electricity Systems investigated” estimated the additional grid costs alone would amount to more than R0.3/kWh. Various in-depth studies by experts around the world substantiate this fact. Some papers include a recent Australian Research study by GHD and Solstice Development Services entitled “HELE Power Station Cost and Efficiency Report.” A report entitled ‘Critical Review of The Levelised Cost of Energy (LCOE) Metric’, by M.D. Sklar-Chik et al, South African Journal of Industrial Engineering December 2016 concludes that “LCOE neglects certain key terms such as inflation, integration costs, and system costs.” They note “Many international reports prove that such electricity supply is extremely expensive due to its variability, interruptibility, inefficiency and its requirement of 100% backup”.

Another study by B.P. Heard et al entitled a ‘Burden of proof: A comprehensive review of the feasibility of 100% renewable-electricity systems’ concluded that “there is no empirical or historical evidence that demonstrates that such systems are in fact feasible”. They also reviewed the CSIR proposals. The study concluded “both the use of the terms ‘technically feasible’ and the attempted costing of the proposed system are inappropriate and premature”.

A research report by D. Weißbach et al (2013) on Energy Returned from Energy Invested (EROI) in Germany showed that renewables are uneconomic and will lead to economic stagnation.

There are many methods of calculation trying to prove one side of the argument or the other. A simple or “simplistic” method using the load factor alone, gives the cost of wind at R1.77/kWh, compared to coal of R1.31/kWh and nuclear at R1.44/kWh. This is purely a guideline estimate and does not consider the additional grid costs above. More complex methodologies taking risk of severe outages into account put the costs of wind at R2.52/kWh, coal R1.10/kWh and nuclear R1.33/kWh. The true figures probably lie somewhere between. There is nothing like the test of global reality. In 2016, it the prices paid by industry in Germany were 52% higher than France (nuclear) and 86% higher than Poland (coal). The average estimates above are close to this global reality.

If any further proof is required, it is a reality that there is no country in the world with high penetration renewables, where electricity prices are cheaper than coal or nuclear-powered electricity where available. This includes countries such as Denmark, Germany, Ireland, China, India, the Asean countries and states like South Australia and California. Many are experiencing energy poverty and deindustrialisation.

In summary, the rankings are quite clear, wind again becomes the most expensive option, Renewables, despite the protestations of many so-called environmentalist, are not capable of driving reindustrialisation and creating conditions suitable for high economic growth in a country such as South Africa. This article has not touched on the vast land area required for windfarms and their grids and the devastating impact on the environment that goes with this.

Economic Risk Consultant

11

Conclusion Emerging economies need to focus on those technologies which are efficient and effective. In South Africa these are nuclear and coal. It is a separate exercise to ensure that all technologies are under all circumstances kept free of corruption at all levels. Corruption has to be stamped out. It is essential that the correct electricity generating sources are selected. This must be made on the basis of efficiency, effectiveness and long-term cost and viability free of any corruption. The country must focus on raising its economic growth rate by ensuring it has sustainable secure supply of electricity at the lowest economic cost. This must be accompanied by the necessary supporting condition fostering domestic and foreign investment into its economy. The final nail in the coffin for South Africa is that increased penetration of wind will lead to a rapidly rising import bill for gas imports and the demise of its coal mining industry if not the entire mining industries. These are catastrophes which could ensure that the future of South Africa will move towards rising unemployment increasing poverty and increasing social and political instability. South Africa needs to focus its energy plans on HELE or clean coal, nuclear, large solar and limited gas apart from some use of other sustainable energy sources such as biomass, Hydro and pump storage.

Rob Jeffrey is an independent economic risk consultant. He is the former MD of Econometrix and continues to consult for them.

Economic Risk Consultant

12

SOUTH AFRICA’S COAL MINING SECTOR COULD SHRINK BY 46%

http://www.engineeringnews.co.za/article/opinion-south-africas-coal-mining-sector-could-shrink-by-462017-10-06 6th October 2017 In this opinion article, independent economic risk consultant Rob Jeffrey argues that the mining industry and coal industry need to fight for their very future otherwise all is lost.

Few people realise that future economic, political and social prosperity are at currently stake. Decisions made in the near future will drastically affect the country for a generation, let alone a decade. It is necessary to examine recent economic trends in order to understand the extent of the county's problems and give guidance to on the decisions that need to be made. https://www.miningreview.com/features/exclusive-future-coal-south-africa-literally-rests-air/ 9 October 2017 It is perfectly true that coal-fired power stations, and their associated mining operations, used to be massive pollutants of the air and their environment. The coal industry's fate is dependent on three major highly flawed arguments being used against it.

The necessity to reindustrialise and redevelop the mining industry The past few decades have seen radical deindustrialisation of the economy.

The mining sector has shown little or no growth for decades. Since 1986, the mining sector has fallen from representing about 13% of gross domestic product (GDP) to 7% of GDP, the secondary sector has fallen from 30% to approximately 21%. The tertiary sector has grown from 51% to 69% of GDP. The last seven years since 2008 have seen the situation worsen, with GDP growth falling to below 2%. Growth in mining and manufacturing has been negligible, while agricultural growth has averaged only 1% a year.

Financial services and personal service growth have averaged 2.4% and 2.8% a year respectively and government services 3.3% a year. The declines in these two sectors have resulted in serious structural economic problems.

The mining and manufacturing industries account for over 60% of the country's exports. Little wonder that South Africa faces a deficit on its balance of trade.

These two industries and agriculture tend to employ proportionally fewer skilled workers.

Since 1995, the population has grown from 45-million to 56-million, but unemployment has grown from 3.7million to 7.7-million. Since 2008, only half a million jobs have been created, almost all of which have been in the services sector, primarily in the public and government sectors. Unemployment is forecast to increase by over one-million by 2020. If ongoing, this is unsustainable.

Quite correctly there have been calls from these major economic sectors to government to assist in creating growth in these sectors. The Energy Intensive Users Group of Southern Africa (EIUG) has called for urgent Economic Risk Consultant

13

intervention to halt what it describes as the current “downward spiral” of a shrinking electricity sales base and increasing and unaffordable electricity tariffs.

The EIUG represents 32 mostly mining and industrial companies accounting for more than 40% of the country’s electrical energy consumption and its appeal comes against the backdrop of Eskom’s latest application for a 19.9% tariff increase from April 1 next year. The mining industry is in decline. The Chamber of Mines has made clear its concerns. Policy is one major issue.

There are some that believe the mining industry is past the point of no return. The issue is not just the decline. It is the loss of skills, intellectual capital, infrastructure and in particular organisational and planning ability at government level. It has been said that mining companies are turning to other countries that are more investor friendly and are open to ideas for development.

Apart from policy issues, in the future, one factor at the core of this reindustrialisation and redevelopment process is electricity. These industries are electricity intensive. If growth is to be restored, they require secure baseload electricity at competitive prices. Current plans being put forward by the Council for Scientific and Industrial Research (CSIR) and appearing in the draft Integrated Resource Plan 2016 will see a major decline in one important component of the mining sector, namely coal. This will have major ramifications throughout the economy and will detrimentally impact the very sectors that most urgently need to be developed.

Unfortunately, the coal industry's fate is being determined by and based on three major, highly flawed arguments being used against it.

Coal and massive pollution The first flawed argument is the view that coal-fired power stations cause mass pollution. It is perfectly true that such power stations, and their associated mining operations, used to be massive pollutants of the air and their environment. However, over the years, Eskom has made enormous progress in reducing pollution.

Particulate matter and emissions have been reduced 90% over 35 years. New High Efficiency Low Emissions (HELE) or ‘clean coal’ power stations will reduce pollutants further. As an example, the installation of flue-gas desulphurisation (FGD) at Kusile removes oxides of sulphur, such as sulphur dioxide.

Not only that, but carbon dioxide (CO2) emissions of HELE power stations are some 30% to 50% less than previous generation power stations. This puts them in a category close to gas power station emissions.

Economic Risk Consultant

14

In any event, CO2 is not the environmental disaster the ideologists claim. There is substantial research on this subject by world renowned experts supporting this view.

They include Dr Patrick Moore, co-founder of Greenpeace and Dr James Lovelock, proposer of the Gaia Hypothesis.

Apart from the well-known Milankovic cycles, solar experts in Asia, the Middle East and parts of Europe believe it is the sun that is the major cause of climate change. According to Dr Neil Frank, former director of the US National Hurricane Centre, the centre has, over the past three-and-a-half years published over 400 papers that discredit CO2 and support natural cycles of the sun.

Among many others, the conclusion of a landmark paper – entitled 'Emission budgets and pathways consistent with limiting warming to 1.5 °C', by Richard J Miller et al, in Nature Geoscience, 2017 – is that the computer models have overstated the impact of CO2 on climate and that the planet is warming more slowly than predicted.

Wind power is not cheaper than coal The second blatant flawed argument is the myth that wind power is far cheaper than coal-fired power or nuclear power. This is totally dispelled by a recent Australian Research study by GHD and Solstice Development Services entitled 'HELE Power Station Cost and Efficiency Report', which estimated that with efficient construction and production, generation costs would be between 41.3c/kWh and 80.5c/kWh compared to Kusile estimates running at about R1.20/kWh and latest estimates for nuclear of R1.20/kWh. These domestic costs could clearly be substantially reduced.

Furthermore, this price is for power generation over 80% of the time. It is, therefore, far cheaper than wind and solar at 65c/kWh but which generates power less predictably and for less than 35% of the time. A simple calculation shows that on a comparable basis, the equivalent price for power 80% of the time is a minimum of R1.48/kWh. The CSIR has plans for high-penetration wind in South Africa involving over 100 000 MW of wind energy capacity covering over 100 000 km2 of land. Apart from the huge environmental damage, a report entitled ‘Critical Review of The Levelised Cost of Energy (LCOE) Metric’, by MD Sklar-Chik et al, in the South African Journal of Industrial Engineering, December 2016, concludes that “LCOE neglects certain key terms such as inflation, integration costs and system costs”. They note, “Many international reports prove that such electricity supply is extremely expensive due to its variability, interruptibility, inefficiency and its requirement of 100% backup”.

Economic Risk Consultant

15

Another study by BP Heard et al entitled ‘Burden of proof: A comprehensive review of the feasibility of 100% renewable-electricity systems’ concluded that “there is no empirical or historical evidence that demonstrates that such systems are in fact feasible”. They also reviewed the CSIR proposals. The study concluded “both the use of the terms ‘technically feasible’ and the attempted costing of the proposed system are inappropriate and premature”.

Germany is trying to develop new markets in Africa and South Africa. Yet, Germany have now curbed their own domestic renewables expansion plans. This is not surprising. They are experiencing growing integration costs and other problems associated with large-scale wind. Fritz Vahrenholt in his study entitled ‘Germany’s Energiewende: A Disaster in the Making’ sums up the situation. “It will take a long time to repair the severe damage caused by a misled energy policy”.

In 2016, it must be noted that the prices paid by industry in Germany were 52% higher than in France (nuclear) and 86% higher than Poland (coal). Clearly, South Africa cannot allow this to happen. A research report by D Weißbach et al (2013) on energy returned from energy invested (EROI) in Germany showed that renewables are uneconomic and will lead to economic stagnation, whereas the EROI of coal and nuclear are in territory that fosters growth.

It certainly is a fact that all major economies with fossil fuel reserves are substantially increasing their electricity supply from these resources, including India, China, the Asean countries, Poland and now the US. In the US, the long-term decline in employment has been reversed. Energy actions have paid job dividends in coal country. The Department of Labour reported mining jobs in America grew by 11 000 in March and by another 7 000 in May. In June, EPA Administrator Scott Pruitt said the US had since the beginning of 2017 added more than 50 000 jobs throughout the coal supply and use chain.

Energy and mining policy uncertainty The third major problem that all business, but particularly the mining industry, including the coal industry, face, is the current policy uncertainty in the country. This is a critical issue that is quite correctly being raised by the Chamber of Mines. There is a complete lack of confidence caused by political and economic policy uncertainty.

Economic Risk Consultant

16

A recent survey shows that business confidence in South Africa has plummeted to its lowest level in more than 30 years as political uncertainty, unemployment and dwindling trade weighed heavily.

South Africa occupied the eleventh position out of the top 25 rated countries in the AT Kearney Foreign Direct Investment (FDI) Confidence index in 2012. In 2016, it dropped to the twenty-fifth position.

South Africa’s has also declined on the 2017 Fragile States Index. Ten years ago, South Africa was ranked in the stable category, but now falls in the elevated warning category. It is hardly surprising that the three key ratings agencies S&P's, Moody’s and Fitch have all downgraded South Africa and have it on a negative watch. The list of policy uncertainty includes State capture and corruption, the potential implementation of Mining Charter Three, the threat of interference to the independence of the South African Reserve Bank, attacks on “white capitalism,” as well as a host of often well-meaning but damaging regulatory laws that often interfere in various markets ranging from labour through to purchasing and investment policies and hamper market efficiency and effectiveness.

The future of coal and coal mining in South Africa to 2050 The above leaves the mining industry and the coal industry, in particular, in a deeply concerning and uncertain position. There are basically two stark choices.

The first major shock could be a decision to effectively close all coal-fired power stations between now and 2050 and go with renewables. This decision will lead to a steady decline throughout the mining industry, particularly the coal mining industry. In fact, the mining industry is already in a perilous situation and such a decision could well be the final nail in the coffin for the mining industry.

The decision would ensure substantially slower growth throughout the entire economy and will have an extensive negative effect on the industrial and manufacturing sectors. In the short term, the impact on coal exports may be insignificant, in fact they may even enhance exports. Eventually, however, lack of domestic demand will affect competitiveness. Any major decline of the coal industry and industries associated with it will have a profound negative impact on the economy. It is estimated that Eskom’s demand for coal would fall away totally by shortly after 2050, once Kusile and Medupi are retired. The coal sector would shrink by effectively 46%. This will reduce the GDP of South Africa by over 2.5% or R75.2-billion given the direct, indirect and induced impact. Compensation of employees would be reduced by R25.1-billion, while investment is expected to be R3.8-billion lower a year.

Government tax income would be reduced by R16.2-billion and the results show a loss in employment of 29 000 jobs in the coal mining industry, and almost 162 000 jobs in the economy with almost one-million dependants affected. The rising costs of energy due to renewables would reduce general economic growth and negatively impact other commodities and could reduce employment increases even further.

Economic Risk Consultant

17

South Africa’s coal reserves are estimated at around 53-billion tons. Nominal sales from coal mining was an estimated R110.6-billion in 2016, an increase of 314% from 2003. This could fall back to approximately R60billion.

Coal mining accounted for 26.7% of the total value of mining production in 2015, making it the most valuable in terms of sales of the 14 main mining commodities tracked by Statistics South Africa. Among other key requirements, mining, manufacturing and industry need security of supply of electricity at competitive prices. The only two electricity generation sources of energy that can achieve these objectives in this country are ‘clean’ or HELE coal and nuclear. The discounted value of coal reserves is more than R1-trillion. The value of uranium reserves is probably equal to this.

The drive for wind would deprive South African citizens of these benefits.

Should incorrect political and economic policies be followed, the above figures could be far worse. South Africa could move into a full medium-term recession. This would result in political and economic instability with dramatically rising levels of unemployment and poverty.

A steady and stable coal mining industry It is to be hoped that policy-makers do not make the former decision. The country, in practice, should over the next 35 years replace and upgrade its coal fleet. Wind should be virtually abandoned, except for special situations, and about 38 000 MW of new HELE coal power stations should be built. As set out in the IRP2016, nuclear would constitute about 20 000 MW and the balance would be solar, gas and the other power generation sources. Coal would constitute only 40% of the electricity generation fleet compared with the current 90%.

Overseas German windfarm experts, even though they have been to this country, together with their local idealistic support and vested financial interests, do not seem to realise that South Africa is an emerging and still industrialising country with high unemployment. Indeed, recently it has been deindustrialising and needs to reindustrialise again. Renewables will never be able to drive or support this process.

In addition, large-scale wind farms are one of the most environmentally damaging renewable energy source. A factor not considered by green idealists or wind farm supporters.

The local goods producing industry, namely mining, manufacturing, agri-processing and agriculture are critical for future growth, lowering unemployment and ensuring exports and import replacement to support the current account of the balance of payments.

The IRP base case foresees only 2.2% a year electricity growth which means the maximum GDP growth rate will be no more than 2.9% a year. Unemployment and poverty will therefore continue to rise. As far as the coal industry is concerned, at least there could be a constant or even slightly increasing demand for coal for power stations.

Other demand growth, although small, in comparison should see moderate growth.

Economic Risk Consultant

18

Export demand would continue to increase at a low pace but it would be into a highly competitive market.

The industry would be vital for the future development and growth of the country. It would provide a stable environment where both junior minors and traditional mining sources could continue to earn a return.

The above growth path assumes that some of the serious policy decisions listed above are somehow overcome.

Growth for the country and the coal mining industry This alternative scenario assumes that the country makes all the correct policy decisions to restore confidence and to make this country attractive for investment again, particularly for mining and industry. The results could be startling. GDP growth could be increased to over 4%. This would require growth in electricity supply increasing at 3.2% a year.

Unemployment and poverty would both be reduced. New HELE coal-fired power stations would need to be increased by 53 550 MW. Coal mining would experience domestic demand growth of 1.5% a year and the industry and the country will truly prosper again.

Conclusion This last scenario is what is required if the country is to exit the unemployment and poverty trap it is in.

Unfortunately, this scenario is a long shot but it should not be.

India and the Asean countries are achieving this and are primarily basing their energy source growth on HELE clean coal power stations. They are set to double their coal-fired electricity generation over the next 30 years. South Africa could do it if there was the will and if policy-makers were willing to work with business to achieve it.

Despite wishful thinking the only true means of achieving security of supply of electricity at competitive prices in South Africa for decades to come is via coal and nuclear generated power. A policy decision to embark on largescale wind is not feasible in any event, as it requires the full back-up of gas. At this stage, sufficient domestic gas deposits have not been found. Viable shale gas deposits have not been proven. Imported gas would create severe economic and balance of payments problems and would be economically unaffordable.

Furthermore, large-scale wind would lead to the destruction of the South African coal industry. The detrimental economic impact of this policy decision cannot be easily contemplated. These are two policy decisions which will be economically catastrophic for the country.

The purpose of this article is not to spread gloom and doom. It is to make quite clear the stark choices the country faces. The mining industry and coal industry need to fight for their very future otherwise all is lost. In fact, all businesses need to look at the facts, as these future policies will affect the entire economy for a generation.

Economic Risk Consultant

19

SA ON BRINK OF VENEZUELAN-STYLE ECONOMIC DECLINE. HERE’S FIVE REASONS WHY https://www.biznews.com/sa-investing/2017/09/11/sa-venezuela-economic-decline/ LONDON — British media is today full of praise for offshore wind farms, forecasting that their cost advantage exposed in the latest Government subsidy auction sounds the death knell for the UK’s controversial Hinkley Point nuclear plant. Offshore windfarms are now coming in at £57.50 per MWh, half the level of Government guarantee required in the auction two years ago. Hinkley Point requires a guaranteed price of £92.50 per MWh from Westminster. But there are two sides to every story. And in this well-argued contribution, economist Rob Jeffrey presents the case against windfarms, specifically in South Africa – and, by definition, the case for nuclear and coal.

He makes the case in the context of an electricity equation which has gone horribly awry – and an economy which he warns is on the brink of repeating the disaster of Venezuela. – Alec Hogg Introduction The future GDP growth in South Africa is set to be pedestrian at best with the potential of serious recession, increasing poverty and political instability hovering like a dark cloud on a not too distant horizon. One would think government, state-owned enterprises and business would work together to ensure this looming disaster is avoided. To date this has not happened. The reason for this gloomy outlook is easy to identify – insufficient domestic and foreign real investment in enterprise and business. Stock market transactions do not count. Real foreign direct investment has declined massively in recent years. The origins of this malaise are not difficult to find.

Policy uncertainty Firstly, there is a complete lack of confidence caused by political and economic policy uncertainty1. South Africa occupied the 11th position out of the top 25 rated countries in the AT Kearney Foreign Direct Investment (FDI) Confidence index in 2012, it has in 2016 dropped to the 25th position. South Africa’s has also declined on the 2017 Fragile States Index. Ten years ago, South Africa was ranked in the stable category, but now falls in the elevated warning category – A snapshot of the ten-year trend shows that only Libya, Syria, Yemen and Mali have had a worse marginal change. It is hardly surprising that the three key ratings agencies S&P, Moody’s and Fitch have all downgraded South Africa and have it on a negative watch. State capture and corruption rank high on the list. According to the Minister of Economic Development, Ebrahim Patel, corruption costs the SA gross domestic product (GDP) at least R27bn annually as well as the loss of 76 000 jobs that would otherwise have been created1.

But, the problems run far deeper. The list includes the potential implementation of the mining charter, the threat of interference in the independence of the SA Reserve Bank, a host of often well-meaning but damaging regulatory laws that interfere in various markets ranging from More magic by top cartoonist Jeremy available at jerm.co.za. labour through to purchasing and investment policies. These often-foster corruption and hamper market efficiency and effectiveness.

Economic Risk Consultant

20

Finally, there are attacks on “white capitalism”. And then there is a long list of poorly performing state-owned enterprises which are absorbing money but in most instances with no real plans to solve their problems. The government has insufficient funds to finance infrastructure development and extensive growth itself. Apart from corruption the country is being bled dry by these ailing state-owned companies requiring bail-outs. Why does the government not privatise some of them or form genuine arms-length (i.e. no buddies) public-private partnerships?

For example, why does South Africa persist in trying to run the ailing South African Airlines (SAA)? Yes, it is a flag bearer but it is time to realise private ownership by some other carrier would be a realistic solution. It could still bear the name SAA. It is time to put national ego aside and do the right thing.

High electricity price increases Secondly, the country has faced years of high electricity price increases.

The sound move to introduce cost reflective tariffs is one reason. The equally important necessity to consider the replacement cost of new build programmes is another. However, both are driven by the high cost of inefficiencies in new build programmes and in the organisation caused in part by the policy factors, including corruption and imperfect government policies, indicated above. South Africa needs to improve its efficiency and compare its cost structures with those in other resource rich countries.

One example could be Australia where a recently released independent report by power sector engineers and advisers GHD and Solstice Development Services entitled “HELE Power Station Cost and Efficiency Report” estimated a current construction cost in Rand equivalent at R22.7m per MW for a modern HELE or ultra-super critical (USC) coal plant.

It estimated generation cost at the Rand equivalent of between R412.8 per MWh to R804.96 per MWh (2017 prices) on a long run marginal cost basis, which includes achieving a return and meeting capital and operating expenses. In comparison with, if numbers were directly compared, Kusile estimated construction costs would be R109 billion compared to R213 billion.

An Eskom Generation sign sits on display at the Grootvlei power station, operated by Eskom Holdings SOC Ltd., in Grootvlei, South Africa.

Photographer: Dean Hutton/Bloomberg Generation costs would be between 41.3cents/kWh and 80.5 cents/kWh compared to Kusile estimates running at about R1.20/kWh. This is for power generation over 80% of the time and is therefore far cheaper than wind and solar at 65cent/kWh but for less than 35% of the time.

It is not possible to transpose directly these figures to South Africa, but when the difference in construction costs is almost 100% or double in South Africa and generation cost is at least 50% and possibly three times higher, then something is undoubtedly amiss. Clearly construction and operating efficiencies are not up to standard and need to be closely investigated.

The point being it is not the technology that is at fault. It is efficiency.

Economic Risk Consultant

21

Econometrix did a study in 2010 on the impact of electricity price increases on future economic growth. The modelling was done by the late great Tony Twine, an outstanding and realistic economist of his era.

It should be remembered that at the time, the country already had had substantial price increases over the previous two years of more than 20% a year.

It was estimated that for the period 2010 to 2018, further real electricity price increases over the period of 84% would decrease economic growth by 1.5% per annum from a base case of 3.5% per annum to an estimated 2.0% per annum. The potential increase in employment over the period would decrease from 5.8 million to 1.6 million. The impact on the mining and manufacturing sectors would be particularly devastating. Reality has confirmed these figures. The real price increase of electricity has been close to the above forecast. GDP growth for the period from 2009 to 2016 has averaged 2% per annum with an employment increase of only 1.59 million.

In fairness, other well-meaning but economically damaging policies have exacerbated the figures. Planned future high increases are possibly the final nail in the coffin for many key industries.

Flawed electricity policy The third major problem is South Africa’s defective planned electricity generation policy. This is based on the belief that future base load electricity can be supplied by renewables, primarily wind.

A report entitled ‘Critical Review of The Levelised Cost of Energy (LCOE) Metric’, by M.D. Sklar-Chik et al published in the South African Journal of Industrial Engineering December 2016 is relevant. It concluded that “LCOE neglects certain key terms such as inflation, integration costs, and system costs.”

Many international reports prove that such electricity supply is extremely expensive due to its variability, interruptibility, inefficiency and its requirement of 100% backup.

Read also: Rob Jeffrey: Renewables not SA’s panacea – time to put country first Another study by B.P. Heard et al entitled a ‘Burden of proof: A comprehensive review of the feasibility of 100% renewable-electricity systems’ concluded that “there is no empirical or historical evidence that demonstrates that such systems are in fact feasible”. They also reviewed the CSIR proposals regarding the high-penetration renewables in South Africa. The study concluded “both the use of the terms ‘technically feasible’ and the attempted costing of the proposed system are inappropriate and premature”. Furthermore “a policymaker could have little doubt that the electricity demand proposed by the high-penetration renewable scenario from CSIR is not realistic and not in keeping with the imperative of alleviating wide-spread poverty in South Africa.”

This is supported by reality on the ground in every single country or state that has substantially increased its supply of this source of electricity.

Fritz Vahrenholt in his study entitled ‘Germany’s Energiewende: A Disaster in the Making’ sums up the situation.

“It will take a long time to repair the severe damage caused by a misled energy policy”.

Economic Risk Consultant

22

In 2016, it must be noted that the prices paid by industry in Germany were 52% higher than France (nuclear) and 86% higher than Poland (coal). In Ireland, often given as an example of the success of wind power, the equivalent comparisons were 34% higher compared to France and 64% higher compared to Poland.

Gouda wind facility, Drakenstein Municipality, Western Cape.

On average Germany’s price of electricity appears to be 44% higher than the average electricity price in Europe.

South Australia evidently pays some of the highest electricity prices in the world. Numerous experts have concluded that wind can never be a major source of electricity power sufficient to drive economic growth in emerging and industrialising economies.

Essential reading includes a research report by D. Weißbach et al (2013) on energy returned from energy invested (EROI) in Germany. The research shows that renewables are uneconomic and will lead to economic stagnation.

Whereas the EROI of coal and nuclear are in territory that fosters growth.

It certainly is a fact that all major economies with fossil fuel reserves are substantially increasing their electricity supply from these resources, including India, China, the Asean countries, Poland and now the United States.

Environmental Issues Fourth, genuine environmental groups are becoming aware of the looming environmental catastrophe windfarms pose. Wind energy’s impacts on birds in South Africa, In Birdlife South Africa Occasional Report Series is one reference and “strategic environmental assessment for the wind and solar photovoltaic energy in south Africa” (2015)” (SEA) is another. Nine game reserves and nature reserves and other environmentalists were party to this submission.

Birdlife South Africa, Vulpro and other environmental groups have also objected to ill-considered windfarm developments and their effects on birdlife. Another reference is “Objection to Environmental Application for The Spitskop West Wind Energy Facility, Eastern Cape Prepared by ADS Environmental Consultants. Objections have, until recently, generally been on specific windfarm developments.

In a study of the Effect of Wind Turbines on Bird Mortality Maeve White November 24, 2016 found that in the USA killed 4 birds per MW in the total USA and 16 or more birds per MW in in California.

These figures were confirmation of an earlier study by Scott R. Loss, Tom Will, Peter P. Marra entitled “Estimates of bird collision mortality at wind facilities in the contiguous United States”. If these average numbers were aggregated over the full envisaged area affected in South Africa of over 100 000 square kilometres and over 100 000 MW as envisaged multiplied by the years then the number of birds lost per annum would be at least 400 000 per annum and over 8 million over the 20-year life of these windfarms.

There are various studies disagreeing with this and pointing to damage by fossil fuels. Notwithstanding that, irreplaceable bird species and other lifeforms to be lost by largescale windfarms will become devastatingly significant.

Read also: Renewable energy plans: Who’s in control? Eskom or govt?

Economic Risk Consultant

23

Some argue that domestic cats kill an enormous number of birds per year but it would be hard put for these environmental enthusiasts to find any domestic cat killings of eagles, vultures, cranes, owls let alone the fairly domesticated Hadeda. Rather the tables are more often the reverse where cats and small dogs are known to be carried off by birds of prey.

Many rare large birds could face extinction because of windfarms, which, apart from having obvious important ecological impacts, could also threaten some aspects of the tourist industries amongst others.

Education and skills Finally, and most importantly, the government needs to improve the educational system. It is necessary that skills are upgraded to a point that youth have the educational and importantly the vocational skills necessary to meet the requirements of a modern industrialising economy. Without this all plans for achieving high economic growth are pointless. This subject is however not the focus of this article.

Mistaken Investment strategies The critical issue must be to concentrate on creating sustainable high economic growth.

South Africa must stop cutting the cake and start baking it. This is the only way South Africa can meet its key objectives of reducing unemployment, poverty and inequality and raising the standard of living of all South Africans.

Much is made by some economists and government that the future lies in fostering entrepreneurial enterprise.

However, most entrepreneurial start-ups fail. Large projects and medium to large enterprises bring with them the finance and skills necessary to build solid foundations for future growth. They can provide the stability, leadership and mentorship so necessary for economic growth and transformation for smaller entrepreneurial businesses to prosper and grow.

Unfortunately, the delusion regarding renewable power sources is supported by many major business entities including financial institutions. These larger institutions are leading South Africa into a low economic growth energy strategy based on incorrect assumptions.

There are many sound environmentally friendly and green backed actions that are vitally necessary. Wind energy is not one of them. Instead there are vested financial and idealistic interests that effectively encourage financial institutions to offer their clients, including major provident and pension funds, investments in wind farm developments.

Economic Risk Consultant

24

These investments offer exceptionally high returns, escalating with inflation, and most importantly government guaranteed returns on their investment. This is as good as or better than an investment in government guaranteed index linked bonds. However, these institutions do not seem to realise that this will ensure slow economic growth for South Africa and in the end slow growth for their very own institutions.

Furthermore, the high returns in fact will be subsidised by other electricity users. In effect, they are a tax on the poor. South Africa needs to urgently reindustrialise and at the same time ensure that the mining industry does not collapse but grows.

A general view shows solar panels used to produce renewable energy at the photovoltaic park in Cestas, France.

Amongst other policy requirements mining, manufacturing and industry need security of supply of electricity at competitive prices. The only two electricity generation sources of energy that can achieve these objectives in this country are clean or HELE (High Efficiency Low Emissions) coal and nuclear.

The discounted value of coal reserves is more than a trillion Rand. The value of Uranium reserves is probably equal to this. The discounted future value of these flows is over R250 000 per person of the available work force. It is enough to build 2 million more than adequate houses sufficient to house over 10 million people.

Read also: Chris Yelland: No end in sight to Eskom’s renewable energy delays Those desiring the renewable route essentially are recommending leaving this treasure trove of natural resources in the ground, permanently throwing these benefits away and denying South Africa’s future generations their natural inheritance whilst at the same time effectively imposing a tax on the poor.

Renewables, despite the protestations of many so-called environmentalist, are not capable of driving reindustrialisation and creating conditions suitable for high economic growth. HELE coal plants are relatively clean. There is a 50% reduction in Carbon dioxide emissions.

In any event CO2 is not the environmental disaster the ideologists claim. There is substantial research on this subject by world renowned experts supporting this view. Amongst many others, including Dr Patrick Moore, cofounder of Greenpeace and Dr James Lovelock, proposer of the Gaia Hypothesis, the well-known author Paul Driessen believes Eco-Imperialism is being forced on the world by extreme environmentalists who are driving the world, particularly emerging economies, into poverty.

Conclusion The five issues above are forcing major multinational corporations to review potential investment projects in South Africa.

One must ask what substantial international business in energy intensive industries would invest in a country where there is uncertainty regarding entitlement, energy supplies becoming less certain, electricity prices potentially rising excessively and, in addition, where there is a requirement to sell off and effectively finance between 30% and up to a 51% shareholding to BEE partners.

Economic Risk Consultant

25

In addition, if their new BEE partners decide, to take a profit or for other sound reasons, sell, the shareholder supplying most of the skills and financial resources is required to repeat the process.

There are regulatory and labour problems together with other difficulties yet to be added to the list. The above fully explains South Africa’s current predicament and slow growth forecast.

South Africa stands on the brink of a Brazilian or Chavez Venezuelan style decline.

The purpose of this exercise is not to spread gloom and doom.

It is to find a way out of this mess. The question for all South Africans is, are we prepared to make a clean break with immediate past policies and move the country towards a brighter future for all? This will take radical change.

Flag of Venezuela

It is time for South Africa to put its anti-capitalistic stance behind it and create the necessary conditions for future growth and prosperity by genuinely fostering domestic and foreign investment by supplying a common vision which all stakeholders can share and work together to achieve.

Rob Jeffrey is a managing consultant and senior economist at Econometrix. He writes this in his personal capacity.

Economic Risk Consultant

26

SOUTH AFRICA: GROWTH OR STAGNATION http://www.ee.co.za/article/south-africa-faces-potential-growth-stagnation.html 12/09/2017 The choice between growth and stagnation depends on the energy mix selected and the policy choices that are made. These issues will determine the economic path of South Africa for the next decade.

Eskom’s mandate There was an important statement by the Minister of Public Enterprises recently which gave cause for some hope.

The Minister said that South Africa is not about to turn its back on coal. However, the debate rages on and the question remains: how quickly will South Africa move towards renewables?

It is important to look at some of this controversy as it has emerged in the media recently. The first aspect has been the criticism of Eskom and its executives for refusing to sign Power Purchase Agreements (PPAs) with 37 independent power producers selected under government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).

However, this criticism is unjustified and unfair. Eskom was merely carrying out the terms of its mandate which states: “Our mandate, which is aligned to the Strategic Intent Statement issued by Department of Public Enterprises (DPE) in August 2015, is to provide electricity in an efficient and sustainable manner; this includes the generation, transmission, distribution and sale thereof. Eskom is a critical and strategic contributor to Government’s goal of ensuring security of electricity supply to the country, and enabling economic growth and prosperity.”

To execute this mandate, Eskom states that its strategy aims to deliver an electricity price path that supports economic growth and improves South Africa’s financial and business sustainability. This comes down to the next important issue and debate: are renewables, primarily wind and solar, efficient and sustainable, and can they can ensure “security of electricity supply” at a competitive economic price that can enable government to achieve its goal of enabling economic growth and prosperity? The theory and the facts of real life strongly suggest not.

The debate around Levelised cost There is a perpetual debate in the literature surrounding the Levelised costs of electricity (LCOE) and the fact that wind and solar have the lowest LCOE at approximately 62c/kWh compared to coal’s LCOE of R1,05/kWh and nuclear at R1,30/kWh. However, these figures do not consider that these renewables deliver electricity less than 34% of the time, are unpredictable, and are subject to the vagaries of the weather.

Their generating lives are very different as well – 20 years as compared to nuclear’s 60 years. The fact is you cannot easily compare dispatchable electricity (coal and nuclear) with non-dispatchable electricity (wind and solar).

A research report by D. Weißbach, et al (2013), on energy returned from energy invested (EROI) has shown that in Germany, all renewables, except commercial solar installed in the Sahara Desert, are currently uneconomic.

This means that renewables must be subsidised indefinitely, unless a major technical breakthrough in energy storage appears. In the report it is stated that because modern society requires so much energy, when the overall EROI drops below 7:1 the economy contracts and we are at risk of recession.

Economic Risk Consultant

27

“Buffered” wind and solar have orders of magnitude less than 4:1 whilst nuclear and coal have magnitudes several times higher than that. These figures were all arrived at in the research study conducted in Germany – the figure of 7:1 may drop slightly in less developed economies. But even poor people like to be able to turn on their lights and use electricity at night. In summary, the economic effectiveness of wind and solar PV are in economically stagnated areas whilst coal and nuclear are in territory that fosters growth.

No wonder America and Europe have had 150 years and more of high growth and India, China and Japan have also enjoyed great prosperity in more recent years.

Doubtless there will be countless people who will be able to prove that EROI is not a justifiable measure to use.

They will have more difficulty in proving the facts that support that it is valid. In 2016, it is interesting to note that the prices paid by industry in Germany were 52% higher than France (nuclear) and 86% higher than Poland (coal).

In Ireland, often given as an example of the success of wind power, the equivalent comparisons were 34% compared to France and 64% compared to Poland.

In addition, Ireland is a tiny country with a grid of only 4,7 GW. America would appear now to be about half the price of equivalent German prices. On average, Germany’s price of electricity appears to be 44% higher than other average other electricity price in Europe. No wonder this has cost Germany jobs and businesses. The Wall Street Journal estimates that Germany’s electricity costs have risen 60% due to their subsidies of renewable energy. This has lowered their GDP, standard of living, and competitiveness. As a result, several companies including BASF, SGL Carbon and Siemens have moved or are considering moving operations from Germany.

Environmental impact of wind A further fact that those holding renewables up as a bright future for South Africa is the area of land that is involved with renewables. As an example, onshore wind farms in Germany produce less than 2 W/m2 of land. A modern oil field, on average, produces 90 W/m2 of land. Nuclear involves absolutely minimal land area, whilst coal obviously is larger but compared to wind and solar it remains negligible. An idea of the magnitude of this problem is that the IRP contains scenarios which will involve more than 10 000 square kilometres of land in South Africa.

This is equivalent to 1500 km of coastal land 3 km deep with wind turbines and similar length of mountain ranges behind plus numerous other windfarm areas. Those defending wind farms will find it difficult to defend the fact that landowners in surrounding areas bordering on windfarms, probably an area twice or even three time the areas of windfarms, have found their land devalued by up to R3000/ha. Only a few wealthy or unscrupulous owners are benefitting from the largesse of equally unscrupulous windfarm interests.

Economic Risk Consultant

28

Apart from that, environmentalists are really concerned about the devastation caused to habitats for large birds, birds, bats, migrating birds, insects and other forms of life even including animal and human health. This is the history of windfarms around the world which are not being given sufficient consideration and weight at present.

The energy plans of emerging countries The pro-renewable faction will also find it difficult to argue with the plans for increasing the use of coal and fossil fuels in many countries. This applies to countries such as Poland, the United States under the new administration, India, China and the Asian countries. Japan is set to build 45 modern highly efficient low emissions (HELE) coal plants totalling approximately 45 GW. The International Energy Agency (IEA) has forecast that 730 GW of these highly efficient plants will be built by 2040. South Africa, despite being one of the most richly endowed coal countries in the world, is planning to increase its coal output by less than 15 GW. According to the current planning, South Africa is happy to increase exports to countries who will thereby use one of the most efficient electricity generating sources in the world to increase their manufacturing and industrial sectors more efficiently and effectively and thereby export lower priced goods to South Africa. This will ensure South Africa’s structural deficit continues and ensures lower economic growth for many years into the future.

The economic damage of renewables Finally, the renewable lobby will find it difficult to argue with the fact that South Africa will pay an extraordinarily high economic price if South Africa’s coal industry declines. Any decline of the coal industry and industries associated with it will have a profound negative impact on the economy. It is estimated that, if Eskom’s demand were to decline by 37% because of closing coal plants, the coal sector would shrink by 17%.

This will reduce the GDP of South Africa by over 0,9% (R27,8-billion) and reduce employment by more than 60 000 people affecting almost 250 000 dependents. In addition, it is likely that export sales of coal could be reduced by more than R10-billion per annum. In practice, the overall economic impact will be far greater than these figures imply and probably more than 300 000 people will lose their jobs. The current IRP 2016 base case and unconstrained scenario are more than likely going to be the final nail in the coffin for the mining industry. South Africa is facing economic stagnation with major economic, political and social implications.

Unfortunately, there are many vested domestic and foreign financial and idealistic interests in the decision mix.

Not least are financial institution who have entire departments geared towards pushing the renewable energy agenda. This is not surprising. After all, they are interested in the rich prize of investing their own and clients’ money in long term high return index linked government guaranteed investments.

The fact is that they are joining forces with foreign vested financial interests that have only one aim – to increase their overseas renewable technology sales in a new market. Meanwhile their own domestic market is at best losing steam, if not declining, because of a failure of the technology. Followers should look closely at the failure of “energiewende” in Germany and wind in South Australia.

Economic Risk Consultant

29

Nuclear and coal are required to ensure SA economic growth The future energy potential of the country lies in those efficient proven technologies of nuclear and coal that give South Africa a competitive edge and comparative advantage, reinforced by major solar for domestic and general business use. These in turn must be supported by a significant expansion of gas but only if South Africa can find it in sufficient economic quantities. The way forward involves building new modern coal plants and refurbishing old power stations where it is economically possible to do – not to close them.

Yet the current IRP 2016 plan, supported by many vested financial and idealistic interests and their enthusiastic but often ill-informed public followers, are about to over-invest in a technology that has proven to be one of the worlds’ least economically efficient and effective technologies. It is not surprising that sailing ships and clippers, although beautiful, finally became obsolete and died out in the second half of the 1800s.

Eskom officials were doing their job of looking after the interests of the country and the public.

Renewables, particularly wind, increases energy poverty and effectively become a tax on the poor. In those countries that have moved in a major way towards renewables, an old joke is returning to haunt us: “What did man use before they had candles? Electricity”.

Economic Risk Consultant

30

SA MUST ACT IN HER OWN BEST INTEREST AFTER G20 SUMMIT https://www.iol.co.za/business-report/opinion-sa-must-act-in-her-own-best-interest-after-g20-summit10670277 7 August 2017, 12:00pm Some major causes of world economic problems Leaders are following their national vested interests; and there are many hidden agendas. Angela Merkel has expressed deep disappointment over two issues, namely the agreements on climate change and trade. A closer examination reveals that Germany is itself a major cause of world economic problems.

As noted by “The Economist” recently, Germany’s surplus of $300 billion (R4.03 trillion) is damaging the world economy. There are two key causes of this surplus. Firstly, it is caused by insufficient investment spending and infrastructure development by Germany itself and secondly the German economy benefits massively from the relatively weak euro.

The result is that Germany earns trade surpluses whilst insisting that its weaker European partners endure austerity. Clearly, Germany has a stake in protecting this trade surplus and must ensure that other countries remain less competitive. It therefore has a powerful interest in maintaining the political EU, with Germany as its leader and more relevantly maintaining the undervalued euro. It must also try to ensure that, having already selected the more expensive non-competitive renewable energy path; it encourages other countries to follow the same route.

This policy will help German wind technology firms to expand their exports. Germany, in the meantime, is effectively curbing its own further massive expansion of renewables whilst increasing its not talked about coal fired power station expansion. Its first new coal-fired plants came on line so quietly that most people do not know of them.

Economic costs of the climate change agenda Bjorn Lomborg, of the Copenhagen Business School, calculates that the promises of the Paris Accord - through slower gross domestic product (GDP) growth as a result of higher energy costs - will result in a global economic cost of $1trln to $2trln every year from 2030.

The costs for the US are likely to be $154/172bn every year in lost GDP. In addition, there is promised support to disadvantaged countries of $100bn per annum in climate aid. The US therefore has an estimated financial economic cost of a trade deficit of $300bn per year. Little wonder that the new US administration is taking a long hard look at both climate change science and pulling out of the Paris accord.

Bjorn Lomborg goes on to say that peer reviewed estimates show that even if all countries continue their promised reductions for 2031, then from 2032 until 2100 it will reduce global temperatures by just 0.17°C. The entire US climate promises will reduce global temperatures by just 0.031°C by 2100.

India and China are two other countries present at the G20 and cutting back on old dirty coal-fired power stations and coal mining activities. But they are expanding their activities in new High Efficiency Low Emissions (Hele) clean coal power stations. In this way they significantly reduce their greenhouse gas emissions and in particularly their production of other pollutants, such as mercury, sulphur, and of course the use of water. Both have massive ongoing expansion programmes of nuclear and particularly coal. Meanwhile, Indian business is planning to invest in one of the biggest coal mines in the world in Australia.

Japan is set to build 45 modern Hele coal plants, totalling approximately 45GW. The International Energy Agency has forecast that 730GW of these highly efficient plants will be built by 2040. Asean countries are expanding their coal fleets at more than 4% per annum.

Economic Risk Consultant

31

Economic costs to South Africa Based on the Lomborg figures above, South Africa’s GDP in relationship to the global GDP and South African emissions of 1.1% of global emissions, means that firstly carbon tax and renewables would cost South Africa between R35bn to R51bn per annum and secondly that South Africa’s sacrifices will reduce temperature increases by only about 0.0026°C by 2100. This is less than measurable. This is a measure of the futility of South Africa’s efforts to curtail production of coal-fired power station generation in a country with a treasure chest of coal resources.

An analysis of domestic economic data reveals that because of the proposed Integrated Resource Plan (IRP) 2016, Eskom’s demand for coal will decline by 37% because of closing coal plants.

The overall economic impact will probably involve more than 300000 people losing their jobs, affecting over one million dependents. In addition, it is likely that export sales of coal could be reduced by more than R10bn per annum.

It is estimated that by 2035, because of the planned IRP 2016 and the planned carbon tax, South Africa’s GDP growth potential will have been reduced by almost R1trln and employment would be almost 5 million less than what could have been achieved. The current IRP 2016 base case and unconstrained renewables scenario and the new mining charter are more than likely going to be the final nail in the coffin for the mining industry.

These policies will certainly destroy the aspirations of emerging miners, transport drivers and employment in the coal mining industry, if not in the whole mining industry. Countries should use the most economic energy systems domestically available. In South Africa’s case, these are nuclear, coal and potentially gas.

The discounted value of coal reserves is more than a trillion rand. The value of uranium reserves is probably equal to this. The IRP 2016 effectively throws these benefits away and denies South Africa’s future generations their natural inheritance.

The need for independent research and evaluation An institution that should be positioned to analyse and advise the country on the best energy and electricity generation path for the country is the CSIR, and clearly Eskom itself. Sadly, the CSIR research seems to be based on a one-sided renewables viewpoint.

These efforts should be matched by equal techno/economic research programmes in other technologies, primarily nuclear and fossil fuels, including coal and gas.

The energy potential of the country lies in those efficient proven technologies of nuclear and new modern Hele coal plants that will give South Africa a competitive edge and a substantial trade advantage.

These in turn can be reinforced by applicable solar for domestic and general business use, supported by a significant expansion of gas, but only if South Africa can find gas in economic quantities.

Renewables, particularly wind, involve increased prices and increased subsidies.

The fact is that the Paris Accord did not bind countries to the agreement. Its objectives were sound targets.

However, countries were left to act in their own best interest. Other countries in the world are doing precisely this. South Africa should also now act in its own best interests.

Rob Jeffrey is the former MD of Econometrix and is an independent economic risk consultant.

Economic Risk Consultant

32

ANOTHER LOOK AT SOUTH AFRICA’S ELECTRICITY GENERATING OPTIONS http://www.engineeringnews.co.za/article/opinion-another-look-at-south-africas-electricity-generating-options2017-07-21

In this opinion article, economic risk consultant Rob Jeffrey calls for a re-evaluation for the draft Integrated Resource Plan (IRP) 2016 planned and recommended electricity mix going forward Introduction Energy is the critical component of the country’s future policy mix. Electricity is the necessary condition for economic growth but not a sufficient condition. The sufficient condition can only be supped by politicians and government policies. The argument around electricity really comes down to the questions: Are renewables, primarily wind, efficient and sustainable?; and can they ensure security of electricity supply at a competitive economic price that can enable government to achieve its goal of “enabling economic growth and prosperity”? The theory and the facts of real life strongly suggest not.

There is a perpetual debate in the literature surrounding the approach utilising Levelised Costs of Electricity (LCOE). The initial superficial analysis suggests that wind and solar are now cheaper than coal and nuclear. However, it is argued by many experts, that these figures do not consider the full additional costs that renewables impose on the system. The fact is that renewables deliver electricity less than 35% of the time, are intermittent, unpredictable, highly variable and have very low energy density. The additional costs these factors impose on the system are not included in the LCOE’s being currently utilised but are payable by the system. These additional costs should be directly attributed to each energy technology responsible for the increased systems cost they cause. The findings of experts are that dispatchable electricity (coal and nuclear) with far longer 40-year to 60-year lives cannot be directly compared with non-dispatchable electricity (wind and solar) which have lives of only 20 years utilising only the LCOE methodology. The literature is replete with articles on the subject supporting these arguments.

Literature Review A report entitled ‘Critical Review of The Levelised Cost of Energy (LCOE) Metric’, by M.D. Sklar-Chik et al published in the South African Journal of Industrial Engineering December 2016 Vol 27(4) is relevant. It concluded that “LCOE neglects certain key terms such as inflation, integration costs, and system costs. The implications of incorporating these additional costs would provide a more comprehensive metric for evaluating electricity generation projects, and for the system as a whole. LCOE must not be used in isolation, but in conjunction with other project metrics and methodologies.”

A particularly important study and survey of modelling was completed by B.P. Heard et al entitled a ‘Burden of proof: A comprehensive review of the feasibility of 100% renewable-electricity systems’. After a review of 24 studies claiming to show that a 100% renewable electricity system is achievable, they concluded that “there is no empirical or historical evidence that demonstrates that such systems are in fact feasible”. Importantly their conclusion read: “The reality is that 100% renewable electricity systems do not satisfy many of the characteristics of an urgent response to climate change: highest certainty and lowest risk-of-failure pathways, safeguarding human development outcomes, having the potential for high consensus and low resistance, and giving the most benefit at the lowest cost.”

Amongst the studies they reviewed was the CSIR proposals regarding the high-penetration renewables in South Africa. The study concluded “both the use of the terms ‘technically feasible’ and the attempted costing of the proposed system are inappropriate and premature”. Furthermore “a policymaker could have little doubt that the Economic Risk Consultant

33

electricity demand proposed by the high-penetration renewable scenario from CSIR is not realistic and not in keeping with the imperative of alleviating wide-spread poverty in South Africa.” In another article Heard stated that the CSIR study was “as originally advertised, a thought experiment. It’s not a plan, it’s not a blueprint, it’s not 'proof' of any kind as the ripple of headlines and reporting suggests.”

Finally, the study by the OECD and NEA entitled “Nuclear Energy and Renewables: System Effects in Low-carbon Electricity Systems investigated”. System costs in this study are defined as the total costs above plant-level costs to supply electricity at a given load and given level of security of supply. This was a comprehensive study focussing on the costs that accrue inside the electricity system to producers, consumers and transport grid system operators referred to as “grid-level system costs” or “grid costs”. Total system costs would include those effects that are difficult to monetise and that could affect a country’s wider economy and well-being beyond the power sector itself. These grid costs would increase the LCOE. Utilising the average additional grid cost for the various technologies established in the study, and applying to South Africa, the additional grid costs of nuclear would be R0.026/kWh, coal R0.013/kWh, wind R 0.364/kWh and solar R0.493/kWh. More accurate costs must naturally be identified and estimated for South Africa. The above relevant costs must be assigned to each technology before determining any least cost mix.

Essential reading also includes a research report by D. Weißbach et al (Weißbach, et al. (2013)) on energy returned from energy invested (EROI) in Germany. The research shows that renewables are uneconomic and will lead to economic stagnation. Whereas the EROI of coal and nuclear are in territory that fosters growth.

The above research strongly implies that judging by experience overseas, the costs of wind and solar are likely to exceed those of coal and nuclear by substantial margins. This is a strong criticism of basing energy decisions purely on the simplistic LCOE methodology currently in use in the South African context. Certainly, this is the popular view expressed in the media. The issue being made is the so called least cost solutions as set out in the IRP 2016 need to be investigated, debated and thoroughly re-evaluated. The costs for each technology must be adjusted for the subsidies currently being paid by the public. In this case they are paid by Eskom. However, these must be passed on to consumers. The costs are ultimately paid by South Africa’s long-suffering business, public and particularly the poor. Eskom are correct to resist these expensive contracts. Labour and labour unions are also correct in considering the impact on employment.

The final words in the work by Fritz Vahrenholt entitled ‘Germany’s Energiewende: A Disaster in the Making’ sum up the situation. “It will take a long time to repair the severe damage caused by a misled energy policy”. Energiewende in Germany is called by many experts a catastrophic failure despite the many excuses put up by its supporters. Recent events in South Australia have proved to be economically disastrous and have shown clearly that large wind leads to substantial economic damage. Electricity prices there have recently risen by over 100%. It is true that Elon Musk has offered to put in storage. It is also true that economic storage will help alleviate the situation. Elon Musk is not being altruistic. His company makes batteries. At the price, this is cheap publicity. The batteries are currently very expensive and South Australians will pay a high price for all the backup wind needs. These facts sum up the future trend in South Africa if current IRP plans go ahead.

Modelling Issues to be considered The above arguments need closer evaluation as they apply to the South African situation. The following factors need to be fully examined, identified and evaluated: •

The real grid costs or additional grid costs and costs associated with grid stability for each technology.

The cost of maintaining additional spinning reserve for those technologies requiring any increase in spinning reserve.

Economic Risk Consultant

34

•

• • •

The uncertainty and the economic risk to the economy associated with increasing uncertainty. All transitions from one energy source to another appear to assume they take place as perfectly smooth seamless transitions under conditions of certainty. There is always risk and uncertainty and therefore there is always a probability of transition delay and failure and this needs evaluation.

The probability of any delays in reducing supplies from dispatchable sources or increasing supplies from dispatchable sources. Delays in supply and resulting unmet demand must be costed at the cost of unserved energy (COUE) currently R77.30/kWh. The increased dispatchable costs if the dispatchable technologies are forced to change their quantum of supply. In effect, the true additional costs of more frequent ramping up and down need to be evaluated.

Costs of excess supply over demand supplied by non-dispatchable supply sources.

It is important that there should be no limits on or constraints on CO2. This would give a proper judgement of actual costs and mixes.

Currently these are absorbed or paid by the grid operator but should be absorbed by the supplier. The additional cost costs for various technologies as set out above must be allocated to each technology. If this is not done, technologies have inaccurate cost allocations are not fairly evaluated. These affect the so-called least cost mixes calculated. Unless these costs are correctly allocated to the technology that causes the additional costs then that technology is in effect receiving an indirect or hidden subsidy. Subsidies, in turn, cause a misallocation of resources. The approach and planning of the IRP 2016 scenarios and the results appear to suggest they take inadequate account or underestimate the above factors. The outcomes bear little or no relationship to the reality in the world if evaluated against prices in other countries.

Externalities and other considerations It is important that externalities are ignored for the purposes of calculating the LCOE and the cost impacts of technology systems. Invariably when these are measured not all externalities and environmental costs are considered. In addition, the real benefits associated with technologies are not considered. All technologies are subject to externalities including renewables. They are extremely difficult to properly evaluate and are subject to personal views, bias and emotions. These costs and benefits should be debated by experts outside of the main costing for each technology and for the mix, which is the subject of this paper.

A full or even partial socioeconomic impact study has not been considered. The IRP 2016 involves major technological changes yet full or partial impact studies have not been conducted. A full socioeconomic impact study forms part of this separate process and this has not been done at all.

Extreme events which invariably do occur need to be statistically incorporated into the input. These are likely to occur more frequently with non-dispatchable highly variable, interruptible technologies causing substantial economic repercussions. Dispatchable technologies are prone to extremely events rarely. To exclude such events gives an unfortunate incorrect bias in favour of these non-dispatchable technologies.

Caution is required when major changes of technology are being considered. All externalities, costs and benefits can be classified into known-knowns, known-unknowns, unknown-knowns and unknownunknowns. Unfortunately, as unknowns increase risks increase and one moves into the field of complex systems. Long term energy planning and complex economies falls into this category.

The work of Professor David Snowdon has been widely cited for developing an award-winning framework for decision making in complex systems in a complicated world. Snowden is the founder and chief scientific officer of Cognitive Edge, a Singapore-based management-consulting firm specializing in complexity and sense making. This process recommends that innovative technologies should not be speedily deployed if the results are uncertain Economic Risk Consultant

35

and decisions could be inflicting long term possible irreversible damage. These systems need multi- disciplined teams to evaluate them properly. Energy is a complex and relatively slow-moving field and caution should be exercised regarding decisions which once made affect large economic processes and have long term irreversible detrimental effects.

Summary Merely taking the current estimates of LCOE’s for each technology and increasing them for the grid costs alone would change the situation considerably. Using the OECD average grid costs would increase LCOE’s for nuclear to R1.31/kWh, Coal R1.06/kWh, Wind to R0.98/kWh and solar to R1.11/kWh. These are only estimates based on an overseas study. Estimates of costs for South African conditions must be established. All the other costs from the factors listed must also be attributed to each technology. It is almost certain that these costs will far exceed the grid costs set out earlier. Estimates place the true economic LCOE adjusted for the above factors at nuclear R1.36/kWh, coal R1.15/kWh, wind R1.80/ kWh, and solar R2.55/ kWh. These numbers will cause outrage amongst renewable supporters, but the best guideline as to whether these prices are realistic or not is to consider pricing overseas. Prices in Denmark, Germany and South Australia have soared because of their moves towards high penetration wind as their major source of supply for their national or state energy supplies. In 2016, it must be noted that the prices paid by industry in Germany were 52% higher than France (nuclear) and 86% higher than Poland (coal). In Ireland, often given as an example of the success of wind power, the equivalent comparisons were 34% higher compared to France and 64% higher compared to Poland.

On average Germany’s price of electricity appears to be 44% higher than the average electricity price in Europe.

South Australia evidently pays some of the highest electricity prices in the world. The above arguments suggest that the current arguments that least cost mix prices using the LCOE of each technology are badly flawed.

The purpose of this article is to state that it is necessary to revisit and re-evaluate the IRP 2016 planned and recommended electricity mixes going forward. More importantly the article is intended to contribute to a rational debate about the real energy choices that South Africa needs to face going forward.

- Jeffrey is the former MD of Econometrix and is an independent economic risk consultant

Economic Risk Consultant

36

ONLY SOLUTION IS FOR SA TO BECOME ATTRACTIVE TO LOCAL AND FOREIGN INVESTMENT https://www.businesslive.co.za/bd/opinion/2017-07-10-only-solution-is-for-sa-to-become-attractive-to-localand-foreign-investment/ 11 July 2017 - 06:15 SA could fall into a full recession in 2018, with the economy shrinking 3% and continuing to shrink at a slower pace for the next two years Confidence is low SA is between a rock and a hard place. It has been there before but this one has all the appearances of a looming iceberg. The economy is in the doldrums, GDP growth has been negative this last quarter and forecasts show that it is unlikely to exceed 1% in 2017.

Confidence is low, business is not investing, the current account remains negative and unemployment has risen to more than 27%.

Foreign direct investment fell $4bn to $1.8bn in 2015. It grew to $2.4bn in 2016 but that is cold comfort as it remains almost 70% below the 2013 inflow of $8.3bn. South African companies are investing more abroad and holding cash there.

These facts indicate that there is a lack of confidence in the South African economy by both domestic and foreign investors.

Picture: ISTOCK This is hardly surprising. While the country occupied the 11th position out of the top 25 rated countries in the AT Kearney FDI confidence index in 2012, it dropped to the 13th position in 2014. It was not included in the 2015 ranking at all but now has taken back 25th spot.

SA’s has also declined on the 2017 Fragile States Index. Ten years ago, SA was ranked in the stable category, but now falls in the elevated warning category. A snapshot of the ten-year trend shows that only Libya, Syria, Yemen and Mali have had a worse marginal change. It is hardly surprising that the three key ratings agencies S&P Global Rating, Moody’s and Fitch have all downgraded SA and have it on a negative watch.

It can get worse Have we reached the bottom or can it get worse? Recent forecasts made by economists are not encouraging, pointing towards slow growth for the period to 2020, possibly reaching 1.5% and at a stretch 2.0% at best.

However, at least this is not a crash or a full-blown recession. It is pedestrian growth and will create no more than about 1-million jobs. Standards of living will not improve and unemployment rates will keep increasing to 30%.

The exchange rate will continue to deteriorate gradually over the period.

This situation is uncomfortable but probably manageable. However, the future could be far worse. A perfectly possible scenario is that SA could fall into a full recession in 2018. The economy could shrink 3% in 2018 and continue to shrink at a slower pace for the next two years. Very few jobs would be created and unemployment would reach levels close to 33%. The exchange rate would fall to R20 to the dollar or worse.

SA has tended to blame international events for its problems. It is true that these have played and could continue to play a role. However, local policies and uncertainty are to blame for most of the country’s problems. The scenario outlined above could easily occur if corruption at the top is not stopped once and for all.

Economic Risk Consultant

37

Some or all the following could cause confidence to evaporate. Any move to nationalise the Reserve Bank and change its mandate and implementation of the mining charter would be near the top of the list of events leading to economic destruction. More state capture and corruption and pressure on the Treasury to spend more and bail out state-owned enterprises would add to the potential powder keg.

The fact is that the state cannot finance economic growth. The only solution is for SA to make itself attractive to domestic and foreign business investment. The country is at present far from achieving this goal.

The need for radical change Are we prepared to make a clean break with immediate past policies and move the country towards a brighter future for all? This will take radical change. These are not difficult but they present a radical change in approach and philosophy. Leadership and the government must recognise that economic growth is the only way to true individual economic freedom, transformation and equality.

SA has chance to make hay while the sun shines on global economy Success will depend on re-industrialisation and releasing the industrial, manufacturing, agricultural and mining promise of the country from the shackles that prevent them reaching their full potential. The challenge is to roll back and radically change some much-loved policies that are the shibboleths of many failed states.

Leadership must unequivocally lead the country away from interventionism and state capture; remove barriers to market entry and foster a spirit of unity and co-operation; adapt or withdraw well-meaning policies that restrict fair and equitable purchasing and labour market practices that lead to low productivity and loss of efficiency; eradicate graft and corruption; adapt land reforms to cater for the requirement that agricultural production be secure; privatise or form public private partnerships for many state companies and assets; and ensure that a large segment of education moves its focus from an academic orientation to a vocational skills-based approach to cater for the needs of an industrialising economy and much of its population.

Policies often have unintended consequences that benefit the few but in practice make matters worse for the poor and unemployed. The country can no longer afford parasites plundering its coffers, milking the state and feeding off the poor. The government and leadership must stop cutting the cake and instead start baking it; otherwise there will not be enough to share.

Infrastructure development is critical and a sound energy policy a prerequisite. For economic growth to be possible, SA needs stable electricity supply giving the wheels of industry and growth security of supply at the lowest economic cost. In this country, the only economically competitive energy sources capable of fulfilling these conditions are nuclear and high efficiency, low emission (hele) coal.

The US administration is not only rebuilding its nuclear and fossil fuel energy resources but is set to encourage the World Bank to finance clean coal plants in developing nations. The Obama administration also viewed clean-coal technology favourably in developing countries. Europe, and particularly Germany, are reducing their stringent requirements following the failure of its energiewende policy. Australia is grappling with a major economic crisis caused by wind energy.

The necessity to focus on growth South African energy authorities should be focusing on providing SA with the "necessary conditions" for economic growth and taking advantage of some of the changing global realities and policy changes. A more positive energy plan will encourage business to take a more optimistic view for their development and growth. The Electricity Intensive Users Group (EIUG), for example, representing businesses responsible for using 40% of SA’s electricity, Economic Risk Consultant

38

is quite correctly taking a cautious view of electricity demand in future. This is not good news for economic growth.

The "necessary and sufficient conditions" can only be met by meeting the challenges above.

Is high growth possible? The Association of Southeast Asian Nations, India and China are aiming at growth of more than 5% a year over the next 10-20 years. Not surprisingly, this growth is underpinned by their reliance on coal and growth in clean coal technologies and other fossil fuels. With all its natural riches resources and treasures, SA has an equivalent potential.

Unless SA works towards meeting the above challenges, SA will face a dark future literally and figuratively.

Jeffrey is a former MD of Econometrix and an independent economic risk consultant.

Economic Risk Consultant

39

PBMR’s COULD BE BUILT IN OLD POWER STATIONS DUE TO BE DECOMMISSIONED http://www.engineeringnews.co.za/article/opinion-pbmrs-could-be-built-in-old-power-stations-due-to-bedecommissioned-2017-05-25/rep_id:4136 25th May 2017 Independent economic risk consultant Rob Jeffrey discusses the potential of building Pebble Bed Modular Reactors at old coal-fired power stations that are to be decommissioned.

Announcement of further development of PBMR’s The African Utility Week saw an important and welcome announcement. Eskom’s chief nuclear officer revealed that Eskom was reconsidering the Pebble Bed Modular Reactor (PBMR). For whatever reason, work on this groundbreaking project was stopped by the South African government in 2010. The latest work on the design indicates that this could be simplified and that build costs could be reduced. This may indeed be good news for the country.

Originally the successful development of the PBMR indicated that the economic impact on South Africa would have been extremely positive. Originally the PBMR design envisaged modules of approximately 200 MW per unit and would normally be designed to operate in pairs, or more, of such modules. No indications have yet been given on the design of the revised units but it is fair to assume it would lead to modular manufacturing with simpler onsite construction activity. This would result in reduced lead times for units coming on line.

Importantly, the PBMR is less water dependent and, being smaller, could be located strategically closer to high demand areas. The benefits are clear; if the units can be designed in such a way that they are economically competitive, there would be substantial local and international demand for such units, particularly in Africa and in Asia.

Economic benefit of PBMR’s As set out in the Integrated Resources Plan (IRP), the initial traditional nuclear reactors would most probably be located at the coast. South Africa would need to build up its nuclear design, manufacturing and construction skills.

A natural extension to this would be the PBMR and this would help strengthen and accelerate the entire nuclear localisation programme. The result would be that South Africa would become a leader in the two key energy technologies required for genuine economic growth and poverty reduction in the twenty-first century. The two are oil from coal, including possibly gas from coal, and secondly the PBMR design and build technology. The economic benefits to South Africa if the initial promise of this programme is realised would include: growth in local nuclear skills in respect of design, manufacturing and construction; an industry with both domestic and export potential; the creation of more than 100 000 jobs between 2030 and 2040; and an increase in gross domestic product (GDP), which could be greater than R40-billion a year or over 1% of GDP by 2040.

Potential siting of PBMR’s The PBMR could be built in old power stations that are due to be decommissioned. Not only does the PBMR installation offer consumers security of supply at very reasonable cost, but also by siting them in these locations they can immediately be reconnected onto the grid through existing grid installations. This would undoubtedly be one of the lowest cost energy solutions going forward. Where adequate supplies of suitable coal are still available, refurbishment of the power stations would almost certainly be the lowest cost solution. These power stations could be refurbished using the latest High Efficiency Low Emissions (HELE) coal technology. These power stations have very low pollution levels and reduce greenhouse-gas emissions by more than 30%. This places new or refurbished power stations on a very competitive basis with alternative energy sources including gas.

The PBMR project was cancelled in 2010. Unfortunately, valuable time has been irretrievably lost and the country lost most of the nuclear skills that were associated with the original project. However, South Africa still has a head Economic Risk Consultant

40

start, and, assuming the design is as promising as indicated, the PBMR would greatly strengthen the view that nuclear should form one of the major elements of the energy mix going forward. It is now essential that decisionmakers step back and carefully weigh up the major energy options in their entirety. Suggestions that South Africa can defer any decision on baseload electricity for an extended period of time are incorrect. It is essential that the country has time to construct and complete a baseload power generating capacity increase by 2024 if the country is to start growing at more acceptable growth rates of over 4% per annum by that date. This power supply must, if the re-industrialisation of South Africa is to become a reality, offer security of supply at competitive prices. If that does not occur, South Africa will face increasing unemployment and with it will come socio-political unrest.

The required baseload capacity can only be supplied by nuclear and HELE clean coal fired power stations. Orders must, therefore, be placed by no later than March next year 2018.

Re-evaluation of all energy technologies Government should therefore put an immediate moratorium on all new energy build programmes including renewables. Decisions on wind farms cannot be taken on a one-on-one basis. Their use must be considered a long-term major change of technology for the country. The recent Western Cape High Court ruling was clear, “any large-scale procurement process undertaken by the state or its agencies must comply with Section 217 of The Constitution.” Wind farms form part of such a ruling. A build programme over twenty years is a large-scale procurement programme which to date has not been subject to the public and parliamentary scrutiny required in terms of this judgement. The planned build programme will cover over 10 000 km2 of land with wind farms which would radically affect more than 100 000 km2 of South African environment and landscape.

Re-examine destructive environmental issues of renewables At last, environmental groups are becoming aware of the looming environmental catastrophe wind farms pose.

An example has been the recent “Objection to the “strategic environmental assessment (SEA) for the wind and solar photovoltaic energy in south Africa” (2015)”. The objection was inclusive of the SEA process itself plus all the identified renewable energy development zones (REDZ), and the basic assessment procedure to be followed for environmental authorisation of wind and solar photovoltaic energy developments within such REDZs. Nine game reserves and nature reserves and other environmentalists were party to this submission. Birdlife South Africa, Vulpro and other environmental groups have also objected to illconsidered wind farm developments and their effects on birdlife. These objections have, until recently, generally been on specific wind farm developments. If the numbers were aggregated over the full envisaged area affected of over 100 000 km2 or more and multiplied by the years of operation then the number of irreplaceable bird species and other lifeforms to be lost could become devastatingly significant.

Rough estimates indicate an aggregate of over half-a-million bird fatalities per year or over ten-million over the twentyyear life of these wind farms. Many could face extinction, which, apart from having obvious important ecological impacts, could also threaten the tourist industries amongst others.

A closer look is required by environmental and economic experts and by the public of all the technologies available.

Such scrutiny is required before any decision is made and, thankfully, the judgement reinforces this process. The final decision on the optimal energy mix can only be made by experts and decision-makers based on efficiency, Economic Risk Consultant

41

effectiveness, environmental and long-term socioeconomic impacts. It is certain that such studies would reveal the fundamental weakness of the current IRP and recommendations that are being made by the Council for Scientific and Industrial Research.

Economic Risk Consultant

42

SA’s FUTURE DEPENDS ON ENERGY BLEND WITH COAL AT ITS CORE https://www.businesslive.co.za/bd/opinion/2017-03-28-sas-future-growth-depends-on-energy-blend-with-coalat-its-core/ 28 March 2017 - 06:38 Rob Jeffrey argues renewable sources lack reliability and scope to help country prosper The choice of energy mix is critical Black power: Taking coal out of SA’s energy mix would have a negative effect on the economy. The choice between a path of economic growth or stagnation over the next decade depends on the energy mix selected for SA and the policy choices that are made for this country.

Public Enterprises Minister Lynne Brown recently gave cause for hope when she said SA was not about to turn its back on coal. However, the debate still rages on how quickly SA will move towards renewables.

The criticism of Eskom and its executives for refusing to sign power purchase deals with 37 independent producers selected under the government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) is unjustified and unfair.

Picture: SUNDAY TIMES They were merely carrying out their mandate to provide electricity in an efficient and sustainable manner, as a strategic contributor to the government’s goal of ensuring power security and enabling economic growth and prosperity. The facts strongly suggest that renewable sources of energy — primarily wind and solar — cannot help Eskom achieve its mandate and aims.

The debate about Levelised costs There is a perpetual debate about the Levelised costs of electricity (LCOE) and the fact that wind and solar have the lowest LCOE at about 62c/kWh compared to coal’s R1.05/kWh and nuclear’s R1.30/kWh. These figures do not take into account that the renewables deliver electricity less than 34% of the time, are highly variable and subject to the vagaries of the weather. Their generating lives average 20 years, compared to a nuclear plant’s 50 years.

Dispatchable electricity (coal and nuclear) cannot easily be compared with non-dispatchable electricity (wind and solar).

Studies measuring energy returned from energy invested (EROI) have shown that all renewables, except commercial solar installed in the Sahara Desert, are uneconomic. Unless there is a major breakthrough in energy storage, renewables must be subsidised indefinitely.

Because society requires so much energy, when the overall EROI drops below 7:1, an economy contracts and a country is at risk of recession. Backed-up wind and solar have orders of magnitude less than 4:1, while nuclear Economic Risk Consultant

43

and coal have magnitudes several times higher. These figures were arrived at in a research study conducted in Germany. The figure of 7:1 may drop slightly in less developed economies.

Doubtless there will be countless people who will be able to prove that EROI is not a justifiable measure. In 2016, the prices paid for electricity by industry in Germany were 52% higher than France (nuclear) and 86% higher than Poland (coal). In Ireland, often used as an example of the success of wind power, the equivalent comparisons were 34% compared with France and 64% compared with Poland. Ireland is a tiny country with a grid of only 4.7GW. Electricity in the US appears to be about half the price of equivalent German prices. On average, Germany’s price appears to be 44% higher than other average electricity prices in Europe. This has cost Germany jobs and businesses.

Renewables and subsidies The Wall Street Journal estimates that Germany’s electricity costs have risen 60% due to the country’s subsidies of renewable energy. This has lowered their GDP, standard of living and competitiveness. Several companies, including BASF, SGL Carbon and Siemens, have moved or are considering moving their operations from Germany.

Another concern is the land area involved in producing renewables. For example, onshore wind farms in Germany produce less than 2W per square metre of land. A modern oil field produces an average of 90W per square metre of land. Nuclear requires minimal land area, and although coal requires more space, it remains negligible compared to wind and solar.

SA’s Integrated Resource Plan (IRP) contains scenarios that will involve more than 10,000km² of land. This is equivalent to 1,500km of coastal land 3km deep for wind turbines and a similar length of mountainous land and other wind-farm areas. Land owners bordering on wind farms have found their land devalued by up to R3,000 a hectare. Environmentalists are concerned about the devastation caused to habitats of birds, bats, insects and other forms of life, including human health.

The renewables faction will no doubt also find it difficult to argue with the plans for increasing the use of coal and fossil fuels in many countries. Japan is set to build 45 high-efficient, low-emission coal plants producing about 45GW. The International Energy Agency forecasts that 730GW worth of these plants will be built by 2040.

Despite being one of the most richly endowed coal countries in the world, SA is planning to increase its coal output by less than 15GW. According to the planning, SA is happy to increase exports to countries that will increase their manufacturing and industrial sectors more efficiently and effectively, and then export lower-priced goods to SA. This will ensure that SA’s structural deficit continues and the country has lower economic growth for years into the future.

Economic Risk Consultant

44

The renewable lobby will find it difficult to argue with the fact that SA will pay an extraordinarily high economic price if its coal industry declines.

If Eskom’s demand were to decline 37% because of closing coal plants, it is estimated that the coal sector would shrink 17%. This would reduce the country’s GDP by more than 0.9% (R27.8bn) and reduce employment by more than 60,000 people, affecting almost 250,000 dependants. It is also likely that export sales of coal could be reduced by more than R10bn a year. The overall economic effect would be far greater — probably more than 300,000 people would lose their jobs.

Vested interests The IRP 2016 base case and unconstrained scenarios are more than likely going to be the final nail in the coffin for the mining industry. SA is facing economic stagnation with major economic, political and social implications. Unfortunately, there are many vested domestic, foreign financial and idealistic interests in the decision mix.

Not least are financial institutions that have entire departments geared towards pushing the renewable energy agenda. They are interested in the rich prize of investing their own and clients’ funds in long-term, high-return, index-linked governmentguaranteed investments. They are joining forces with foreign financial interests that have only one aim: to increase their renewable technology sales in a new market.

Meanwhile, their domestic markets are at best losing steam if not declining because of a failure of the technology.

Look closely at the failure of "energiewende" in Germany and wind in South Australia.

Future energy potential The future energy potential of SA lies in the efficient, proven technologies of nuclear and coal that give the country a competitive edge and comparative advantage, reinforced by solar for domestic and general business use. These must be supported by a significant expansion of gas, but only if SA can find it in sufficient economic quantities.

The way forward involves building new modern coal plants and refurbishing old power stations where economically possible, not to close them. Yet, the IRP 2016 plan is about to result in the overinvestment in a technology that has proven to be one of the world’s least economically efficient and effective technologies. It is not surprising that sailing ships and clippers — although beautiful — became obsolete and died out in the second half of the 1800s.

Eskom’s officials are doing their jobs — looking after the interests of the country and the public. Renewables, particularly wind, increase energy poverty and effectively become a tax on the poor.

• Jeffrey is a senior economist and managing consultant

Economic Risk Consultant

45

NUCLEAR AND COAL CHEAPER AND MORE RELIABLE THAN RENEWABLES https://www.businesslive.co.za/bd/opinion/2017-01-25-nuclear-and-coal-cheaper-and-more-reliable-thanrenewables/ January 2017 When variables are taken into consideration, including resultant unemployment from shutting down mines, wind and solar energy do not shine brightly. Energy from wind and solar farms is often unreliable, difficult to store and unable to be dispatched, says the writer. On the other hand, coal and nuclear power is easy to deliver, reliable and creates thousands of jobs. Energy from wind and solar farms is often unreliable, difficult to store and unable to be dispatched, says the writer. On the other hand, coal and nuclear power is easy to deliver, reliable and creates thousands of jobs. http://www.engineeringnews.co.za/article/opinion-south-africa-at-a-electricity-crossroads-2017-01-23 January 2017 In this commentary, independent economic consultant Rob Jeffrey cautions that a future electricity mix which relies heavily on wind and limits the contribution of coal could undermine South Africa’s plans for addressing unemployment and poverty Introduction There is a critically important debate taking place in the media at present regarding South Africa’s future power generating sources as set out in the 2016 update to Integrated Resource Plan (IRP 2016) base case and assumptions. The current debate centres on the strong supporters of its findings and those with a contrary view.

The outcome will determine whether South Africa faces a dark future of slow economic growth and rising unemployment or the potential of achieving high sustainable economic growth and achieving the only key objectives that matter to this country, namely reducing poverty, inequality and unemployment.

The difference arises as to whether the country selects a reliable, secure and stable source of electricity at the lowest possible price or not. The fact is that electricity growth is a necessary but not a sufficient condition to achieve economic growth. Naturally, high sustainable economic growth can only be achieved if supported by other economic, social and political policies.

Facts and fiction Unfortunately, this appears to have become a debate between fact and fiction. The facts are simple truths and logical argument, which are often deliberately not mentioned or insufficiently emphasised.

It is perfectly true that: • Wind appears to be today one of the cheapest sources of generating electricity.

• Both wind and solar energy sources are relatively free, and the cost to harvest this free energy is falling.

• Wind and solar are variable, unreliable and unpredictable.

ISTOCK.

•

They require extensive back-up by way of either storage or alternative highly reliable electricity generating sources.

• Importantly, neither of them can generate electricity for immediate use and for storage at the same time.

What is not said and certainly not emphasised are the following truths: • Wind only supplies electricity at best on average 34% of the time. It is highly variable, unreliable and unpredictable.

Economic Risk Consultant

46 46

• •

Solar is only available to generate electricity on average 26% of the time.

Solar has considerable advantages over wind because it is more predictable. It is only able to generate during daylight hours. During this period, it on average generates electricity 52% of the time.

Many people are not aware that all energy is derived from the sun and earlier periods as stars form and collapse in terms of their nuclear life. At that time, heavier elements were formed, such as nuclear material and carbon, the essential basis for all human existence. The most efficient usable energy storage systems are natural and are today stored underground. Nuclear is the most efficient, formed by their earlier nuclear processes followed closely by fossil fuels, primarily coal, gas and oil from plant growth driven by the sun. Thereafter comes energy from current solar activity namely biomass, wind, tidal, hydropower and of course solar and wind.

Truth and facts from the real world The above truths are supported by facts from the real economic world: • South Africa is still in an industrial phase of its economic development. It is an emerging economy with a natural comparative advantage in its mineral resources, its abundant labour force and its agricultural potential.

• The engine rooms of economic growth and employment are mining, manufacturing, and agriculture and those sectors that beneficiate their output. They require secure dispatchable electricity at the lowest possible price.

• Wind and solar are highly unreliable and variable. In other words, their electricity supply is not dispatchable Nuclear and coal are the cheapest sources of supplying sustainable dispatchable electricity.

• Renewable electricity requires extensive back-up either in the form of expensive storage or from alternative source of secure reliable electricity generating sources. This makes their delivery costs higher or marginally lower at best.

• Due to the variability of wind and solar there are significant periods when electricity cannot be supplied. As a result, there is an economic cost to the economy, called the cost of unserved electricity.

• The back-up assumptions to the IRP 2016 estimate this cost at R77.30 per kWh. When the full costs arising from the variability are included the cost of wind exceeds the costs of coal and nuclear.

• It has been estimated that as a result of the electricity crisis since 2008, the cost of unserved electricity has reduced the gross domestic product (GDP) by more than R300-billion.

• The cost of virtually destroying the coal mining industry and its associated exports could, by 2050, reduce the GDP by 3% or more, and increase unemployment by more than 150000.

• The above cost excludes the fact that these policies are driving mining investment, both foreign and domestic, and investment generally away from this country.

• The proposed policies will also dramatically increase opportunities that exist for junior miners and local beneficiation.

These facts are not mentioned by those vested financial and idealistic interests favouring renewables. In fact, they are studiously and deliberately avoided.

The overseas energy experiences The facts set out above are supported by events overseas. Firstly, ‘energiewende’, the German policy to eliminate nuclear- and coal-based electricity and make the country virtually completely dependent on renewables, primarily wind, is now considered to be a total failure. Germany has put a cap on further wind development and has withdrawn all subsidies associated with wind. Electricity prices in Germany and Denmark are now more than 65% higher than nuclear France and the highest in Europe. The policy is chasing industry out of the country and has resulted in rising levels of energy poverty in a rich country. This is true elsewhere in Europe, even in the UK, as

Economic Risk Consultant

47 47

well as in California. The impact of the current cold winter is considered by many to be the final nail in the coffin for energiewende.

South Australia is another spectacular example of the failure of the policy of increasing wind based electricity. The prices of electricity in South Australia have increased significantly and are approximately 50% higher than in coal dependent Queensland.

Political, financial, economic and environmental experts in both these countries and elsewhere are strongly condemning any major use of large-scale wind. It is not surprising under these circumstances that German wind energy manufacturers are targeting new markets, particularly in Africa and South Africa.

The above truths and facts based on practical experience and evidence support the view that baseload electricity should be supplied by proven technologies namely, in South Africa, clean coal and nuclear. This involves building new clean-coal-fired power stations and importantly the refurbishment of old power stations with clean-coal technology as an urgent major priority. Solar and gas must support these plans. Both these technologies could become major industrial drivers. Gas, however, must be found in significant quantities in South Africa in the form of shale gas, coal-bed methane, or new offshore or onshore gas discoveries.

If this is not possible, and gas is developed on a major scale, South Africa will become a major energy importer as opposed to the current little-recognised position of being an energy exporter. The full socioeconomic impacts of changing from a coal-based energy country have not been fully or realistically considered.

High growth economies of the world, namely India, the Asean countries, such as Indonesia and Vietnam, are increasing their use of their natural resource coal not decreasing it. Former US President Barack Obama recognised the needs of these countries and recommended that clean-coal technology be used. America’s new President, Donald Trump, has clearly indicated that he favours increasing the use of fossil fuels, including coal, because of the material economic and social damage caused in the Midwest by closing coal plants. It has resulted in increasing unemployment amongst the lower middle classes and the poor in these regions. The same fate could await those in power in South Africa if that were to occur here. Poverty is globally the world’s biggest social and health problem. Energy poverty is rising wherever excessive wind is used and where reductions in coal use have taken place.

Finally, it has been disturbing to watch the debate in the media on the benefits derived from wind when there was a shortage of supply of electricity. It is true. However, it is biased and one sided. When there is a sufficient electricity supply from a stable reliable source, it is not true. In fact, the opposite is true.

Germany has been forced to export surplus electricity at a loss and when there has been a shortage of electricity to import the shortfall at a considerable cost. Effectively, this amounts to a subsidy to their wind energy industry. In South Africa, the same occurs, except that here it is not possible to import electricity when there is a shortage. The cost to Eskom is a straight subsidy to the wind industry paid by electricity users throughout the country. The fact is that renewables and the carbon tax are regressive taxes as they hit the poor hardest.

Eskom has the legal and moral obligation in terms of its mandate to "supply secure electricity at the lowest possible cost� to business, to foster economic

Economic Risk Consultant

48 48

development, and, naturally, to the public. Eskom is currently being criticised unfairly by some commentators for doing exactly that, placing the facts before the public and executing its mandate.

Conclusion In conclusion, there are domestic and foreign financial and idealistic interests that are unknowingly or knowingly driving the country in a direction that in time will prove to be a social and economic disaster as the facts above prove. It is strange that in this country, amongst some experts, there is such a strong bias towards wind when all the evidence and recommendations from experts in countries that have experience of major wind strongly point in the opposite direction. The correct decision supported by the facts above is that South Africa needs to foster proven competitive technologies, namely clean coal, nuclear, solar and gas, providing the contracts are awarded in terms of public, fair and competitive legal tenders. Energy, electricity and employment growth are the keys to South Africa’s future economic, social and political prosperity, sustainability, stability and individual economic freedom.

If South Africa follows the path of increasing renewables and cutting the use of coal and nuclear, South Africa is indeed heading for a dark future.

Jeffrey is an independent economic consultant

Economic Risk Consultant

49 49

WE DENIGRATE COAL AS A STABLE SOURCE OF ELECTRICITY AT OUR PERIL https://www.businesslive.co.za/bd/opinion/2017-01-03-we-denigrate-coal-as-a-stable-source-of-electricity-atour-peril/ 03 January 2017 Rob Jeffrey argues emerging economies will suffer if coal is taken out of the energy equation Modern Coal plants are cleaner and more efficient Many articles suggest clean energy will save the planet, but one published by The Guardian in the middle of 2015 entitled "Clean energy won’t save us" is true for many reasons.

The main objectives of emerging economies, in particular, must be to reduce poverty, inequality and unemployment. This can only be achieved by increasing the economic growth rate in these countries. It is illconsidered to restrict the amount of electricity generated by coal. Such a plan does not consider some of the real economic and social problems of achieving such a goal.

Modern coal plants are more efficient and create less pollution and substantially reduced greenhouse gas emissions (GHG) than previous-generation coal power plants. In many emerging countries such as SA, India, Indonesia and other Asean countries, moderngeneration coal technology remains by far the cheapest source of generating a stable, secure and dispatchable supply of baseload electricity. Electricity remains the essential driver of economic growth and prosperity.

Picture: Robert Tshabalala These countries, excluding SA, acknowledge these facts and have major, ongoing plans to significantly increase electricity output from coal and gas. Not surprisingly, they have higher current and planned economic growth rates. Their current and planned growth rates exceed 5%. SA’s sustainable longer-term economic growth outlook is less than 2.8% per annum and is currently less than 1%.

The logic of believing that climate change will be solved only by reducing fossil fuel-based electricity, particularly coal in SA, and failing to introduce nuclear by significantly increasing wind-generated electricity is fallacious and any attempts will come at great economic and social cost.

A brief examination of some facts and figures reveals the irrationality of the vested financial and idealistic interest driving the plans to substantially reduce electricity production from coal.

Economic Risk Consultant

50 50

Limited if any impact on climate In many emerging countries such as SA, India, Indonesia and other Asean countries, modern-generation coal technology remains by far the cheapest source of generating a stable, secure and dispatchable supply of baseload electricity.

Calculations indicate that reducing coal-fired electricity globally and particularly in SA would have a small impact on global warming as projected by the Intergovernmental Panel on Climate Change. This depends on whether human beings do play the major role in any long-term impact on global temperature change. This theory is being disputed by an increasing number of respected scientists. The Bray and Von Storch International Survey of Climate Scientists in 2015-16 reveals 75% are convinced there is global warming, but only 49% are convinced human beings are behind the warming.

To believe humans are the major driver of climate change when nature has been doing this over a far greater temperature range for 4-billion years is illogical and arrogant. It is estimated that total global coal-fired electricity generation accounts for a potential global temperature increase of about 4.8% of the postulated increase in temperature of 6ºC by 2100. This would result in a potential 0.29ºC reduction in temperature if global coal were eliminated by 2100.

Significantly, if a saving of 33% is made through reduced emissions output by global coal, it may reduce the anticipated change in the temperature increase of 33% multiplied by 0.29ºC or 0.096ºC by 2100. This amounts to 0.0011ºC per annum over the remaining years of this century.

As SA is responsible for only 1.1% of the global greenhouse gas (GHG) emissions, then all other things being equal, total emissions from SA’s coal production is 1.1% of 0.29ºC, i.e. 0.0032ºC. SA’s contribution of reducing its coal usage for electricity by 33% from current levels and moving to renewables would reduce global temperature by 0.0011ºC by 2100.

Norway fund blacklists more coal groups over climate concerns But all other things are not equal, because SA is a heavy user of coal for electricity and energy. Adjusting the figures for this major point, it is calculated that the impact by South African coal-fired power stations on global temperatures amounts to only 0.058ºC by 2100. If coal usage is reduced by 33%, the reduction would amount to no more than 33% of 0.058ºC, i.e. 0.0193ºC by 2100. This works out at 0.00023ºC per year.

Cost of renewable programme and carbon tax It is estimated that the cost of the carbon tax and the renewable programme through higher prices, unstable electricity supply and lower economic growth will reduce GDP by 2035 by about R1-trillion to R1.5-trillion.

Economic Risk Consultant

51 51

Bjorn Lomborg, president and founder of the Copenhagen Consensus Centre and a visiting professor at Copenhagen Business School, wrote in a recent article that based on UN figures, if every country were to make all promised carbon cuts, the Paris treaty’s 2016-2030 aims would reduce temperature rises by 0.207ºC. Lomborg calculates these promises, using the best peer-reviewed economic models – through slower GDP growth from higher energy costs — would reach $1-trillion to $2-trillion every year from 2030.

On the basis of SA’s GDP in relationship to global GDP, and SA’s contribution of 1.1% to global emissions, this means carbon-tax renewables and its other efforts would cost SA R35bn-R51bn per annum. SA’s efforts will furthermore reduce temperature increases by about 0.0026ºC by 2100. These figures offer substantial support to the figures above.

Picture: ISTOCK Political and social consequences of renewables The GHG emission figures and their impact on temperature are so insignificant that for all practical purposes, SA’s contribution is negligible and not even quantifiable over 85 years. Meanwhile, China, India and the Asean countries will be increasing their emissions from increased fossil fuel and coal usage considerably.

If anthropogenic CO² is the major driver of modern global warming, an assumption many renowned scientists’ question, its contribution will negate savings that SA makes many times over. The potential negative economic, social and political consequences for SA of making the planned sacrifices in electricity generation from coal are enormous. It is an expensive feel-good factor for the wealthy and those with vested financial and idealistic interests. The naivety of the South African policy is clearly illustrated by the figures.

The generation of clean-coal and nuclear-power electricity are the cheapest and most economic energy sources for generating secure, sustainable, stable and dispatchable electricity for many countries that are still emerging and industrialising.

Jeffrey is a senior economist and managing consultant at Econometrix

Economic Risk Consultant

52 52

REINDUSTRIALISING SOUTH AFRICA IS AN URGENT NECESSITY http://www.engineeringnews.co.za/article/reindustrialising-south-africa-an-urgent-necessity-2016-10-07 7th October 2016 South Africa is at a crossroads in its economic, social and political development. Hard choices need to be made, which will determine whether the country is to grow and help its people prosper or whether it is to sink into a long period of slow growth, stagnation, declining standards of living and steadily rising unemployment. Much will depend on the vision and courage of its political and business leaders in fostering a spirit of cooperation and support from all citizens and groups. By Rob Jeffrey Introduction South Africa is blessed with a treasure trove of natural resources. Some say the country holds the richest reserves of minerals in the world. It also has a population with the abilities and cultural diversity to develop them. It is indeed a country with huge possibilities and opportunities. In addition, it offers a gateway and hub to a continent with vast market and economic growth potential.

Yet the signs are not good. Indeed, at the moment, they are ominous. Since 1986, the secondary sector has fallen from 30% to about 21% of gross domestic product (GDP), while the mining sector has fallen from representing about 13% to 7%. In the meantime, the tertiary sector has grown from 51% to 69% of GDP. Some of these trends are a normal development in economies with a rapidly growing standard of living, but for a country at this stage of its economic development, these shifts are excessive. The last seven years – since 2008 – have seen the situation worsen, with GDP growth falling to below 2%. Growth in mining and manufacturing has been negligible, while agricultural growth has averaged only 1% a year. Since 1995, the population has grown from 45-million to 55-million, and unemployment has grown from 3.7-million to 7.7million. Since 2008, only about 500 000 jobs have been created, almost all of which have been in the services sector, with the larger portion in government.

Some argue that South Africa needs to move away from mining and manufacturing. The direction they favour is an economy based on the service sectors. They take the current trends as signs that South Africa is moving in this direction. This is incorrect. It is actually a strong sign of failed economic, industrial and energy policies.

South Africa is still in an industrialising phase of its economic development. The skewed growth in services at the expense of mining and manufacturing growth, far from being an indicator of a successful change to a services- based economy, is an indication of the country’s inability to grow its goods-producing sectors and that it is destructively deindustrialising.

Objectives and policy The current inequity in South Africa is reflected by the fact it has an excessively high Gini coefficient.

Unemployment is currently running at over 25%, while, among those aged from 16 to 24-year olds, it is close to 50%. After assessing the age distribution of the population, it is estimated that, between 2015 and 2030, about 16-million people will enter the labour market. However, with a sustainable GDP growth rate of only 2.5% a year, less than six-million jobs will be created by 2030. Unemployment will almost double and increase to close to 15-million.

This cannot be done without transforming the economy and focusing on raising the sustainable economic growth rate. This has to be the priority. All other priorities need to be of a secondary nature and rank far behind. All policies should be assessed by whether they are more likely to contribute to economic growth. If they do not and/or there is a likelihood that they will reduce economic growth, then they should be struck off the list or materially altered to reflect the priority objective – economic growth. Government has many such present and proposed policies that in practice, or will in practice, reduce economic growth. Such policies include minimum wages, the National Health Insurance scheme, the carbon tax, the renewable-energy Economic Risk Consultant

53 53

programme and the sugar tax, to name a few. All these have the potential to significantly reduce investment, slow economic growth and increase unemployment. The key to success in the future is reindustrialisation, as envisaged in the National Development Plan.

The future South Africa desperately needs five important components for its future economic success. Firstly, the country needs to have its leadership positions filled by people who have impeccable credentials and are capable of giving clear leadership and guidance to a country of talented people.

Secondly, it needs people of vision. The country requires a more equitable developmental model that is based on its strengths. It is imperative that South Africa urgently reindustrialise. Many of the same industries remain important but different, new industries are required for the modern world.

Thirdly, there is need to withdraw restrictive legislation and introduce legislation that fosters an environment that promotes both foreign and domestic investment.

Fourthly, it needs a government that is steadfast and firm enough to instil confidence that the future course will be strictly followed.

Finally, it urgently needs to ensure security of supply of sufficient baseload electricity at competitive prices, which are necessary for an industrialising economy.

In summary, the leadership and government must recognise that there are many conflicts in a diverse emerging economy and that compromises are necessary. For success in the reindustrialisation process and to restore domestic and foreign investor business confidence in South Africa, leadership should: • Unequivocally lead the country away from interventionism and hold the leadership accountable to effect this.

• Remove all barriers to market entry and foster a spirit of unity and cooperation, as JF Kennedy did when he said: “Ask not what your country can do for you; ask what you can do for your country.” Government, by its laws and actions, must lead the reunification of South Africa. Adapt, or withdraw, a host of wellmeaning policies that could restrict fair and equitable labour-market practices, leading to low productivity and loss of efficiency. These policies often have unintended consequences that benefit the few but often, in practice, make matters worse, not better, for the poor.

• Adapt policies that are abused and lead to increases in graft and corruption or ensure that there is accountability for misconduct.

• Ensure that decisions are made on a competitive basis and are based on efficiency and cost. The economy remains largely untransformed. This needs to be urgently addressed by adopting policies that focus on creating economic growth rather than focusing on policies which restrict participation.

• While the premise on which preferential supplier agreements are enacted should be lauded, these agreements often have significant unintended consequences. Apart from encouraging corruption, they frequently increase prices and inefficiency and, hence, reduce the rate of economic growth and increase unemployment.

• Base its legislation on improving productivity, efficiency and effectiveness. The laws governing procurement and the restrictions on market entry have a profound negative impact on all these matters.

• Adapt land reforms to cater for the requirement that agricultural production needs to be secure.

Agriculture is one of the foundations of the country’s economy. South Africa needs to ensure a healthy commercial agriculture industry to ensure food security, profitable yields and the wellbeing of farmers and farm workers.

• Privatise many State-owned companies and assets. This should involve an arm’s-length, market-related transaction involving the sale of shares and genuine control into private, competent ownership, whether this involves foreign or domestic investment, or both.

Economic Risk Consultant

54 54

•

Finally, and most importantly, ensure that a large segment of education moves its focus from an academic orientation to a vocational skills-based approach to cater for the needs of an industrialising economy and the skills of the broad majority of its youth.

Only by making significant progress in each of these areas can the economy move towards higher economic growth based on reindustrialisation. In short, it is necessary that government and leadership “stop cutting the cake and instead put the ingredients in place to start baking it”.

Conclusion The reindustrialisation of South Africa is critical for growing the economy and increasing employment in the country. The goods-producing industries – mining, manufacturing, agriculture and agricultural processing – are crucial job drivers in the country’s economy. These industries have significant upstream and downstream linkages to other sectors in the primary, secondary and tertiary sectors. The socioeconomic contribution of these sectors is vital in contributing to the social upliftment of communities. Together, these industries, with their upstream and downstream linkages, make a significant contribution to the South African economy as a whole in terms of GDP, employment, compensation, government revenue, exports and capital investment.

Reindustrialisation, electricity and employment growth are the keys to South Africa’s future economic, social and political prosperity, sustainability, stability and individual economic freedom. For this to occur, it is essential that government, business, trade unions and the people of South Africa recognise their obligations and work towards the common goal of making this process a success.

Jeffrey is MD and senior economist of Econometrix (this article is adapted from the full article that first appeared in the South African German Chamber of Commerce Annual Report 2016)

Economic Risk Consultant

55 55

REINDUSTRIALISE SA-CRITICAL FOR ECONOMIC GROWTH, JOBS https://www.biznews.com/sa-investing/2016/09/16/rob-jeffery-reindustrialise-sa-critical-for-economic-growthjobs/ South Africa’s economy rebounded in the second quarter with 3 percent growth but there are still tough questions that need answering for it to swim to calmer waters. Following negative growth in the first quarter, a technical recession was avoided, but there is still concern such a fate could be met by year end. Triggers lie in wait as rating agencies sit with fingers on the button to downgrade the sovereign credit rating to junk, which could cause an unwanted domino effect. Rob Jeffrey puts on his economic hat, looking at solutions to the low-growth environment.

Jeffery says reindustrialisation, electricity and employment growth are key but for this to occur, government, business, trade unions and the people of South Africa must recognise their obligations and work towards a common goal. The detailed report was first published in the SA German Chamber of Commerce 2016 annual report. – Stuart Lowman Introduction South Africa is blessed with a treasure trove of natural resources. Some say the country holds some of the richest reserves of minerals in the world. It also has a population with the abilities and cultural diversity to develop them.

It is indeed a country with huge possibilities and opportunities and, in addition, it offers a gateway and hub to a continent with vast market and economic growth potential. Yet South Africa is at a crossroads in its economic, social and political development.

Hard choices need to be made, which will determine whether the country is to grow and help its people prosper or whether it is to sink into a long period of slow growth, stagnation, declining standards of living and steadily rising unemployment. Much will depend on the vision and courage of its political and business leaders in fostering a spirit of cooperation and support from all citizens and groups.

REUTERS/Sophie Sibeko Workers are seen at a construction site in Sandton outside Johannesburg, South Africa June 20,2016.

The slowdown in Economic Growth The signs are not good. Indeed, at the moment, they are ominous. In recent years, there has been a dramatic slowdown in the key goods-producing sectors, primarily agriculture and agricultural processing, mining and manufacturing. The global recession of 2008/9 left many sectors of the economy with sharply reduced domestic and export demand levels. Since the early years of the most recent 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, amongst others, iron ore, chrome, platinum and manganese. However, if the supporting legislation were more enabling and the infrastructure, including logistics and electricity, were in place, South Africa could develop its mineral resources and manufacturing sectors to a far greater extent.

Since 1986, the secondary sector has fallen from 30% to approximately 21% of GDP, whilst the mining sector has fallen from representing approximately 13% to 7%. In the meantime, the tertiary sector has grown from 51% to 69% of GDP. Some of these trends are a normal development in economies with a rapidly growing standard of living, but for a country at this stage of its economic development, these shifts are excessive. The last seven years Economic Risk Consultant

56 56

since 2008 have seen the situation worsen, with GDP growth falling to below 2%. Growth in mining and manufacturing has been negligible, whilst agricultural growth has averaged only 1% per annum. Financial services and personal service growth have averaged 2.4% and 2.8% per annum respectively and government services 3.3% per annum. Since 1995, the population has grown from 45 million to 55 million, but unemployment has grown from 3.7 million to 7.7 million. Since 2008, only half a million jobs have been created, almost all of which have been in the services sector and the larger portion in government.

Some argue that South Africa needs to move away from mining and manufacturing. The direction they favour is an economy based on the service sectors. They take the current trends as signs that South Africa is moving in this direction. More than that, many believe the recent decreasing trends in electricity demand and electricity intensity are signs that South Africa is moving in this direction naturally. This is incorrect. It is actually a strong sign of failed economic, industrial and energy policies. South Africa is still in an industrialising phase of its economic development. Like many other emerging economies, less than 25% of the population account for more than 75% of all energy, goods and resources usage, while unemployment remains high. Unemployment is currently running at over 25%, whilst amongst the young 16 to 24-year olds, it is close to 50%. After assessing the age distribution of the population, it is estimated that between 2015 and 2030, approximately 16 million new entrants will enter the labour market.

Objectives and policy The objectives of government are clearly to reduce unemployment, poverty and inequality. This cannot be done without transforming the economy by focussing on raising the economic growth rate and thereby increasing employment and raising the standard of living of all South Africans – particularly that of the poor – and give the poorer 75% of the population a far bigger opportunity to obtain a greater share of the resources and goods. The mining and manufacturing industries are important contributors to the economy, representing 7% and 12% of South Africa’s GDP respectively. Their impact on the total economy, however, is far greater through their linkages with other important sectors of the economy. More importantly, these two sectors account for over 70% of the country’s exports by value. The skewed growth toward the government and services sectors and inadequate growth of the goods producing-sectors have resulted in a structural current account deficit with insufficient exports and higher imports. Services generally employ workers that are more skilled. This together with inadequate education and vocational skills training facilities has led to a shortage of skilled labour and high unemployment amongst less skilled workers. Universities and vocational training facilities are training students for jobs that the market doesn’t need. The development of higher education training cannot be done in isolation.

It needs business and government to take greater responsibility for collaborating in developing skills that businesses need. The high growth in services at the expense of mining and manufacturing growth, far from being an indicator of a successful change to a services-based economy, is an indication of the country’s inability to grow its goods-producing sectors.

There are many policy issues causing bottlenecks, which have resulted in an inflexible labour market, uncertainty regarding ownership and infrastructure weaknesses, particularly with regard to electricity. A strong perception has developed that government is not fostering or encouraging business and that business is considered to be part of the problem, not the solution. The recent interventions by government in financial institutions and the leadership issues associated with this have only added fuel to the fire. As a result, there has been a loss of domestic and overseas investor confidence in South Africa. All these matters need to be urgently addressed.

Lessons from the past and the need for a new visionary The South African economy was transformed from its farming roots by the finding of diamonds near Kimberley in 1867 and later gold on the Witwatersrand in 1884. Other mineral discoveries were made and the rich mineral resources of South Africa became the engine room for the development of the South African economy. However, the economic base only increased dramatically once support industries started to develop.

Economic Risk Consultant

57 57

It is these advances, which resulted in the real development and transformation of South Africa from a resourcerich commodity-exporting country into the modern, developing, mixed economy that it is today. What were the catalysts that separated South Africa from so many other economies that have failed to fully utilise their own natural resources?

The first reason, as always, is that there was someone, who had the vision and ability to see the potential of what could be done. The second reason was that the leadership of the country recognised this opportunity and gave effect to the development of this vision.

The landscape from those dark days in the country’s history has changed. Now the economy has to provide opportunities, not only for a minority of the population, but for all South Africans willing and capable to participate. While the ideologies underlying the vision of former governments and leadership to develop the economy were inherently flawed, examples of the economic contribution of companies such as Sasol and Eskom started decades ago have merit. The challenge of the modern government and leadership is to provide the country with the vision and direction that incorporates all South Africans.

In the 1920s, the man with the vision and the ability to execute these tasks was unquestionably Dr Hendrik Van der Bijl. There were other pioneers, but it was his vision and guidance that laid the foundations for the development of South African industry and modern South Africa.

Part of the vision was: “It is not the Government’s function to do everything for its people, but it is its duty to create conditions that will encourage enterprise, not the type of enterprise that results in the unfair enrichment of some at the expense of others, but enterprise that results in equitable distribution of all the benefits.”

At that time, he made an assessment and concluded that cheap secure electric power, cheap steel and financial and technical assistance to the developing industries were the prerequisites to further development. The capital would be provided by the State and the companies would be run on commercial lines. This led to him founding Eskom in 1923, followed by Iscor, the Industrial Development Corporation, and Amcor for the beneficiation of South Africa’s base minerals, and Van der Bijl Engineering for the establishment of a heavy engineering industry.

The key components of the strategy depended on the cheap energy source that the rich resources of local coal allowed. One of the key decisions was that the country’s industrial development be based on secure low-cost electricity.

By 1975, South Africa was faced with potentially increased isolation and rising levels of sanctions. There was a considerable need to become more self-sufficient in its energy requirements. Whilst independent in terms of its electricity-generating requirements, South Africa remained heavily dependent on imported oil and chemicals.

Sasol was established in 1952 and significantly reduced South Africa’s dependence on imported hydrocarbons.

Today, the Secunda operations of Sasol are one of the world’s largest petrochemical operations and manufacture more than seven million tons of fuels and chemical feedstock a year in their primary production phases. Besides producing liquid and gaseous fuels, the group produces more than 200 chemical products supplying customers in over 90 countries. It supplies the majority of the country’s chemical building blocks. While Sasol arguably stands out among the success stories of companies created out of necessity, the need to drive growth through the creation of new businesses should become the vision for a modern and transforming South Africa.

Developmental strategy The strategy was effectively a developmental state policy, philosophy and strategy, albeit a deeply flawed government policy model, as it was effectively based on cheap labour and the equity was mainly held by a privileged segment of the population. Nevertheless, its impact propelled South Africa and the majority of its people from an agricultural and resource commodity-based trading economy to become a modern mixed economy with a solid economic base for future development and growth.

Throughout its post-1860’s existence, the mining industry has been an important raison-d’être for the development of both the mining financial and other financial markets within the South African economy. Mining contributed to the development of secondary and tertiary education in the country as its technological Economic Risk Consultant

58 58

requirements expanded. The sector has played an important developmental role in both social and socio-political developments in the country and the SADC region over the past 150 years. For many decades, it provided the basic demand for industrial outputs of technology, which soon spread to the transport and communication sectors of the economy, and eventually to the manufacturing, electricity supply and construction sectors. Although the other sectors of the South African economy may appear to be independent of mining activity today, the initiation of many value-added chains can be traced back to a combination of the historic demands and wealth of the mining sector and its current output and export contribution to the economy. All this has been based on the security of supply of electricity, for which the energy source has been coal.

It is not suggested that in the future South Africa is going to depend on the same industries as set out above to the same extent. Mining will take some time to recover from the recent global reduction in demand and low prices. There are new industries that require development for the modern economy. However, the aforementioned industries remain the essential building blocks of almost any successful sustainable economic development for many years to come.

The future The decline in the rate of economic growth, the balance of payment deficits and the low increase in the rate of employment, particularly for less skilled workers and youth, are structural problems caused partially by the relative decline of the country’s goods-producing industries – effectively the deindustrialisation of South Africa – and partially by well-meaning policies which have had unintended detrimental consequences. 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 improves and employment increases. One way for this to occur is if the country were to reindustrialise. This can only happen, if the rate of growth of the electricity-intensive goods-producing industries, namely mining, manufacturing, agriculture and agricultural processing, are substantially increased.

If this does occur, then the electricity intensity in the country may well increase or at least stay constant. For this to occur, the correct economic policies must follow. Energy and electricity will never again be cheap, but for higher economic growth, there has to be security of supply of electricity at competitive prices. Unfortunately, economic growth models based on relatively low electricity growth forecasts become self-fulfilling prophecies.

This will result in the objectives listed above becoming unachievable.

South Africa desperately needs five important components for its future economic success.

• Firstly, the country needs its leadership positions filled by people with impeccable credentials, capable of giving clear leadership and guidance to a country of talented people.

• Secondly, it needs people of vision. The country requires a more equitable developmental model based on its strengths. It is imperative that South Africa urgently reindustrialise. Many of the same industries remain important but different, new industries are required for the modern world.

• Thirdly, there is need to withdraw restrictive legislation and introduce legislation that fosters an environment, which promotes both foreign and domestic investment.

• Fourthly, it needs a government steadfast and firm enough to instil confidence that the future course will be strictly followed.

Economic Risk Consultant

59 59

•

Finally, it urgently needs to ensure security of supply of sufficient base load electricity at competitive prices, which are necessary for an industrialising economy.

In summary, the leadership and government must recognise there are many conflicts in a diverse emerging economy and that compromises are necessary. For success in the reindustrialisation process and to restore domestic and foreign investor business confidence in South Africa, leadership should: • Unequivocally lead the country away from interventionism and hold the leadership accountable to effect this.

• Remove all barriers to market entry and foster a spirit of unity and co-operation, like Kennedy did when he said, “Ask not what your country can do for you: ask what you can do for your country.” The government by its laws and actions must lead the reunification of South Africa.

• Adapt, or withdraw, a host of well-meaning policies that could restrict fair and equitable labour market practices, leading to low productivity and loss of efficiency. These policies often have unintended consequences that benefit the few but often in practice make matters worse, not better, for the poor.

They can also be abused and lead to increases in graft and corruption. These range from current labour legislation to the proposed legislation on minimum wages. All these have the potential to significantly reduce investment, slow economic growth and increase unemployment.

• Ensure that decisions are made on a competitive basis and are based on efficiency and cost. The economy remains largely untransformed and this needs to be urgently addressed by adopting policies, which focus on creating economic growth rather than focussing on policies which often restrict participation, becoming excessive and are often abused.

• While the premise, on which preferential supplier agreements are enacted, should be lauded, they often have significant unintended consequences. For example, purchasing policies, where high cost electricity producers whatever their merits are selected in preference to lower cost producers, can cause unnecessarily high electricity prices that reduce the rate of economic growth and job creation, thereby creating unemployment.

• Base its legislation on the fact that the country needs to improve its productivity. More than that, it needs to improve its efficiency and effectiveness. The laws governing procurement and the restrictions on market entry have a profound negative impact on all these matters. Many laws are in place that protect employed labour at the expense of the unemployed.

• Adapt its land reforms to cater for the requirement that agricultural production needs to be secure and agricultural supplies offered at competitive prices. The country has lost almost half its farming population.

Farming is a commercial enterprise today. Agriculture is one of the foundations of the country’s economy.

South Africa needs to ensure a healthy agricultural industry to ensure food security, profitable yields, and the well-being of farmers and farm workers.

• Privatise many state companies and assets. This should involve an arm’s length market related transaction involving the sale of shares and genuine control into private competent ownership whether this involves foreign or domestic investment or both.

• Finally, and most importantly, ensure that a large segment of education moves its focus from an academic orientation to a vocational skills-based approach to cater for the needs of an industrialising economy and the skills of the broad majority of its youth.

Only by making significant progress in each of the above areas, can the economy move towards higher economic growth based on reindustrialising its economy. In short, it is necessary that government and leadership should “stop cutting the cake and instead put the ingredients in place to start baking it.”

Economic Risk Consultant

60 60

South Africa should take as examples the success of those countries that have adopted market orientated policies and fostered their goods producing sectors.

Vietnam stands out. In 1992 the Prime Minister V Văn Kiệt, an economic reformer introduced more market orientated policies. He died in 2008, but the country has since flourished. During the period 2000 and 2015, it grew at over 6% per annum. Its growth has not been due to its farming output alone; high growth has also been recorded in manufacturing, information technology and high-tech industries.

Men hold placards offering temporal employment services in Glen vista, South of Johannesburg. REUTERS/Siphiwe Sibeko Future energy sources Industrialised countries and their leaders need to recognise that the needs and requirements for emerging and developing economies are very different from their own. They should not force their own standards onto these economies. Emerging markets need secure base load electricity power at the lowest possible cost. This means they need to fully utilise the natural resources that give them a comparative economic advantage, whether that natural resource be oil, hydroelectricity, or a fossil fuel such as coal or gas. Germany has chosen a path that is based on wind and solar. However, solar and wind are highly variable sources of power. In these instances, Germany is able to access a grid, from which it can draw nuclear power from France, coal-based power from Poland or hydroelectricity from Scandinavia or Switzerland. South Africa has no such luxury. It must generate its own power with very little being imported from elsewhere. Wind and solar only provide power approximately 33% of the time at best. South Africa must provide its own generation for approximately 67% of the time, when the renewables are either not working or not generating electricity because of their variability. The developed world needs to recognise that, at this stage of technological development, fossil fuels in the form of gas and coal will continue to play a substantial role in providing the country’s major energy source. They, together with nuclear, are the only sources of energy that can provide security of supply of base load electricity at internationally competitive prices. Energy, electricity and employment growth are the keys to South Africa’s future economic, social and political prosperity, sustainability and stability.

India is a case in point, their electricity power demands are expected to increase at more than 4% per annum during the period up to 2030. The coal-fired share of electricity production will fall from 75% to approximately 55%. However, it is anticipated that more than 120GW of additional coal-fired capacity will be brought on line.

This represents an increase of approximately 3.6% per annum. The reason is that the Indian Government considers coal-fired electricity to be the cheapest and most secure source of base load power. In a speech earlier this year President Obama acknowledged that India and China would be building coal-fired power stations, but they should use clean coal technology. Other countries following this path include Bangladesh, Indonesia, Vietnam and Poland. This is something South Africa needs to do, and replacing older coal-fired powers stations with new clean coal technology is an important way forward.

Economic Risk Consultant

61 61

Over the next century, the world’s sources of energy will move inexorably towards sustainable sources of energy, which are environmentally clean and have a smaller carbon footprint. Cleaner coal, gas and petrochemicals will remain dominant for many years in countries such as South Africa, India and China. Nuclear power is also available as a source of energy but it is so expensive in capital cost that only relatively small increases can realistically be envisaged. The impacts of higher electricity prices on goods-producing industries, especially the mining and manufacturing sectors, are of particular concern. Other than PV solar for domestic use, large-scale, unreliable and expensive wind and solar are not suitable for base load power in the South African context.

South Africa’s economy and employment growth is dependent on the good performance and growth of the goods producing sectors.

Their global competitiveness must be maintained as a major priority in order to promote exports and limit imports.

Sishen Solar Farm Conclusion The reindustrialisation of South Africa is critical for growing the economy and increasing employment in South Africa. The goods-producing industries, namely mining, manufacturing, agriculture and agricultural processing, are crucial job drivers in the country’s economy. These industries have significant upstream and downstream linkages to other sectors in the primary, secondary and tertiary sectors. The socio-economic contribution of these sectors is vital in contributing to the social upliftment of communities. Together these industries with their upstream and downstream linkages make a significant contribution to the South African economy as a whole, in terms of GDP, employment, compensation, government revenue, exports and capital investment.

South Africa has had many national plans including AsgiSA, GEAR and the New Growth Path to guide the industrialisation of South Africa. All of these – to a greater or lesser extent – have not achieved their objectives.

Today it has the National Development Plan (NDP). It must not be allowed to fail. It is time to put words into action. This document sets guidelines for this transition to happen. An example of what needs to occur has been given by the success and thrust of government working with the automotive industry where BMW, MercedesBenz and Volkswagen have made such a tremendous contribution to the industry, South Africa and all its peoples.

There are many other industries, in which business leaders are ready to cooperate and lead the way. South Africa is not short of talented political, economic, religious, social and business leaders of all backgrounds to guide South Africa out of its current difficulties. With this talent and the assistance of the industrialised giants of the world, such as Germany, South Africa could indeed have a bright future.

Reindustrialisation, electricity and employment growth are the keys to South Africa’s future economic, social and political prosperity, sustainability, stability and individual economic freedom. For this to occur, it is essential that government, business, trade unions and the people of South Africa recognise their obligations and work towards the common goal of making this process a success.

Rob Jeffrey, Managing Director and senior economist of Econometrix.

Economic Risk Consultant

62 62

Economic Risk Consultant

63 63

SOUTH AFRICA, THE CONTINENTS FORMER GOLDEN CHILD http://www.radiofreesouthafrica.com/south-africa-continents-former-golden-child/ This article first appeared in Good Governance Africa SA companies are increasingly investing elsewhere. According to data, FDI flows into the rest of the world were R83.2-billion in 2014 and R68.3-billion in 2015 Robert Jeffrey & Johannes Jordaan 04 May 2016 Foreign Direct investment flows The South African economy has made great strides since 1994, when apartheid was replaced with a democratic system. One useful measure of this is the country’s FDI liabilities — FDI stock held by foreign companies in the country. In 1996, these were $14.4-billion in nominal terms, but by 2015, they were $148-billion, having reached a high of $179-billion in 2011.

However, the tide of FDI to South Africa is turning. In 2015, world FDI flows increased an estimated 36.5% to $1.7-trillion, according to the United Nations Conference on Trade and Development (UNCTAD). Meanwhile, FDI flows to Africa decreased 31.4% to $38-billion in the same year, and FDI flows into South Africa decreased 74% to $1.5-billion.

Data from the SA Reserve Bank (SARB) shows that FDI to South Africa reached a record level of R80.1-billion Johannesburg — Picture: Dylan Harbour ($8.3-billion) in 2013 and was still high at R62.6-billion ($5.78-billion) in 2014, but that it dropped to R22.6-billion ($1.77-billion) in 2015. FDI flows tend to be volatile, but the 2015 level is the lowest level in nominal terms since 2006.

According to UNCTAD, the large decline in FDI to African countries is due to the recent end of the commodity “super-cycle”, which has seriously affected the flow of FDI to resource-rich countries. In 2015, FDI flows into Mozambique were down 21% to $3.8-billion while FDI to Nigeria declined 27% to $3.4-billion, for example. However, both of these figures were higher than South Africa’s FDI of $1.5-billion in the same year. (UNCTAD preliminary data for 2015.

Differences in value with respect to the previous paragraph may be due to different definitions of FDI used by SARB and UNCTAD.) Meanwhile, South African companies are increasingly investing elsewhere. According to SARB data, South African FDI flows into the rest of the world were R83.2-billion ($7.7billion) in 2014 and R68.3-billion ($5.4-billion) in 2015. This demonstrates the entrepreneurial qualities inherent in South African business, but it is also an indication of a lack of confidence in the domestic economy. In 2014, South Economic Risk Consultant

64 64

African companies held more foreign FDI assets as compared to the FDI liabilities held by foreign companies in South African companies. It was the first time we have seen this since 1998.

The sharp decline in FDI to South Africa is highlighted by its performance on the AT Kearney FDI Confidence index.

While the country occupied the 11th position out of the top 25 rated countries in 2012, it dropped to the 13th position in 2014. More ominously, it was not included in the 2015 ranking at all. According to the 2015 EYE Africa Attractiveness survey, FDI flows into new green- and brown-fields projects in South Africa declined in 2015, for a second consecutive year.

Slowdown in key goods-producing sectors Internally, South Africa has seen a dramatic slowdown in key goodsproducing sectors in recent years, mainly in agriculture and agricultural processing and in the mining and manufacturing sectors.

Following the global recession of 2008/9, many of the country’s economic sectors faced sharply reduced domestic and export demand levels.

Key sectors of the economy have also seen longer-term declines.

Manufacturing contributed about 30% of GDP in 1986, but that share is currently at about 21%. The share of mining fell from 13% to 7% in the same period. Meanwhile, services have grown from 51% to 69% of GDP. The UK remains the largest FDI investor in South Africa, according to SARB data. The FDI assets (stocks) held by UK companies in South Africa were 45.6% of the total South African FDI liabilities in 2014.

However, this share decreased from 54% in 2009. As against this, companies from the Netherlands held 16.6% of South African FDI liabilities in 2014, an increase from 10.6% in 2009.

In another development, foreign investors are changing their interest in South Africa, with more emphasis on the service industry and less on value-added industries such as mining and manufacturing.

FDI liabilities in manufacturing decreased from a share of 27.9% in 2009 to 16.5% in 2014. However, the FDI share in finance, insurance, real-estate and business services increased from 27.1% in 2009 to 44.4% in 2014 from R235billion ($27.8-billion) in 2009 to R715 billion ($65.9-billion) in 2014 (in nominal terms). FDI liabilities in mining and quarrying accounted for 33.4% of total FDI liabilities in South Africa in 2009, but dropped to 23.5% in 2014.

The increased share in the service sector was mainly driven by foreign investment in South African banking. This could change, depending on who buys the Barclays share in Barclays Africa Group. In early April this year, Londonbased Barclays plc confirmed its plans “to sell down its 62% stake in Barclays Africa (Absa) over the next two to three years, to a level at which it can deconsolidate it, probably below 20%”, according to the Johannesburg daily newspaper, Business Day. One contributing factor to the lower inflow of FDI to South Africa in 2015 was the sale by UK pharmaceutical giant GlaxoSmithKline of half of its 12.4% stake in South African drugs manufacturer Aspen Pharmacare for R10.5-billion ($823.5-million). Steinhoff bought control of Pepkor, a South African holding company with extensive interests in retail, from South African business tycoon Christo Wiese and Brait, an investment company with South African roots but a primary listing in Luxembourg. The deal also involved Brait Mauritius, which was holding Brait’s 37% of Pepkor, and “therefore counted as a foreign investor disinvesting from a South African asset for balance of payments purposes,” according to the Rand Daily Mail, a South African website.

Economic Risk Consultant

65 65

These deals resulted in a net FDI inflow of -R13.9billion (-$1.09billion) in the first quarter of 2015, but this was followed-up with positive net inflows of R6.9-billion ($541.2-million), R15.9-billion ($1.25-billion) and R13.7-billion ($1.07-billion) in quarters two, three and four respectively, according to SARB data.

Foreign investors are losing confidence in the South African economy Nevertheless, the recent sharp decline in FDI to the country is clear evidence that foreign investors are losing confidence in the South African economy. Given the sluggish growth of the South African economy, investors were looking elsewhere, according to the 2015 EY investment attractiveness report.

Significant investment from other countries, notably the Brics grouping, which consists of Brazil, Russia, China and India, as well as South Africa, has not been forthcoming. These countries are also facing economic challenges caused by the global economic slowdown and the fall in prices of commodities.

South Africa’s economic performance has certainly been influenced by low commodity prices, but the end of the commodity super-cycle tells only part of the story. Resource-rich countries, particularly in Africa, have generally failed to develop much-needed infrastructure and to develop their potential downstream supply and other industries. They have also suffered the twin scourges of corruption and poor policymaking. Sadly, South Africa is now no exception.

In particular, policy uncertainty generated by the South African government and the resulting poor sector performance are negatively shaping the situation. As in other African countries, government policy decisions are impeding economic growth and discouraging foreign investment — particularly from Western industrialised countries, traditionally the major source of FDI to the country.

Without improved economic growth, the country’s domestic consumer growth will be limited. Currently, South African households are in serious debt. Government investment growth is limited because the government is short of funding.

Realistically speaking, the only source of growth in the near future will be a significant increase in domestic investment, and in particular, foreign direct investment.

Measures are required to promote economic growth If the country is to turn its economic fortunes around — and hence its ability to deliver services and a decent quality of life to its citizens — a number of measures will be necessary.

• Restrictive legislation that leads to inefficiencies and low productivity must be withdrawn.

• Legislation that promotes both domestic and foreign investment must be encouraged, rather than discouraged.

• The country’s infrastructure must be enhanced to support growth.

• South Africa’s goods-producing primary and downstream industries must be developed.

• Many of the country’s state assets, which are performing inadequately, must be privatised, and control handed to the private sector.

Individual freedom and true economic independence will only come by focusing on those factors that increase economic growth. Countries that do not participate in the process of globalisation, or which introduce inferior or inadequate policies as compared to those of developed or other developing countries, run the risk of becoming Economic Risk Consultant

66 66

comparatively less competitive in the global economy. Such a fate awaits South Africa, unless its political leadership wakes up.

This article first appeared in Good Governance Africa

Economic Risk Consultant

67 67

SOLVING ENERGY POVERTY, UNEMPLOYMENT, AND GROWTH CHALLENGES IN SOUTH AFRICA http://cornerstonemag.net/solving-energy-poverty-unemployment-and-growth-challenges-in-south-africa/ http://www.engineeringnews.co.za/article/energy-poverty-unemployment-and-growth-2016-08-05/rep_id:4136 5th August 2016 This opinion piece Rob Jeffrey argues that the South African economy cannot afford to restructure its economy and industry towards renewable energy, nor can it afford the other structural changes this implies.

Introduction The three fundamental objectives of South Africa, and most emerging nations, are to address inequality, unemployment, and poverty. These objectives cannot be achieved by redistribution of wealth alone. They can only be achieved by raising the economic growth rate. A higher growth rate is dependent on having the correct public policies in place and having an adequate and growing supply of affordable electricity. In order to ensure economic growth, South Africa must develop its industrial base and therefore it is essential to supply electricity at the lowest possible cost.

Renewables In South Africa the major electricity supply company is Eskom. The major issue raised by Eskom executives in this debate concerns renewables. They have accurately described the fallacy and weakness of the primary renewables, wind and solar. These are highly variable, often supplying power when they are not needed and not supplying power when they are needed.1 As a result, these are expensive forms of energy production, yet the supply must be bought in terms of the purchase agreements at set prices. This has been the experience of Germany (under the “Energiewende” program) where the country sells unwanted electricity at a loss to other countries and purchases the required supply at a premium. These prices are in effect financial subsidies for wind and solar.

In Germany, they are fortunate that they have other major electricity-generating countries nearby; they can tap into electricity provided by nuclear power plants in France, coal-generated electricity in Poland, or hydroelectricity from Scandinavia.

Cape Town city lights coming on at dusk.

South Africa does not have that option. Due to these financial subsidies, Germany, aside from Denmark, has the most expensive industrial and household electricity in Europe. Consequently, Germany has now placed a cap on the supply of renewables and is in the process of removing all financial subsidies to renewable companies.2 What “energiewende” has clearly established is that wind energy and solar CSP are not technologies suitable for mass baseload electricity supply.3 This theme has been repeated in other countries such as Australia where their wind energy drive is a case in point and echoes what has happened in Germany.4 The drive for “green energy” is slowing growth and enforcing poverty in emerging economies. In developed economies, it is causing unemployment, reducing living standards, and increasing energy poverty. This can be seen in the political backlash in Britain, the U.S., and even Germany. In these nations, affluent environmentalists argue that the cost is merited. They have the ear of financial institutions and governments. The institutions see secure profits because of guaranteed prices and subsidies, and governments can afford the subsidies because there are limited objections to “green” taxes. Green taxes can become a regressive tax with people on lower 68 Economic Risk Consultant 68

incomes having to pay relatively more than people on higher incomes. Consequently, renewables are in effect a tax on the poor.

In South Africa, concerns exist over plans to introduce massive windfarms totalling 60 GW spread across South Africa. It is deemed that geographically separated windfarms will ensure a more continuous supply of electricity.5,6 A wind profile study has been conducted across the country. This theoretical study held the view that somewhere in the country, the wind is blowing. This is not the experience of Europe and the UK where the average load factor from all onshore windfarms remains 30% or less.7 Electricity generation would still need to have back up for baseload power when delivery fails. As set out by the Council for Scientific and Industrial Research (CSIR), a full delivery plan for 16 GW of baseload electricity requires a total of 60 GW energy capacity consisting of onshore facilities (offshore windfarms have not yet been considered, as they are far too expensive) of 32 GW wind, 12 GW solar PV, and 16 GW of gas for consistent secure delivery of electricity. This full delivery plan for 16 GW baseload power would require more than 6000 km2 of unsightly windfarms generally built on high ground to ensure maximum efficiency. More than 12,000 km of roads will be needed to service all the units and the landscape of the countryside would be criss-crossed by at least 10,000 km of additional transmission lines. They would also damage the local habitat, with extensive evidence from other windfarms of mortality to insect, bird, bat, and other flying life that are particularly vulnerable to windfarms. Windfarm developers in the planning stages must take adequate preventative provisions and actions to avoid habitat, ecological, and environmental problems.

Nuclear The second major issue raised by Eskom concerned nuclear. The CEO of Eskom stated that baseload electricity should be provided by coal (presumably including other fossil fuels, primarily gas) and nuclear. The question remains, how much nuclear? Nuclear power stations can take up to 10 years and longer to build, and the upfront costs make a large build program unaffordable for a country such as South Africa. As an example, Britain recently approved the construction of the Hinckley Point nuclear power station project. The total cost for the 3200MW Hinckley Point nuclear power station could be US$30 billion. In comparison, the new 4800-MW Medupi coal-fired power station costs an estimated US$14 billion and the initial, now installed, renewables 2310-MW program cost approximately US$12 billion.

Coal-fired power stations provide most of South Africa’s electricity.

Renewables in South Africa only have a load factor or deliver power 31% of the time, 8 their total cost exceeds nuclear with load factors of 92% while clean coal-fired plants such as Medupi with load factors of 85% are far less expensive. Renewable capital costs have dropped substantially since 2011 and are currently far below the initial costs as set out above. The guaranteed delivered costs for wind-generated electricity are approximately 62 cents/kWh. A first assessment would indicate that wind is cheaper than its coal and nuclear competitors.

However, based on this guaranteed delivered price and a load factor of only 31%, this guaranteed price effectively becomes a subsidized price as it is paid for whether the electricity is required or not. There are also increased costs due to a low load factor on transmission costs, and furthermore, greater distances are involved. As a result, the true total cost of wind power as a deliverable baseload dispatchable power source is significantly more

Economic Risk Consultant

69 69

expensive than coal-generated electricity. The cost is also greater than nuclear which, in turn, is also approximately 30% more than equivalent coal-fired electricity.

These significantly higher final delivered electricity prices would have a major detrimental impact on the economy.

Increased electricity costs would slow economic growth and devastate the goods-producing industries—in particular, the key mining, manufacturing, agricultural, and agri-processing industries. These industries are important to South Africa’s export performance and employment growth, particularly among the relatively unskilled work force. By 2030, it is estimated that there will be 16 million new workers entering the work force.

With low baseload electricity growth of only 2.5% per annum, due to the planned heavy reliance on renewables unsuitable for baseload power, GDP growth is unlikely to increase at more than approximately 2.8% per annum.

At this growth rate, fewer than 6 million jobs will be created by 2030, resulting in unemployment growing by at least 10 million job seekers.9 Independent Power Producers The third major issue raised concerned the role of Independent Power Producers (IPPs). The point made was that Eskom would no longer sign new agreements with IPPs.10 According to Eskom, the issue concerned the guaranteed prices and offtakes of renewables, not the IPPs themselves. It would be uneconomic for Eskom to pay guaranteed prices without assurance that electricity would be delivered. This is economically, and from a business perspective, absolutely correct and there is now concern about the future role of IPPs. However, IPPs are essential for the future of energy provision and economic development of the economy.

Eskom is already a giant monopoly controlling generation, transmission, and distribution of the entire market, which cannot be allowed to continue in a market-orientated economy. Eskom generates, distributes, and controls through the grid close to 40,000 MW. By 2035, in less than 20 years, South African electricity demand is expected to increase to over 70,000 MW. The bulk of this electricity growth should be provided by IPPs to ensure a more competitive power market.

The existence of a mega-monopoly, whether state-controlled or privately owned, prevents competition and will affect negatively on the economy. The structure of Eskom in this process must be addressed. Eskom, one of the largest electricity utilities in the world, should be split into at least two, and preferably three, stand-alone independent operating companies: a generation company (Genco), a company responsible for the grid transmission and market operations (Gridco), and a distribution company (Disco).

Internationally, countries are increasingly privatizing and deregulating their electricity sectors to ensure more efficient management. The three companies, Genco, Gridco, and Disco, should be set up as three independent public-private partnerships with management firmly in the hands of the private sector. Genco would focus on baseload generation, replacing its aging fleet using clean coal technologies supported by major gas operations.

This structure would allow the IPPs to flourish and bring in genuine competition free of all subsidies. This must include all generating, grid, and distribution subsidies. If subsidies are required, for example to encourage distribution and poverty alleviation, these must be government funded not company funded. Some difficult political decisions would need to be made in a transparent way.

Environmental The fourth major issue in the background of every decision regarding energy is climate change and the commitment to COP21. The outcome of COP21 was the Paris Agreement. What was important was not only what was agreed but more importantly what was not agreed.

Governments were able to negotiate a set of sound long-term global objectives. The Paris Agreement reflects a “hybrid” approach, blending bottom-up flexibility (to achieve broad participation) with top-down rules, to promote accountability and ambition.11 Importantly, the agreement asked for no firm commitments by any Economic Risk Consultant

70 70

country. Many provisions establish common goals while allowing flexibility to accommodate different national capacities and circumstances. The reason for an objective or goal without binding obligations was simply that various countries were unable to reach national political agreement internally (e.g., the U.S.). Emerging countries were also not going to make firm commitments as they had other priorities such as high levels of poverty and/or had rich fossil fuel reserves. In summary, countries were expected to do what was in their best economic and financial interests. This is and needs to be exploited by all emerging economies with high levels of poverty and with extensive, relatively cheap fossil fuel resources.

Energy Policies in Emerging Economies The emerging countries include the ASEAN countries, China, Russia, India, Vietnam, Korea, and Poland. Many of these countries are embarking on major expansions of coal and fossil fuels. They have determined that clean coal and gas are the cheapest, most efficient, and reliable sources of electricity to achieve their economic growth objectives and, in turn, poverty reduction, with replacement of aging inefficient power stations a major objective. Clean coal is globally recognized to be a cost-effective and efficient method of reducing emissions and reducing other pollution.12 The 10 ASEAN countries are prime examples of countries using clean coal technologies. In these countries, electricity generation increased by an average of 7.5% per year, from 155.3 TWh in 1990 to 821.1 TWh in 2013. Fossil fuels generated 79.4% of ASEAN electricity in 2013.

Coal-based electricity capacity is projected to increase from about 47 GW in 2013 to 261 GW in 2035, an average growth rate of 8.1%.13 In Vietnam, GDP growth is expected to average 6% per annum between 2015 and 2030. Coal generation will increase from 36% of electricity generation to 56%, increasing at 7.2% per annum.14 All these countries are expecting annual growth of over 5% for the next 15 years.

South Korea expects growth in its power sector of 3.6%, the major proportion of which will be coal and gas.15 In Poland, electricity growth is also expected to be primarily coal-based generation.

Piyush Goyal, Minister of State with Independent Charge for Power, Coal, New and Renewable Energy in the Government of India, has stated, “We will be expanding our coal-based thermal power. That is our baseload power. All renewables are intermittent. Renewables have not provided baseload power for anyone in the world.”16 It is not surprising, therefore, that in India annual average electricity demand between 2000–2013 grew from 376 TWh to 897 TWh, most of it coal based. Coal-fired electricity is forecast to grow at over 4% per annum from approximately 166 GW to 500 GW by 2040.17 Cape Town settlement.

In comparison, the average growth in “Electricity available for distribution in South Africa” as measured by StatsSA grew an average of only 1.7% during 1990 and 2015.18 Average GDP growth was 2.5% during the same period.

Even worse, average electricity demand growth from 2000 to 2015 has averaged only 1.3% per annum. Over this period, the average GDP was 3.1% per annum.19 This higher economic growth was due to excessive growth in the services sector, primarily in the public and government sectors, not from the mining and manufacturing sector where growth was poor. The equivalent figures for the period 2008 to 2015 were electricity supply growth of only Economic Risk Consultant

71 71

approximately 1.1% per annum and GDP growth of only 1.9% per annum. It is little wonder that South African GDP growth does not parallel other high-growth emerging economies. In terms of the IRP, electricity growth between 2015 and 2030 appears to be approximately 3.9%.20 However, because of the low load factors of renewables, real deliverable baseload electricity growth could be only 2.5% per annum. As a result, future average growth to 2030 is unlikely to average more than 2.8% per annum.20 The Way Forward South Africa is facing slow growth and lack of both domestic and foreign investment primarily in the mining and manufacturing industries. From a policy point of view, public policies need to change radically to make South Africa (a treasure chest of coal and minerals) attractive to such investment again. Planning for low baseload electricity growth is a self-fulfilling prophecy. Industrialized countries and their leaders need to recognize that the needs and requirements for emerging and developing economies are independent from their own with different priorities such as poverty alleviation.

Emerging markets need secure baseload electricity power at the lowest possible cost to give them a comparative economic advantage, whether that natural resource is oil, hydroelectricity, or a fossil fuel such as coal or gas. The developed world needs to recognize that, at this stage of technological development, fossil fuels in the form of gas and coal will continue to play a substantial role in providing the country’s major energy source. In a speech earlier this year, President Obama acknowledged that emerging economies such as India, China, and the ASEAN countries would be building coal-fired power stations out of necessity, but advised they should use clean coal technology.21 It is time for South Africa to break away from the vested idealistic or financial interest driving the large renewable expansion schemes. They are not the panacea for the country’s future energy problems and growth. Nuclear and coal are the only sources of energy that can provide security of baseload electricity supply at internationally competitive prices. The fact that nuclear is capital-intensive upfront means that South Africa cannot afford a major investment in nuclear as the way forward. Nevertheless, if procurement goes ahead, it should be no more than a maximum of 3200 MW. The way ahead for South Africa lies in limited nuclear build, major new build, and replacement of relatively older coal-fired power plants with new clean coal power generation supported by major expansion of gas plants. It should be made mandatory to install solar PV on all new domestic houses and all business buildings. Tax incentives should be available to install solar PV on new and existing structures.

Conclusion The South African economy cannot afford to restructure its economy and industry toward renewable energy nor can it afford the other structural changes this implies, including any form of carbon tax, either now or in the foreseeable future. Such a move will only increase uncertainty and further reduce long-term domestic and foreign investment. Carbon tax and massive renewable policies are poised to take South Africa in the wrong economic direction resulting in slow economic growth and increased unemployment. This will have major detrimental economic, political, and social consequences affecting the country for a generation.

The cost and burden of such plans always fall on the poor in terms of high unemployment, regressive taxation, and increasing poverty. South Africa already has these problems and needs to follow the lead of other emerging Economic Risk Consultant

72 72

nations that are increasingly using coal and gas to pursue higher growth. Energy, electricity, and employment growth are the keys to South Africa’s future economic, social, and political prosperity, sustainability, and stability.

It is time to put South Africa first.

By Rob Jeffrey Senior Economist and Managing Consultant, Econometrix (Pty) Ltd References 1. Eskom Media Statements. (2016). Various, www.eskom.co.za/OurCompany/MediaRoom/Pages/Media_Statement_Archive.aspx 2. Horgan, J. (2016, 7 July). Germany’s energiewende sticks it to the poor. The American Interest, www.theamerican-interest.com/2016/07/07/germanys-energiewende-sticks-it-to-the-poor/ 3. Andrews, R. (2016, 22 August). An update on the energiewende. Energy Matters, euanmearns.com/anupdate-on-the-energiewende/ 4. Sloan, J. (2016, 19 July). Energy price reveals folly of renewables. National Wind Watch, www.windwatch.org/news/2016/07/19/energy-price-reveals-folly-of-renewables/ 5. Bofinger, S., Zimmermann, B., Gerlach, A.-K., Bischof-Niemz, T., & Mushwana, C. (2016, 3 March). Wind and solar PV resource aggregation study for South Africa. Public presentation of results. Pretoria: CSIR and Fraunhofer.

6. World Nuclear Association. (2016, September). Renewable energy and electricity, www.worldnuclear.org/information-library/energy-and-the-environment/renewable-energy-and-electricity.aspx 7. Eskom. (2016, 31 March). Integrated report, www.eskom.co.za/IR2016/Documents/Eskom_integrated_report_2016.pdf 8. Econometrix in-house analysis 9. Eskom Media Statements. (2016). www.eskom.co.za/OurCompany/MediaRoom/Pages/Media_Statement_Archive.aspx 10. Bodansky, D. (2016, 17 May). The Paris climate change agreement: A new hope. American Journal of International Law, 110 (forthcoming). Available at: ssrn.com/abstract=2773895 11. Sporton, B., (2016, 30 March). The power of high-efficiency coal. World Coal Association, www.worldcoal.org/power-high-efficiency-coal-0 12. Suryadi, B, & Velautham, S. (2016, 9 June). Coal’s role in ASEAN energy. ASEAN Centre for Energy, www.aseanenergy.org/blog/coals-role-in-asean-energy/ 13. World Coal Association (WCA). (2016, 15 March). Coal in the energy mix of Vietnam, www.worldcoal.org/coal-energy-mix-vietnam 14. Siemens. (2013). South Korea: A paradigm shift in energy policy, www.energy.siemens.com/hq/pool/hq/energy-topics/publications/living-energy/pdf/issue-08/essaysouth-korea-SeungIlCheong-Living-Energy-8.pdf 15. WCA. (2016). Energy in India. WCA, https://www.advancedenergyforlife.com/sites/default/files/03.08.16%20WCA_Factsheet_India.pdf 16. WCA. (2015). India’s energy trilemma, www.worldcoal.org/file_validate.php?file=WCA%20report%20%20India%27s%20Energy%20Trilemma.pdf 17. Statistics South Africa. (2016). Electricity generated and available for distribution: July 2016, www.statssa.gov.za/publications/P4141/P4141July2016.pdf 18. South African Reserve Bank. (2016). Full quarterly bulletin, No. 281, September 2016, 19. Department of Energy, Republic of South Africa. (2013, 21 November). Integrated Resource Plan for Electricity (IRP) 2010–2030. Update report 2013, www.doe-irp.co.za/content/IRP2010_updatea.pdf 20. Econometrix in-house analysis Economic Risk Consultant

73 73

21. Martin, R. (2016, 9 June). Modi and Obama shake hands, but India’s path to clean energy remains long.

MIT Technology Review, www.technologyreview.com/s/601649/modi-and-obama-shake-hands-butindias-path-to-clean-energy-remains-long/

Economic Risk Consultant

74 74

THE BENEFITS AND CHALLENGES ASSOCIATED WITH COAL IN SOUTH AFRICA http://cornerstonemag.net/the-benefits-and-challenges-associated-with-coal-in-south-africa/ http://www.fossilfuel.co.za/articles/2014/Rob-Jeffrey.pdf

By Rosemary Falcon: SARChI Chair of Clean Coal Technology, University of the Witwatersrand, Johannesburg; Rob Jeffrey: MD, Econometrix; Andrew Kinghorn: Executive Director, Fossil Fuel Foundation The Cornerstone of South African Energy The important role that coal has played in South Africa’s economic development is often downplayed in today’s world, where fossil fuels are frequently denigrated. Coal supplies over 70% of the country’s energy needs, over 90% of its electricity requirements, and over 95% of its metallurgical carbon (coke) requirements. While these percentages are likely to decline in the long run, they are likely to remain significant over the next 30 years, failing which serious long-term damage to the economy could result.

Coal was South Africa’s primary source of resource revenue for total sales value in 2011, 2012, and 2013 (Figure 1) and the first commodity to generate a total sales value in excess of R100 billion (US$9.3 billion) in one year.1– 3 Such statistics highlight the continuing importance of coal to the South African economy.

The Electric Sector Eskom is the state-owned utility charged with providing the country and greater region with power. Thirteen coalfired power stations are currently in operation, including three that were recommissioned after being mothballed.

All but three stations use pulverized fuel technologies.4,5 Eskom relies on coal-fired power stations to produce approximately 90% of its electricity. These stations operate 24 hours a day to meet demand. Eskom’s Generation Division provides an installed capacity of 37,745 MW from the 13 coal-fired power stations. Their total net output, excluding the power consumed by their auxiliaries and generators currently in reserve storage, is 34,952 MW. Two new coal-fired power stations, Medupi and Kusile (similar supercritical coal-fired power stations with a planned efficiency of 38% compared to 34% of the subcritical technologies in the older stations), are now under construction and are proceeding in accordance with environmental requirements from funders and legislation.

Economic Risk Consultant

75 75

The Integrated Resources Plan for Electricity (IRP) envisages a further 6250 MW of new coal being required before 2030.6 We believe this will be totally inadequate if South Africa is to achieve higher rates of economic and industrial growth. The IRP envisages 9600 MW of new nuclear power. We are concerned that there will be fairly substantial delays in bringing nuclear power on line by 2023, given that the normally accepted lead time for nuclear power is 14 years. This could mean the new nuclear power may not come online until 2029 at the earliest.

Coal would be a more reliable and lower-cost baseload option for the time frames under consideration. The capital cost for coal-fired power stations, in particular, is substantially less than for nuclear power stations. We believe that the higher capital costs may well have compromised South Africa’s sovereign ratings and, therefore, its ability to fund other essential infrastructure and social development programs. Although nuclear power should not be excluded, a smaller nuclear allocation would be a more prudent solution. Thus, we recommend that at least 8 GW of new coal capacity is required if South Africa is to achieve the higher levels of economic growth required by the National Development Plan. The fact is that energy, electricity, and employment growth are the keys to South Africa’s future economic, social, and political prosperity, sustainability, and stability. Ensuring the security of supply of energy sources for electricity at competitive prices is a prerequisite for this to occur. Fossil fuels—in the form of gas and coal in South Africa’s case—are the only sources of local energy that can provide sufficient security of baseload electricity supply for this to be a realistic, achievable goal.1 The Cost and Coal Cliffs A key national decision after the Second World War was that South Africa’s industrial development should be based on inexpensive energy to promote growth. Given the resources available, coal-based energy became the central driving force behind the modern economic state of South Africa.

However, today’s energy prices are skyrocketing. Eskom’s tariff has more than tripled from R20 c/kWh in 2003 to >R70 c/kWh in 20148 [compared with an average price of R212 c/kWh for Independent Power Producers (IPP) in 2013]. This is a result of the influence of the ruling party during the late 1990s when Eskom’s proposal to build further coal-fired power stations due to diminishing spare capacity was rejected in favour of IPPs which ultimately did not materialize, the current indecision regarding the way forward, and the World Bank’s lending terms. The estimated cost of power from both Medupi and Kusile is expected to be about R1.00/kWh. In addition, the price is expected to double in the next five years. Known as the cost cliff, this is further exacerbated by the fact that most municipalities charge a 100% mark-up. This is caused by a multitude of factors, ranging from increases in the cost for coal and new-build power plants to policy measures, and means that homes and offices now pay ~R140 c/kWh, for example, in Gauteng.

Looking to the future, South Africa is facing a dramatic power crisis largely caused by the lack of sufficient coal for power generation over the next five years. Known as the looming coal cliff, the size of the coal shortfall ranges from 60 to 120 Mt and is expected to impact the country between 2014 and 2019. South Africa’s biggest nearterm energy challenge, therefore, is to supply Eskom over the next five years. Of the four billion tons of coal that Eskom will need over the next 40 years, two billion tons will need to come from new sources.

Economic Risk Consultant

76 76

Sasol and CTL In South Africa, Sasol has been producing fuels and chemicals using Fischer–Tropsch technology since 1955 and has evolved into one of the country’s largest corporate contributors to economic development. Sasol contributes about R40 billion, or 4%, to South Africa’s national annual gross domestic product (GDP). Sasol supplies about 25% of the country’s liquid fuel needs through synfuels derived from coal and natural gas at Secunda, and an additional 12% from conventional fuels derived from crude-oil refining via their Natref oil refinery at Sasolburg. This saves the country more than R30 billion a year in foreign exchange as a result of not having to import finished. Sasol plays an important role in reducing reliance on imported oil by producing synthetic transportation fuels, liquid petroleum product, chemical feedstock, intermediates, and final products.

South Africa’s Energy Reserves South Africa possesses an abundant supply of most key economically important minerals, with the key exception of crude oil. Natural gas on the Cape South and West coasts and the potential of the Karoo shale gas deposits could well resolve South Africa’s energy problems for the next two or three generations. The largest energy resource is coal; the country is endowed with estimated coal reserves sufficient to cater for both domestic and export demand for 200 years with a sizeable reserve beginning to be exploited in the Waterberg in Limpopo Province and in the neighbouring countries of Botswana, Zimbabwe, and Mozambique.

Challenges Coal has become to South Africa what oil is to the countries of the Middle East—the basis of its economy as the primary source of foreign exchange, energy, and its manufacturing industry. However, the future of coal in South Africa also faces many challenges, not the least of which is a lack of a clear strategy for the future.7 As the National Planning Commission (NPC) noted:7 While most of South Africa’s energy comes from coal, it is striking that government has no integrated coal policy.

South Africa ranks fifth internationally as a coal producer and exporter, yet government has no clear export strategy. There is also no integrated development of mining, rail and port infrastructure to facilitate either exports or anticipated increases in local production and consumption, within acceptable environmental constraints. The private shareholders of the Richards Bay Coal Terminal have expanded export capacity to 91 million tons per year.

However, Transnet has barely been able to transport 60 million tons per year from the central coal fields to the coast. Government urgently needs to bring together all relevant players (mining companies, Transnet, Richards Bay Coal Terminal, relevant government departments, banks and others) to forge an agreed investment strategy and plan to accelerate coal exports, which could have beneficial balance of payment and current account impacts.

An expanded export drive would need to be framed within a national policy on the optimal use of depleting coal reserves, including secure supplies for legacy power stations, and the opening of the Waterberg with the required rail links. The private sector has initiated work on a Coal Road Map. Government needs to be an active partner.

Although the current contribution of the coal value chain to the South African economy—in terms of employment, income, energy supply, and contribution to GDP, coupled with South Africa’s significant coal resources— demonstrates a strong potential for continued economic benefit and energy security, there are a number of challenges to the value chain that will shape its future. Not the least of these is efforts to mitigate climate change, which is increasingly shaping international energy debates.

Economic Risk Consultant

77 77

Therefore, serious consideration must be given to the risks and weaknesses that are starting to threaten this mineral commodity, as well as to the potential strengths and opportunities that could arise from a new approach in the future.

Several major concerns confront coal in South Africa. For instance, the run-of-mine coal qualities are now generally higher in ash content and therefore lower in grade as much of the better-quality coals have already been selectively extracted. Coals on the thermal (steam) market in South Africa are sold on grade (i.e., calorific content).

From the late 1970s well into the 1990s, South Africa mined out and sold very clean low-ash coals (known as Special Grade) to Asia as blend coking coals (7% ash) and moderately clean (10–14% ash) coal to Europe (highgrade steam coals or Grade A).

The top grades (Grades A to B) with ash contents of 15% or less (note that little such coal remains) are now either exported or sold at a premium domestically/export parity. Such coal products are few and far between today and often not economically profitable to produce from the high-ash materials now being mined. This means that over 80% of local coals sold to the inland market (including Eskom and Sasol) are now classified as Grades C and D, with average ash contents of 20–30%. India is also a purchaser of some of these grades for their Indian power stations (generally ash contents of 20–25%), leaving local users with even lower grades for home use. Eskom now burns coal averaging 35–45% ash contents in some of its more recently built power stations.

Beneficiation of the coals currently being mined is therefore mandatory in order to provide products suitable for local and export market purposes; this is with the exception of Eskom because they have designed their power stations according to the available coal.

The shortage of water for beneficiation processes is also becoming a serious concern, especially in remote coalfields such as those north of the main Karoo Basin. This is a limiting factor in the chain of production. Dry coal beneficiation processes are now under serious investigation. Eskom aims to reduce freshwater usage and eliminate liquid effluent discharge through effective water management processes, water conservation and water-demand practices, as well as the treatment and potential use of mine water. The future key performance indicator targets progressively reduce to 1.20 L/kWh by 2017.

The production of ever-increasing tonnages of discard stockpiles arising from beneficiation is an ongoing point of concern for land owners and environmentalists. Currently over two billion tons are stored in stockpiles in various coal mining districts, with a further 60 million tons accumulating each year. Technological processes are being investigated to make use of this potentially useful carbon resource.

The coalfields of the future lying farther afield will require considerable infrastructure and development before such resources can be fully utilized. In turn, this is likely to incur increased costs not only for establishing new mines and supporting urban, retail, and industrialized areas, but also for transporting coal to the traditional areas of industrialization (Gauteng).

Logistics for the transport of coal to and from remote coalfields and from current coalfields to the Richards Bay Coal Terminal for export is constrained by railage limitations at present, thereby impeding the export capacity of South African coal to markets abroad. Road transport is currently damaging the surfaces of the roads in the northeastern sector of the country, a fact which is currently receiving considerable attention.

The threat of acid mine drainage from defunct mines remains an ever-present concern. Government is seeking solutions to these problems arising from the past and is imposing stringent regulations in the form of environmental impact assessments and mine closure insurances on currently operating mines.

Economic Risk Consultant

78 78

The storage of CO2, the most abundant greenhouse gas produced predominantly from the power stations boilers and petrochemical gasifiers in this country, may be limited by a lack of underground storage capacity in South Africa. Currently identified sites are relatively far removed from point sources.

Environmental pressures are increasing and, notwithstanding the future potential benefits of carbon credits, carbon taxes are already making their first appearance. International trade partners appear to be considering the banning of exports from countries whose exporting manufacturers have unacceptably high carbon footprints. In a country such as South Africa, where power generation and petrochemical production give rise to high carbon emissions with little chance of commercially feasible CO2, such threats are of serious concern.

Notwithstanding the issues outlined above, the South African coal industry is buoyant and currently addressing the many issues that face the industry. Several of these issues can be addressed through the development and deployment of domestically derived clean-coal technologies that are being designed to specifically suit the needs in South Africa, including high-ash coal, low water availability, and socioeconomic requirements.

Clean Coal Technologies Given the undeniable need to use coal as the baseload source of energy in South Africa, the country has been undertaking research in a number of clean coal technology areas, and in some fields South Africa can now be considered a global leader. For instance, acid mine drainage research has shown that such water can be used for agriculture, with fly ash from power stations used as a filter in the upgrading/treatment process.

Beneficiation has been developed to an advanced, world-class degree, which provides cleaner coal that can improve plant efficiencies and reduce CO2 emissions. A number of new dry coal beneficiating technologies are now undergoing pilot-scale testing in an attempt to reduce the requirement for water in such processes. The results to date have proved highly successful, with considerable beneficial impacts in user processes; for example, the upgrade (i.e., deshaling or the removal of contaminating rock) from the coals being sold to the Eskom power stations.

The upgrading and use of coal washery discard materials is undergoing further review as a source of energy in fluidized bed combustion and gasification processes. The ash from such processes is being developed for use in cement manufacture, and in building and road materials.

Furthermore, cleaner and more environmentally friendly processes, including underground coal gasification (UCG), are now being developed, with Eskom’s UCG pilot-scale initiative being considered a world-class feat. The process has been in use at the Majuba Colliery in KwaZulu-Natal for about three years and gas with calorific values averaging 4 MJ/L has been fed into the Majuba power station on a pilot-scale basis. Should this process continue to prove successful in larger-scale operation, this technique could make possible considerably cleaner in-seam utilization of the many deeper and poorer-grade coal seams in South and southern Africa.

Economic Risk Consultant

79 79

The logistics of transport are under discussion in terms of privatizing railroad links and increasing rolling stock (i.e., rail wagons and locomotives). In addition, smaller mines are collaborating to share stockpiling and sidings in an attempt to rationalize road transport.

To increase efficiencies of coal utilization (i.e., using less coal for more power, thereby reducing greenhouse emissions), Eskom has set and achieved high targets in terms of increased combustion efficiencies in some of the world’s largest coal-fired power stations, some of which are using coals with ash contents well in excess of 45%—a feat not yet achieved anywhere else. Increased boiler efficiencies in all other industrial coal-using plants to ensure considerably lower emissions of CO2 are ongoing and the subject of current training and consultations.

In terms of criteria emissions, flue gas desulfurization (FGD) systems are being installed in some power plants, while smaller capture-ready units are readily available for others. However, given the low sulphur, mercury, arsenic, and chlorine contents of South African coals, control over these toxic emissions may not need to be as stringent as is the case in the coals of the Northern Hemisphere. Research conducted in South Africa on coals in the Highveld Coalfield has shown that sulphur reduction through beneficiation prior to use could be more costeffective and efficient than through the installation of post-use FGD processes.

With regard to CO2 emissions, research is currently being targeted at CO2 utilization rather than storage. Long term, relatively advanced research is currently underway in South Africa to utilize CO2 by developing algal and/or bamboo farms for CO2 adsorption and biomass co-firing adjacent to power stations, coal-to-liquids plants, and agricultural land.

Conclusions The future sustainability of energy in South Africa—whether based upon coal, nuclear, or renewables—will depend on the ability to fund it by the government of the day. The consumer, who ultimately foots the bill, will be the key factor in determining how the energy mix functions.

While many legislative, technical, and economic steps remain to be taken, and minds must be turned to achieving the goals of an environmentally “clean” South Africa, much has already been initiated. The future will depend on the vision of those yet to come, for the road is long and the plans of action are more than one generation in duration. One thing is certain, however: The value of coal as an energy source and a highly prized carbon-based chemical source can never be underestimated. Coal is undeniably the source of the most valuable commodity in the South African economy as it provides low-cost energy and is the source of some of the most valuable chemicals known to man.

References Directorate Mineral Economics, Department of Mineral Resources. Public Mining, December 2013, December 2012, December 2011, December 2010, December 2009. (Provisional) (data obtained via authors’ request).

Chamber of Mines of South Africa. (n.d.). Mining factsheets: Facts & figures 2013, 2012, 2011, 2010, 2009, chamberofmines.org. za/media-room/facts-and-figures (data obtained via authors’ request).

Economic Risk Consultant

80 80

Department of Mineral Resources, Public Mining 2013, 2012, 2011, 2010, 2009, (data obtained via authors’ request).

Eskom. (2014). Energy technologies, www.eskom.co.za/About electricity/ElectricityTechnologies/Pages/Electricity_ Technologies.aspx (accessed July 2014).

Eskom. (2014). Fact sheets – 4. Supply of water and coal, financialresults.co.za/2012/eskom_ar2012/factsheets/004. php (accessed July 2014).

Department of Energy, Republic of South Africa. (2013, November). Integrated resource plan for electricity 2010– 2030: Revision 2, Final report, www.doe-irp.co.za/content/IRP2010: Promulgated.pdf, 6 May 2011.

The South African Coal Roadmap. (2013, July). I Hall (Ed). Fossil Fuel Foundation, www.fossilfuel.co.za/initiatives/2013/SACRMRoadmap.pdf Kinghorn, A. (2014, 11 April). South African energy update – Eskom, a company in distress, Presentation at 2nd Zimbabwe’s Energy Conference, www.fossilfuel.co.za/2nd-zimbabwes-energyconference/ The authors can be reached at rob@economicrisk.co.za, falcons@icon.co.za, and akinghorn.private@gmail.com

Economic Risk Consultant

81 81

CARBON TAX HURTS GROWTH, SOCIO-POLITICAL STABILITY AND EXACERBATE UNEMPLOYMENT https://www.iol.co.za/business-report/opinion/carbon-tax-to-hurt-growth-socio-political-stability-andexacerbate-unemployment-1845755 http://www.ee.co.za/article/carbon-tax-impact-south-africas-economic-future.html April 16th, 2015, A carbon tax will reduce economic growth in South Africa with detrimental consequences to employment and potentially to the social and political stability of the country. Econometrix has submitted an updated report on the Update report 2013 of the Integrated Resource Plan for Electricity, IRP 2010 to 2030, which spells out the damage a carbon tax would do to the South African economy.

Negative impact on the goods-producing sectors The carbon tax will have a serious negative impact on the goods-producing sectors of the economy, particularly mining, manufacturing and agri-processing by making the country less competitive in the global economy.

Econometrix submitted a report on the 2013 update to the Integrated Resource Plan (IRP) for Electricity, IRP 2010 to 2030.

The report has been updated and it spells out the damage the carbon tax would do to the local economy. Included in the report is comment on the futility of introducing a carbon tax or any other envisioned carbon tax-trading scheme.

The intervening period has only reinforced these views.

The facts to back this up include: the failure of such schemes in Europe and elsewhere, the false promises by most leading nations regarding the real steps they will take to mitigate carbon emissions and that there has been no real decline in carbon emissions during this period.

The exception to this has been the US, where greater use of gas has led to a slowdown in their growth in carbon emissions.

Environmental concerns The annual growth increase of China’s carbon emissions has been 520 million tons a year over a ten-year period compared to South Africa’s total annual carbon emissions of 440 million tons in 2013.

A saving of 20 percent in South Africa would amount to 88 million tons but India’s annual growth in carbon emissions over ten years exceeds 90 million tons a year.

Any decline in the growth of carbon emissions in China and India is unlikely in the period up to 2030 as they continue to pursue economic growth.

Furthermore, the argument regarding global warming has changed considerably over the past few years. The global temperature has not increased materially for more than 18 years.

Econometrix is not an expert in this field but it would appear that there are extremely strong arguments and indications that the impact of man-made global warming has been vastly exaggerated. Certainly, South Africa should not be leading the pack in curbing its own carbon emissions at substantial economic and personal cost when the rest of the world is flagrantly disregarding the same set of rules. This is particularly true when South Africa’s likely contribution to any reduction in carbon emissions will be less than measurable.

Passing on costs A carbon tax will increase the costs of electricity and the products of many important industries. These costs will be passed on through price increases to business and consumers. Downstream business and industry will be faced with these increased costs and will in turn pass these costs on to its consumers.

Economic Risk Consultant

82 82

Certain industries will be faced with a carbon tax of their own and in turn their increased electricity costs and carbon tax costs will also be passed on to their consumers and users of their product.

Ultimately, demand will decline as the price increases faced by consumers will reduce their disposable income. In the case of export industries trading in the global competitive market they will either face a decline in demand and/or reduced prices with resulting lower returns. In turn, imports would become more competitive and import sensitive industries would suffer.

The complex impacts of unnecessary real price increases would result in a further deterioration in the current account of the balance of payments, already at an excessively high level. Furthermore, there would be a decline in the return on investment of the affected business and real investment would decline. At present, it is already running at below required levels capable of sustaining an acceptable economic growth rate. Each industry would need to be examined on its merits. An example of the damage it could cause would be the motor vehicle industry.

Current exports total more than R100 billion an annum and total employment exceeds 100 000. The competitive damage to this industry alone could be significant.

Economic impact Econometrix has calculated the economic impacts of these effects. The carbon tax would slow gross domestic product (GDP) growth by 0.4 percent a year, resulting in a 6.5 percent reduction in the size of GDP by 2030, or R350bn, and a reduction of almost 1.4 million in the number of jobs available.

The number of dependents affected is therefore estimated at almost 5 million. This is a sizeable effect on an economy with a population estimated to be approaching 70 million by 2030. Significantly, it will reduce the cumulative taxes collected by 2030 by R750bn due to the slower growth. It will require a large and costly bureaucracy to run this complex, cumbersome and highly inefficient tax. The reduction in taxes is likely to be greater than the net taxes that will be collected.

Overseas experience The argument that the tax will be neutral because this money will be funnelled back to develop the green economy must be treated with great suspicion.

There are a number of economic arguments that strongly suggest that this will not be the case.

It amounts to a tax on existing industries and effectively a subsidy for new ventures many of which are less efficient with higher cost structures.

It consequently will foster higher costs and inflation. Bureaucracy is not the best means of fostering economic efficiency. This is the task of market forces in order to develop a more efficient and effective economy. The experience overseas supports this argument. For example, there are substantial question marks regarding the policy and Germany’s “Energiewende� is a well-documented case in point.

Electricity prices there are the highest in Europe because of the move to renewables and that the development of the new transmission grid has fallen well behind schedule resulting in localised rolling power cuts and has required substantial unforeseen investment. As a result, certain key electricity-intensive industries are considering moving to the US. It is worth noting that Germany is in the process of building a number of coal-fired power stations to correct the imbalance that renewables have caused for electricity supply.

Economic Risk Consultant

83 83

Finally, carbon tax and higher prices of the large input cost increases from electricity price increases runs contrary to the country’s own beneficiation policies, where some companies are now expanding elsewhere because of the non-competitive electricity costs in this country. It is noteworthy that one of South Africa’s key global competitors, Australia, has scrapped plans to introduce such a scheme.

Damage to potential growth Econometrix has recently estimated that South Africa should, with the correct policies and adequate and secure electricity growth, have a potential sustainable growth rate of GDP of 4.1 percent a year. As a result of a number of policy issues, insufficient security of supply and non-competitive prices of electricity, the carbon tax and the switch to more costly renewables and other investment adverse policies, the sustainable GDP growth of South Africa is unlikely to exceed 2.5 percent a year.

This will have a detrimental impact on the country’s goods producing industries, particularly mining, mining beneficiation, manufacturing and its agri-processing sectors. By 2030, this would result in GDP being R1.4 trillion less than what should be achieved, while employment levels could be roughly 5 million lower than the levels actually possible and required.

Carbon tax will play a substantial role in this poor economic performance, which will have a detrimental effect on the standard of living, unemployment and the social and political structure of South Africa. More particularly it would make the country’s important goods-producing sector less competitive. This will cause further structural problems for the current account of the balance of payment, which already has a substantial deficit.

In the latest global competitiveness report, out of 144 countries, South Africa has fallen to 113th in terms of its labour market efficiency, 89th on its macroeconomic environment and has fallen 11 places to 56th in the overall competitiveness index.

The carbon tax will only exacerbate these trends. Most importantly it will more than likely result in a further deterioration in South Africa’s sovereign rating with serious consequences to South Africa’s cost of capital, ability to raise capital and its ability to attract foreign investment.

Rob Jeffrey, is the managing director and senior economist of Econometrix

Economic Risk Consultant

84 84

CARBON TAX, MOVE TO RENEWABLES WILL SLOW DOWN ECONOMIC GROWTH Carbon tax and the excessive use of renewables at this stage will reduce sustainable economic growth in South Africa with detrimental consequences to employment and potentially to the economic, social and political stability of the country

http://www.engineeringnews.co.za/article/carbon-tax-move-to-renewables-will-slow-down-economic-growth2013-11-22 22nd November 2013 Negative impact on goods-producing sectors The introduction of a carbon tax and the rapid move to renewables will have a substantial negative impact on goods-producing sectors, namely mining, manufacturing and agriculture. These decisions will slow economic growth and reduce employment opportunities, particularly for the relatively unskilled and the less privileged.

Three key priorities of policy are alleviating poverty and creating employment, focusing attention on developing goods-producing industries and making South Africa more productive by ensuring that it remains globally competitive. The impact of cost increases in electricity supply is therefore of critical importance to the country.

Proponents of the move to renewables and a carbon tax list several potential advantages, including the fact that they will help reduce the emission of greenhouse gases, contributing to a reduction in global warming by encouraging energy suppliers to use lower carbon techniques and users to move to alternative, lower-carbon sources of energy.

The electricity sectors The electricity sector is responsible for about 48% of South Africa’s carbon emissions as a result of its dependence on coal. As far as domestic users are concerned, it may well be possible, at a cost, over a relatively short period to move to other sources of electricity, primarily solar energy. However, domestic use accounts for only about 26% of total electricity use. The primary users of electricity in South Africa are the all-important mining and manufacturing industries. The important agriculture and agri-processing industries are also electricity intensive.

These industries certainly can and will improve their efficiency, but this is a long-term process. This generally involves new investment in more expensive and more efficient modern plant and equipment. Notwithstanding this, there can only be a slow improvement on the side of industry and they are limited by their electricity sources, as Eskom is their sole supplier for their baseload power. In this country, over 80% of electricity supply is coal fired.

Levying a carbon tax on Eskom will have little impact in the short term on South Africa’s energy mix. In the long term, as set out in the Government’s Integrated Resource Plan for Electricity, there will be a movement towards other energy sources. In this case, the plan is to move to much more expensive wind, solar and nuclear electricity sources. Gas is another potential source that needs to be considered, as it could prove to be a far cheaper and abundant alternative. In the short term, the additional cost of the tax will simply be passed on to consumers in the form of higher tariffs. In the long term, there will be the higher costs of the more expensive sources of electricity.

European electricity supply Notwithstanding the claimed advantages, one must preserve a competitive cost structure for industry. South Africa is not in the same position as European countries, which can hook into a vast electricity power grid with alternative energy sources when shortages of electricity from less reliable sources of power arise. The European power grid has many alternative sources of power generation – ranging from coal-fired power stations in Poland to nuclear stations in France, while some countries, such as Norway, Sweden and Switzerland, are dependent on hydropower.

Economic Risk Consultant

85 85

Already the selected-wind powered option in Europe is proving to be uneconomic and highly unpopular. There are numerous and expensive delays in the delivery of supporting infrastructure, while supply is proving to be unreliable and expensive. A recent article in The Economist highlighted the problems facing Germany’s Energiewende. The aim of this policy is to phase out fossil fuels and nuclear power and move to renewables, primarily wind and solar. The article stated that the process “undermines Germany’s claim to efficiency, threatens its vaunted competitiveness and unnecessarily burdens households”. Costs are expected to double “as prices for natural gas and electricity in North America are plunging, thanks to the shale revolution, so Germany’s most energy- intensive industries are now eyeing expansion on the other side of the Atlantic”. Security of supply and competitive pricing are critical elements of baseload power for these all-important goods-producing industries.

Many people are taking a lead recently given by President Barack Obama, whereby the US is to impose a tax on carbon emissions from coal-fired power stations. Only time will tell how this eventually plays out and whether this will be a good thing for the US. However, the US is very different to South Africa. It currently has a plentiful and growing supply of gas. Energy prices have, as a result, already fallen significantly, and this is leading to a renaissance in the US’s manufacturing and industrial sector.

Carbon tax will increase electricity prices The introduction of the carbon tax in South Africa will increase prices and place the country at a considerable competitive disadvantage. This is particularly important for the goods-producing industries, especially the mining, manufacturing and agriculture sectors and industries. It is proposed to introduce, in 2015, an initial carbon tax of R120/t on carbon dioxide emissions above certain threshold limits. Thereafter, this tax will increase by 10% a year until the end of 2019. The initial proposed tax, because it will be passed on to customers, implies an increase of about 18% in the cost of electricity supplied to users. By the end of 2019, this would amount to an increase in the real price of electricity of 29% for the average consumer. Even with the proposed discounts of 60% to selected industries, this implies that the carbon tax alone will result, by 2020, in an increase in the real price of electricity of about 12%.

The tax, together with the shift to renewables, could conceivably lead over the next seven years to a doubling of the real price of electricity to both business and households. The economic impact of the price increases will insidiously be felt over a period of time, as decreased investment and other negative impacts filter through the economy. By 2021, it is estimated that the carbon tax alone would result in a –0.3% reduction in the potential annual growth of the GDP. This would be accompanied by a reduction in the cumulative potential employment creation of approximately 650 000 persons by 2021. If indeed the real price of electricity does double, these figures could increase by at least 50%. These are serious numbers, making employment creation targets of some five-million additional productive jobs for the economy by 2020 impossible to achieve.

Economic impacts of increasing electricity prices The impacts on the mining, manufacturing and agricultural sectors are of particular concern. The mining and manufacturing industries are important contributors to the economy representing 9% and 14% of South Africa’s gross domestic product (GDP) respectively. 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 75% of the country’s exports by value. Agriculture and agricultural processing is equally important and it should be noted that South Africa has now become a net importer of these products. It is not an understatement to say that the wellbeing of the country is critically dependent on the good performance and the growth of these three sectors. Their continuing and improving global competitiveness is vital if this is to be achieved. They are essential for the economic and employment growth of the economy, as the country is, and will continue to be dependent on their exports and their ability to limit the necessity to import goods.

Economic Risk Consultant

86 86

The mining and manufacturing sectors are highly electricity intensive. Agriculture is also relatively highly electricity intense. These industries’ capability to effect short-term improvements in carbon efficiency will prove to be a slow process. In short, a price increase on the scale envisaged by the move to renewables and the introduction of the carbon tax negatively impacts on the entire economy, with particularly severe impacts on the mining and manufacturing sectors. It is estimated that, based on the introduction of the carbon tax alone: • The mining sector would, by 2021, have a cumulative GDP contribution of 2.7% less than would have been the case if the carbon tax had not been introduced. Recent growth in the sector has been limited and it can be expected that, in the absence of other measures, these trends could continue and the sector could well show little growth.

• The manufacturing sector would, by 2021, have a cumulative GDP contribution of 1.1% less than would have been the case if the carbon tax had not been introduced.

The above would be accompanied by a reduction in the cumulative potential employment creation of about 8%, or about 70 000 fewer jobs in these two sectors alone. These numbers could easily increase a further 50% as a result of the cost of moving to renewables. The knock-on effect from these two important sectors leads to an extremely poor performance of the total economy. The fact is that global markets are extremely price competitive, their ability to pass on costs is at best limited, and exports will be impaired. At the same time, local production will be less import competitive. The result is a double effect on the balance of payments. This will result in further deterioration in the current account of the balance of payments and further depreciation of the rand, which would slow economic growth and have inflationary consequences for the economy.

The negative impact on South Africa’s competitiveness could lead to a withdrawal of investment or, at least, international investors would prefer to expand in more economically friendly and more competitive countries. It is also interesting to note that the higher electricity costs may result in the exact opposite of one of the key objective, namely a reduction in global green- house-gas emissions. The mineral beneficiation industry is a case in point. This industry is of critical importance to South Africa, being a value-added process, and an important contributor to South Africa’s exports. International producers may plan their increases in capacity in other countries with possibly lower emissions standards than South Africa. Global carbon emissions could well rise rather than fall. It has been said that carbon finance should be a substantial opportunity for developing economies, as it is a way to promote new development projects, such as renewable energy. It appears that, in reality, the benefits are at best difficult to achieve and at worst do not exist. In Europe, many projects are falling behind.

Impact of carbon tax and renewables This article underlines the concern that the far too rapid movement towards renewables and the introduction of a carbon tax will slow South Africa’s economic growth, reduce its employment potential and raise unemployment levels, while not achieving the goals its proponents claim will be achieved. It would certainly detrimentally affect South Africa’s business sector and reduce the attractiveness of South Africa as an investment destination for its all-important goods-producing sectors. It could be an expensive price for South Africa to pay at a critical stage in its economic and political development.

The problem of climate change is a global problem but South Africa, as an emerging economy, is going to pay a considerably higher price than many other emerging and advanced economies. Our contribution to reducing global climate change will be less than measurable, but our sacrifice will be enormous.

Unfortunately, the major sacrifices will be paid for by the already disadvantaged, not the privileged few, who in general are those most in favour of its introduction.

Economic Risk Consultant

87 87

CARBON TAX, MOVE TO RENEWABLES WILL SLOW DOWN ECONOMIC GROWTH Introduction Taxation is necessary. However, unnecessary and inefficient taxation can have negative economic and social consequences. Slow economic growth arises when the size of government is excessively large and thus taxation is unnecessarily high. However necessary the tax is viewed by those introducing them. A few facts concerning the trends that have been identified and the taxes that are being considered, including green taxes and particularly the carbon tax include:

•

Taxing a relatively efficient source of power and effectively subsidising a costlier, less efficient source of power will result in a double negative impact on economic and employment growth.

•

Significantly, the US senate recently passed amendments blocking the federal government from taxing carbon dioxide emissions and two measures that attributed climate change to human activity.

•

The above was under the Obama presidency the movement away from such taxes will undoubtedly increase under the new administration.

•

China and India have a clear focus on continuing their industrialisation programmes. Whilst they do have large renewable programmes they clearly focus their major electricity generating programmes based on fossil fuel and primarily coal fired power stations. They also do not have any meaningful tax on carbon.

•

This is anticipated to continue for the future period to 2035 and possibly beyond. Asean countries are even more focussed on utilising their coal and gas resources.

•

The reasons they have done this is because they wish to maximise economic growth and recognise that that must be based on generating electricity from the cheapest possible source, namely coal.

•

Electricity generation must be regarded as the first step in a value adding chain, which extends to using it to add value to other products in the manufacturing, agri-processing, mining and mining beneficiation processes.

•

The reasoning is illogical if South Africa is aiming to maintain or increase its exports of coal allowing other countries to add value to it by generating electricity cheaply and increasing their value-added production processes. Their products become cheaper whilst South Africa’s manufacture products become more expensive because they are curbing cheaper coal power whilst significantly focussing on more expensive renewable power.

•

The carbon tax amounts to a tax on efficient industries and using these funds as a subsidy to developing renewables and a less efficient green economy. South Africa will reduce and lose its comparative advantage both in its export markets and in its import substitution and import replacements industries. This will have significant impacts on its trade balance and hence not only slow its potential growth rate further but also limit its sustainable growth rate.

•

For this reason and because there is insufficient information as to how the tax will be recycled into the economy any recycled benefits have been excluded from this study.

•

Electricity generation must be regarded as the first step in a value adding chain, which extends to using it to add value to other products in the manufacturing, agri-processing, mining and mining beneficiation processes.

Consumption of electricity and carbon dioxide emissions This section summarises the findings. Although the modelling process was undertaken for the Davis Tax Commission in 2014 the figures are relevant for today assuming later start dates. The table below shows the Scope 1 carbon emissions in South Africa per the 2013 CDP report. The cost of the 2013 carbon emissions, at R120 per ton, adds up to R67.2 billion or 1.9% of the 2013 GDP.

Economic Risk Consultant

88 88

Top CO2 emitters in South Africa SA Scope 1 emissions (2013)

CO2e (tons)

SA Scope 1 (Excluding JSE 100, Eskom & Transnet) Eskom Sasol Arcelor Mittal South Africa Ltd JSE 100 (excel top ten emitters) Pretoria Portland Cement Co Ltd BHP Billiton Sappi Anglo American Gold Fields Ltd Mondi Plc Anglo American Platinum AngloGold Ashanti

239 166 956 227 900 000 59 880 000 11 318 077 7 279 498 4 437 330 2 947 000 2 620 570 1 954 091 792 618 733 832 524 028 96 000 559 650 000

Percentage share

42.7% 40.7% 10.7% 2.0% 1.3% 0.8% 0.5% 0.5% 0.3% 0.1% 0.1% 0.1% 0.0%

Total value of emissions at R120/ton (Rm) R28 700 R27 348 R7 186 R1 358 R874 R533 R354 R315 R235 R95 R88 R63 R12 R 67 158

Source of CO2, CDP 2013

The GOS can be used as a proxy for the profit per industry or an indicator of the sustainability of such a sector if this is compared over several years.

The table below shows the estimated impact per GOS given the CO2 emission impact on electricity. Already the basic iron and steel, casting of metals shows a negative GOS. This excludes the Scope 1 emissions impact from that will lead to further losses. If such losses occur over time, higher cost producer in such industries will either close their businesses in SA or move their business to countries with lower input cost. This may also deter further investment in such sectors in the future. The impact may also be much worse (compared to what is indicated) in sector like basic precious and non-ferrous metals that include the Hillside smelter that currently has a favourable tariff with Eskom. If, in the case of these smelters, their contract of cheap electricity expires in 2025, the impact of much higher tariffs combined with the impact of carbon emission may result in the closing such smelters.

Exports from these smelters will be lost and products currently produced must be imported.

Economic Risk Consultant

89 89

Impact of a CO2 emission tax on electricity (at R120/ton) on GOS (2013)

Industry Mining of gold and uranium ore Electricity, gas, steam and hot water supply Nuclear fuel, basic chemicals Mining of metal ores Glass Basic precious and non-ferrous metals Basic iron and steel, casting of metals Real estate activities Other chemical products, synthetic fibres Mining of coal and lignite Other mining and quarrying Forestry Agriculture Other business activities Paper Non-metallic minerals Spinning, weaving and finishing of textiles Fishing Source: Economic Modelling

Adjusted GOS given tax on electricity emissions at R120/ton 17 193 65 721 5 164 75 955 469 5 379 -1 873 147 748 1 245 44 172 22 293 4 549 42 508 28 836 10 988 7 172 1 042 1 956

Percentage impact -7.3% -2.0% -16.2% -1.9% -10.5% -5.1% -234.5% -0.8% -27.6% -0.5% -0.9% -1.7% -1.8% -2.5% -1.5% -1.2% -5.9% -0.2%

The economic impact on GDP and employment All figures are approximate and focus on the cost side of the potential impact. Not enough information is available on how such a tax will be recycled back into the economy and this was left out of this study on purpose. Tax support for investment in energy saving technology may result in increasing imports resulting in a worsening of the trade balance; resulting in a depreciating currency, higher inflation and a higher relative interest rate. Taxing current sustainable business will result in lower profits, lower taxes, lower employment, lower investment and potential business failures that will not only shift the supply and demand curves, but will remove the domestic supply completely. This is especially the case for the ferrous and non-ferrous smelters (and the combined impact of much higher electricity tariffs from Eskom). Business failures in these sectors, combined with an existing demand in the domestic economy for such products (for example for steel or aluminium) will result in increasing imports with a worsening effect on the trade balance. With business failures, exports from these sectors will also be reduced and this will have a further negative impact on the trade balance. It must also be noted that it is not a given that new ‘green’ manufacturing and electricity generation businesses will be sustainable without subsidies and incentives. This has been found to be the case in Germany which has now taken away subsidies and put a cap on renewable energy because of its inefficiency and variability and interruptibility. •

The direct introduction of the carbon tax alone could slow GDP growth by between 0.3% and 0.43% per annum, resulting in a reduction of between 4.4% and 6.2% in the size of the GDP by 2035, or between approximately R213 billion and R300 billion. Between 1.1 million and 1.5 million fewer jobs could be

Economic Risk Consultant

90 90

available by 2035. The number of dependents affected is therefore estimated at approximately 5.0 million.

This is a sizeable impact on an economy with a total population estimated to be approaching 75million by 2035. Significantly, the slower growth could reduce the cumulative taxes collected by 2035 by approximately R600 billion. In addition, it will require a costly bureaucracy to run this complex, cumbersome and highly inefficient tax.

•

The tax could impact mining GDP growth by between 0.24% and 0.34% per annum. The mining sector could therefore have a cumulative GDP contribution by 2035 of between 3.5% and 5.0% less than would have been the case if the carbon tax had not been introduced. Over this period, the GDP of the sector could be approximately between R11 billion and R16 billion lower than if no carbon tax had been introduced.

Approximately 35 000 and 50 000 fewer jobs could be available. Recent growth in the sector has been limited and it can be anticipated that, in the absence of other measures, these trends could continue and the sector could well show little growth or indeed a decline in growth.

•

The tax could slow manufacturing GDP growth by between 0.1% and 0.36% per annum. By 2035, the manufacturing sector could have a cumulative GDP contribution of between 1.5% and 5.5% less than would have been the case if the carbon tax had not been introduced. Over this period, the GDP of the sector could be approximately R15 billion and R33 billion lower than if no carbon tax had been introduced. This could result in approximately 120 000 and 225 000 fewer jobs being available.

•

The impact on agriculture could also be considerable. Agriculture must cope with the vagaries of the weather and there has been a diminution in the number of farmers over the past 25 years. It is imperative to protect a country’s food resources as well as the farming community. Farming should be both safe and profitable.

Input costs are critical components of the cost structure and it is often forgotten that this vitally important industry is dependent on electricity. Examples of sub-sectors in the agricultural sector affected by price increases in electricity and absolute security of supply for whatever reason are: o o o o o

Poultry production Processing commodities: Wheat/flour, maize/animal feed Food storage: Climate control for apples and export fruit, dairy products Vegetable production and processing.

Food security is a major government requirement: Raises costs & has inflationary consequences for citizens; affects export competitiveness.

The impacts described above would be felt far beyond the manufacturing, industrial, mining and agricultural sectors of the economy because their value chains are so enmeshed in the broader economy.

Impact due to reduction in fixed investment Not considered in the above figures is the likely drop in real foreign and domestic direct investment in the productive economy. It is estimated that a reduction of 1% in direct investment results in a reduction of between 0.04% and 0.17% in GDP. This implies that a reduction of approximately 10% in private sector investment amounting to approximately R50 billion per annum, could result in an annual reduction of between 0.4% and 1.7% per annum in GDP growth or between R12 billion and R50 billion per annum. In total, this results in a reduction in the annual growth rate of between 1% and 1.7% per annum. Yet many are not endowed with the natural energy and other resources that South Africa has in abundance. Clearly, an annual reduction in private fixed investment of some R50 billion per annum because of carbon tax and increased electricity prices and other problems associated with the movement towards renewables could reduce annual GDP by a further 0.4% to 1.7% per annum. The combined effects are potentially extremely damaging to the economy and could easily result in the economic growth rate being reduced from a potential growth rate of more than 3.5% per annum to a forecast rate for the current year of approximately 2.5%.

Economic Risk Consultant

91 91

Price and the economic impact A carbon tax will increase the costs of electricity and the products of many important industries. These costs will be passed on through price increase to business and consumers. Downstream business and industry faced with these increased costs will in turn pass these costs on to its consumers.

Balance of emissions in trade Certain industries will be faced with a carbon tax of their own and in turn both their own increased electricity costs and their own carbon tax costs will also be passed on to their consumers and users.

The ultimate impact will be felt through the price increases faced by consumers and demand will decline as the price increases reduce the disposable income of consumers. In the case of export industries trading in the global competitive market they will either face a decline in demand and/or reduced prices with resulting lower returns. The table below shows that the more carbon intensive are the exports of a country the greater will be the damage to its exports. South Africa being commodity and mining orientated with power-based coal is very carbon intensive. Thus, the impact on the carbon tax will be significant. One can anticipate that the current account of the balance of payments could come under even greater pressure and slow down sustainable economic growth even further.

In turn, imports would become more competitive and import-sensitive industries would suffer. The complex impacts of unnecessary real price increases would result in a further deterioration in the current account of the balance of payments, already at an excessive level. Furthermore, there would be a decline in the return on investment of the affected businesses and real investment would decline. At present, it is already running at below required levels capable of sustaining an acceptable economic growth rate. Each industry would need to be examined on its merits. An example of the damage it could cause would be the motor vehicle industry and the coal industry.

Impact due to renewables The view that the carbon tax can be ring-fenced and that its proceeds will be reinvested to develop the green economy must be treated with some circumspection. Besides that, and far more important, if it is perceived that the proceeds should be used to develop renewable energy then this is not a realistic investment decision for the economy. Basically, it will result in a tax on the efficient side of the economy and a subsidy towards a less efficient form of energy and probably less efficient industries. In terms of currently available technologies, renewables are significantly more expensive than efficient fossil fuel and nuclear technologies-based technologies.

•

In terms of the findings of this report it is estimated that, in terms of the current IRP plans regarding the electricity generating source energy, the real increase in electricity prices because of the switch to renewables would mean a further increase of approximately 20% in real electricity prices.

Economic Risk Consultant

92 92

•

Because of the introduction of more renewables, the figures set out above could also be doubled by 2035.

This could amount to a cumulative loss of GDP of over approximately 8.8% or over R400 billion Rand and over 2.0 million fewer people employed. There could be approximately 8 million dependents affected by these decisions. These numbers are highly significant when considering policy.

•

The introduction of more renewables could double the above figures by 2035.

The combined economic impact on GDP and employment

•

South Africa has a relatively high population growth of approximately 1.7% per annum and therefore a high annual increase in the labour force.

Social grants in South Africa It is generally recognised that worldwide youth unemployment is three times higher than adult unemployment. This is supported by figures in South Africa where unemployment is running at over 25% whilst the unemployment rate of young adults is estimated as being approximately 40% or more and increasing.

Only through higher economic growth, focused on the goods-producing sectors, will there be sufficiently high sustainable growth to absorb the growth in the work force and potentially decrease these dangerously elevated levels of current unemployment and excessively high social grants in proportion to the size of the working population.

Source: Econometrix

The country already has over 176 million people on social grants and only about 7 million tax payers. Increasing unemployment will place even more people on social grant. The country also needs to reduce its population growth rate. This can only be done by raising standards of living and education through a higher sustainable growth rate. The fact is that industrialisation and larger projects spawn smaller upstream suppliers and smaller downstream industry. These generally are smaller businesses and tend to be more labour intensive.

Larger industrial business plays a vital and influential role in economic development. Not only do they supply important products for export and the local market but through their multipliers create other industries including other businesses that are often smaller and more labour intensive. South Africa also has very low labour productivity. South Africa is in the bottom quartile in the world labour productivity statistics, despite having one of the highest expenditure on education as a percentage of Gross Domestic Product (GDP) in the world. What is wrong is clearly a potential social ethic driven by our labour laws, where workers are excessively protected, wages are not in line with productivity, union activity protects workers, minimum wages effectively block more efficient workers amongst the unemployed from becoming employed and a host of other effects. These and other laws are creating a drive towards more capital-intensive equipment. These trends are a worldwide problem.

Unemployment amongst youth or young adults runs at excessive levels in South Africa more than 35%. The very policies that are implemented to protect labour often contribute to the high unemployment rate. A carbon tax will become a major contributor to this state of affairs.

The damage to economic potential In short, carbon tax and certain labour laws, although having good intent, result in lower investment, slower economic growth and increased investment in more energy-efficient equipment. Perversely, these foster higher Economic Risk Consultant

93 93

levels of investment in more capital-intensive equipment to increase output whilst at the same time poor productivity will also foster more expenditure on capital-intensive, labour-saving equipment which naturally is more energy-intensive. Those who believe energy intensivity or electricity intensity will continue to decline are sadly out of touch with economic reality and/or the economic necessities of the country.

Correct policies and adequate and secure electricity growth, South Africa could and should have a potential sustainable GDP growth rate of approximately 4.1% per annum. Because of several policy issues, insufficient security of supply and non-competitive prices of electricity, the carbon tax and the switch to more costly renewables and other investment adverse policies, South Africa’s sustainable GDP is unlikely to exceed 2.5% per annum. This is the case if the current IRP 2016 base case is implemented. This will have a detrimental impact on the country’s goods-producing industries, particularly mining, mining beneficiation, manufacturing and its agriprocessing sectors. By 2035, this would result in GDP being approximately R1.4 trillion less than what should be achieved, whilst employment levels could be some 5.0 million lower than the levels possible and required. Carbon tax will play a substantial role in this poor economic performance, which will have detrimental impacts on standards of living, unemployment and the social and political structure of South Africa. More particularly, it would make South Africa’s important goods-producing sector less competitive. This will cause further structural problems for the current account of the balance of payment, which already has a substantial deficit. Although in recent years with slow economic growth the deficit has decreased markedly. The carbon tax will only exacerbate these trends. Most importantly, it will more than likely result in a further deterioration in South Africa’s sovereign rating with grave consequences to South Africa’s cost of capital, ability to raise capital and its ability to attract foreign investment.

The potential total economic impact Potential impact of slow growth 2014 to 2035 The total potential economic impact of introducing the carbon tax, the greater use of renewables and their impact through higher input costs flowing through the economy on investment is set out below. It must be made clear that the impact on investment includes the impact of the current poor confidence caused by various policies affecting the business investment climate in South Africa. It is not possible to say what the direct impact of the carbon tax will have on direct business investment in the economy.

•

In total, this results in a reduction in the annual growth rate of approximately 1.3% per annum. This could lead to a reduction in GDP of R1 billion by 2035 and five million fewer jobs being created. The number of dependents affected adversely could be 18 million.

•

The combined effects are potentially extremely damaging to the economy and could easily result in the economic growth rate being reduced from a potential growth rate more than 4.0% per annum to a rate close to the current growth forecast rate this year of 1.8% and in the next few years possibly approximately 2.5%.

•

It is difficult to analyse the difference between the impacts of uncompetitive price increases and investment and business unfriendly political and economic policies.

•

South Africa’s economic growth rate is stuck in the low region of emerging countries economic growth range at approximately 2.5% per annum whereas other countries classified as emerging economies including India, Economic Risk Consultant

94 94

China and the Asean countries, have economic growth rates and planned economic growth rates of greater than 5%.

•

Many countries are not endowed with the natural energy and other resources that South Africa has in abundance. Clearly, something is radically wrong with the country’s political, social and economic policies and its energy and electricity generation policies.

•

Many of the current policies affect labour namely, BEE, affirmative action, and minimum wage rates drive labour-saving investments. Driving a greener economy artificially through a carbon tax and other disincentives for business forces higher prices into the system. They will not create a more labour-intensive economy. In fact, they will do exactly the opposite. They discourage South Africa as a business destination and will reduce investment growth not only in major developments, but also in smaller more labour-intensive businesses.

•

Significantly, slower growth could reduce the cumulative normal taxes collected by 2035 by approximately R600 billion. It will require a costly bureaucracy to run this complex, cumbersome and highly inefficient tax.

The lower taxes collected through normal channels would have to be offset by the estimated carbon tax collected.

•

South Africa should, with the correct policies and adequate and secure electricity growth, has a potential sustainable GDP growth rate of approximately 4.1% per annum. Because of several policy issues, insufficient security of supply and non-competitive prices of electricity, the carbon tax and the switch to more costly renewables and other investment adverse policies, South Africa’s sustainable GDP is unlikely to exceed 2.5% per annum.

•

This will have a detrimental impact on the country’s goods-producing industries, particularly mining, mining beneficiation, manufacturing, agriculture and its agri-processing sectors. By 2035, this would result in a GDP of between R1.0 trillion and R1.4 trillion less than what should be achieved, whilst employment levels could be approximately 5.0 to 7.0 million lower than the levels possible.

•

Carbon tax will play a substantial role in this poor economic performance, which will have detrimental impacts on standards of living, unemployment and the social and political structure of South Africa. More particularly, it would make South Africa’s important goods-producing sector less competitive. This will cause further structural problems for the current account of the balance of payment, which already has a substantial deficit.

•

Whilst there is a complex web of offsets in the carbon tax, which exclude some industries or sectors, these will be reduced over a period. More than that, the link between sectors becomes blurred because at the end of the day all sectors are strongly linked. Cost increases in one sector find their way into other sectors and there are numerous unintended consequences.

•

Notwithstanding any exceptions and offsets, the potential damage to the economy consequent to the introduction of a carbon tax is so substantial and overwhelming that the strongest possible recommendation is made that the introduction of the carbon tax is cancelled. This would avoid uncertainty. Unless this is done, investment uncertainty would remain.

The serious potential economic impact of Carbon Tax and renewables Often recommendations, particularly by overseas observers and advisors, regarding carbon tax, show very little understanding of the realities that face developing countries, such as South Africa, nor of the energy realities that are required for sustaining economic growth and raising standards of living in such economies. The commentaries received are dominated by vested financial and idealistic interest. The economic realities of emerging industrialising economies are that for the near future, they require security of supply of electricity at the most cost-effective economic prices to raise their economic growth rates and thereby their standards of living in a modern competitive global economy.

Economic Risk Consultant

95 95

In summary, the South Africa is facing a national crisis and it is necessary that the government raise the necessary funds to avert the potentially long-term economic stagnation of the country. Eskom must be properly and effectively structured and funded in the very near future, so that the country can restructure the industry, introduce IPPs, encourage co-generation and foster genuine electricity efficiency. It would be incorrect and a fatal economic error if the capital build programme is delayed and partially funded out of current tariff increases, thereby making domestic industry uncompetitive in global terms.

Electricity-generating capacity increases are the single biggest employment-generating decisions policy makers can make. This report utilised econometric techniques to develop the necessary models to analyse the potential benefits of alternative industrial strategies and the damage that potential shortages of electricity capacity and excessive pricing can cause to the national economy. However, analysis of some simple economic trends supports the need to act and acknowledges the fact that a successful strategy will bring handsome rewards in terms of job growth and financial payback of any investment.

There three major impacts linked to the carbo tax which have substantial negative impacts on the economy. The introduction of the tax could •

Impact mining GDP growth by approximately 0.3% and 0.34% per annum. By 2035 its reduction in cumulative GDP could be about 3.5% or some R11bn less than it could have been. Approximately 40000 fewer jobs could be available. Recent growth in the sector has been limited and it can be anticipated that, in the absence of other measures, the sector will decline. This does not consider the potential negative impact on the coal mining industry and its associated coal exports.

•

Slow manufacturing GDP growth by approximately 0.3%. By 2035, the manufacturing sector could have a reduction in its potential cumulative GDP contribution of approximately 2.5% or approximately R20 billion less than it could have been. A total of 150 000 fewer jobs would be generated.

•

The impact on agriculture could also be considerable. Agriculture must cope with the vagaries of the weather and there has been a diminution in the number of farmers over the past 20 years. It is imperative to protect a country’s food resources as well as the farming community.

There are four negative economic impacts that result from the carbon tax and the associated renewable programmes.

•

The first is the direct impact on the economy.

•

The second is the direct impact of the renewables programme due to increased prices and instability in the grid.

•

The third is the negative impact on domestic and foreign direct investment.

•

Finally, there is the direct impact of a decline in the coal mining industry and a reduction in its exports. These have not been discussed previously. It is estimated there could be a reduction of 37% of the size of the industry. This would reduce GDP of 1.8% and a reduction in direct and indirect employment of more than 175000 people.

Conservatively this is a reduction in GDP of one trillion Rands from the size the economy could possibly have grown to by 2035. It would reduce the economic growth rate of potentially 2.5% by 0.8% to 1.8%. If policies are in place for an economic growth rate of 3.5% (including energy policies) the combined impact would reduce the GDP growth rate to less than 2.7% per annum.

Notwithstanding any exceptions and offsets, the potential damage to the economy consequent to the introduction of a carbon tax is so substantial and overwhelming that the strongest possible recommendation is made that any possibility of the tax being introduced is negated and the carbon tax is cancelled. This would avoid uncertainty, Economic Risk Consultant

96 96

otherwise there is no doubt that the negative impact on long term investment decisions will be substantial. A postponement still has a substantial negative impact on long term investment, which in mining and manufacturing has ten to twenty-year and more investment time horizons. It is not surprising that the Davis tax Committee recommended an indefinite suspension of any such tax or similar tax. There is no need for South Africa to lead the pack and expose its economy and its citizens to potentially severe damage and deprivation.

The above figures are conservative the GDP reduction or R1 billion Rand is less than the estimated GDP reduction of R1.4 billion using a different methodology in a previous section. It points to the South African economy being some 12% to 15% smaller than it should be by the year 2035. This is disastrous and the implications by the year 2050 are catastrophic.

Economic Risk Consultant

97 97

CONCLUDING COMMENT: THE CHOICE SOUTH AFRICA FACES-POTENTIAL GROWTH OR STAGNATION As do most emerging nations, South Africa must address three fundamental issues: inequality, unemployment, and poverty.

These problems can be remedied only by raising the economic growth rate. A higher growth rate is dependent on correct public policies coupled with an adequate and growing supply of affordable electricity. To ensure economic growth, South Africa must develop its industrial base; therefore, it is essential to supply secure electricity at the lowest possible cost.

The choice between growth and stagnation depends on the energy mix selected and the policy choices that are made. They will determine the economic path of South Africa for the next decade. It comes down to the critical issue and debate. “Are renewables, primarily wind and solar, efficient and sustainable and can they can ensure “security of electricity supply” at a competitive economic price that can enable government to achieve its goal of “enabling economic growth and prosperity”. “The theory and the facts of real life strongly suggest not”.

Comparing the Levelised Costs of Electricity (LCOE) of different energy sources is not correct or fair for individual sources and for any mix. It assumes certainty of supply and delivery when required. This assumption is false.

Wind and solar deliver electricity less than 34% of the time, are unpredictable and highly variable and subject to the vagaries of the weather. The fact is you cannot easily compare dispatchable electricity (coal and nuclear) with non-dispatchable electricity (wind and solar). There are three highly relevant papers. They are reports by A May entitled Exergy and Power Plants and Renewable Energy, what is the cost? Essential reading is a research report

by D. Weißbach et al (Weißbach, et al. (2013)) on EROI, or energy returned from energy invested. Without going into detail Weißbach, et al. has shown that, in Germany, all renewables, except commercial solar installed in the Sahara Desert, are currently uneconomic.

Solar, and particularly wind, are not efficient or effective sources of electricity. A few principal facts supporting this argument include.

• In Germany, the prices paid by industry were in Germany 52% higher than France (nuclear) and 86% higher than Poland (coal).

• Wind blows when electricity is not required and does not blow when required. This is costly in terms of lost activity and GDP which together with other issues involved is costly for the economy and for the grid operator.

Essentially these costs are passed on to consumers. In effect, it becomes an additional tax on consumers and in practice becomes an additional tax on the poor.

• The area of land that is involved for wind and solar are high onshore wind farms in Germany produce less than 2 W/m2 of land. A modern oil field, on average, produces 90 W/m2 of land. Nuclear and coal involve minimal land area in comparison.

• The IRP is looking at windfarms covering 10000 to 20000 square kilometres i.e. that is 1 million to 2 million hectares. Landowners in surrounding areas bordering on windfarms, probably an area twice or even three time the areas of windfarms, have found their land devalued by up to R3000 per hectare. Conservatively that is RR2 billion to R6 billion.

• Environmentalists are really concerned about the devastation caused to habitat for, birds, bats, insects and other forms of life even including animal and human health. This is the history of windfarms around the world which are not being given sufficient consideration and weight at present.

• There are plans for increasing the use of coal and fossil fuels in many countries. This applies to countries such as Poland, the United States, India, China and the Asean countries. Japan is set to build 45 GW of modern high efficient low emissions (HELE) coal plants. The International Energy Agency (IEA) has forecast that 730GW of these highly efficient plants will be built by 2040.

Economic Risk Consultant

98 98

•

Any decline of the coal industry and industries associated with it will have a profound negative impact on the economy. It is estimated that, if Eskom’s demand were to decline by 37% because of closing coal plants the coal sector would shrink by 17%.

• This will reduce the GDP of South Africa by over 0.9% (R27.8 billion) and reduce employment by more than 60,000 people affecting almost 250000 dependents. In addition, it is likely that export sales of coal could be reduced by more than R10 billion per annum. In practice, the overall economic impact will be far greater than these figures imply and probably more than 300000 people will lose their jobs.

• Unfortunately, there are many vested domestic and foreign financial and idealistic interests in the decision mix. Not least are financial institution who are only interested in the rich prize of investing their own and clients’ money in long term high return index linked government guaranteed investments.

• Foreign vested commercial and financial interests that have only one aim and that is to increase their overseas renewable technology sales in a new market. Meanwhile their own domestic market is at best losing steam if not declining because of a failure of the technology.

The future energy potential of the country lies in those efficient proven technologies of nuclear and coal that give South Africa a competitive edge and comparative advantage, reinforced by major solar for domestic and general business use. These in turn must be supported by a significant expansion of gas but only if South Africa can find it in sufficient economic quantities. The way forward involves building new modern coal plants and refurbishing old power stations where it is economically possible to do, not to close them.

The current IRP 2016 plan and scenarios are about to overinvest in a technology that has proven to be one of the worlds’ least economically efficient and effective technologies. Renewables, particularly wind, increases energy poverty and effectively becomes a tax on the poor.

Key References A May: Renewable Energy; What is the cost? https://andymaypetrophysicist.com/renewable-energy-what-is-thecost/ A May: Exergy and power plants. https://andymaypetrophysicist.com/2017/03/18/exergt-and-power-plants D. Weißbach a,b,*, G. Ruprecht a, A. Huke a,c, K. Czerski a,b, S. Gottlieb a, A. Hussein a,d; a Institut für FestkörperKernphysik gGmbH, Leistikowstraße 2, 14050 Berlin, Germany; b Instytut Fizyki, Wydział Matematyczno-Fizyczny, Uniwersytet Szczeci_nski, ul. Wielkopolska 15, 70-451 Szczecin, Poland; c Institut für Optik und Atomare Physik, Technische Universität Berlin, Hardenbergstraße 36, 10623 Berlin, Germany; d Department of Physics, University of Northern British Columbia, 3333 University Way, Prince George, BC V6P 3S6, Canada: “Energy intensities, EROIs (energy returned on invested), and energy payback times of electricity generating power plants” source: Weißbach, et al. (2013) ,

Economic Risk Consultant

99 99

BIBLIOGRAPHY African Development Bank/, Organisation for economic development, “Mozambique. African economic outlook”: Mozambique, 2004.

Aiginger, K. (2001), “Speed of Change and Growth of Manufacturing”, in: M. Peneder, Aiginger, G. Hutschenreiter and M. Marterbauer, Structural Change and Economic Growth, WIFO, study commissioned by the Ministry of Economics and Labour, Vienna.

American Energy Information Administration, Various publications Amianti Grace D., The Jakarta Post, Jakarta,6 August 2015, Andrews, R. (2016, 22 August). An update on the energiewende. Energy Matters, euanmearns.com/an-update-on-theenergiewende/ Anderson, Per-ake, “The impact of the megaprojects on the Mozambican economy”, Gabinete de estudos, discussion paper no. 18.

Arestis, P., Demitriades, P., 1997: Financial development and economic growth, assessing the evidence; The Economic Journal 108, 783--799.

American Energy Information Administration, Various publications Arestis, P., Demitriades, P., 1997: Financial development and economic growth, assessing the evidence; The Economic Journal 108, 783--799.

Areva, Industry Insights Conference Baumol, W.J. (1967), “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis”, American Economic Review, Vol. 57, Issue 3 (Jun. 1967), 415-426.

Beck, T., Levine, R., Loayza, N., 2000: Finance and the sources of growth; Journal of Financial Economics 58, 261--300.

Bolnick B R: “Economic Growth as an Instrument for Poverty Reduction in Mozambique: Framework for Development”: Gabinete De Estudos Discussion Paper No 12a Brandt, N. (2004), “Business Dynamics in Europe”, DSTI Working Paper 2004/1, OECD, Paris.

Bencivenga, V.R., Smith, B.D., 1991: Financial intermediation and endogenous growth; Review of Economic Studies 58, 195-209.

Benhabib, J., Spiegel, M.M., 2000: The role of financial development in growth and investment; Journal of Economic Growth 5, 341--360.

Berger, A. N., Hasan, I., Klapper, L., 2004: Further Evidence on the Link between Finance and Growth, An International Analysis of Community Banking and Economic Performance. Journal of Financial Services BP Statistical Review of World Energy 2013.

Business Trust of South Africa BP, BP Statistical Review of World Energy, June 2015.

Bischof-Niemz Dr Tobias, CSIR Energy Centre Net renewable benefits- first half 2015”, August 2015 Bischof-Niemz Dr Tobias, CSIR Energy Centre, ‘Financial benefits of renewables in South Africa in 2014”, “ Actual diesel- and coal-fuel savings and avoided “unserved energy” from the first approximately 1.6 GW of wind and PV projects in a constrained South African power system”, 21 January 2015 Bodansky, D. (2016, 17 May). The Paris climate change agreement: A new hope. American Journal of International Law, 110 (forthcoming). Available at: ssrn.com/abstract=2773895 Bolnick B R: “Economic Growth as an Instrument for Poverty Reduction in Mozambique: Framework for Development”: Gabinete De Estudos Discussion Paper No 12a Bofinger, S., Zimmermann, B., Gerlach, A.-K., Bischof-Niemz, T., & Mushwana, C. (2016, 3 March). Wind and solarPV resource aggregation study for South Africa. Public presentation of results. Pretoria: CSIR and Fraunhofer.

Brandt, N. (2004), “Business Dynamics in Europe”, DSTI Working Paper 2004/1, OECD, Paris.

Bryce, R., & Lesser, J. (2015, 26 July). Renewable energy mandates same as a tax on the poor. The Orange County Register, www.ocregister.com/articles/energy-673760-california-state.html CSIR

Economic Risk Consultant

100 100

Carrington, D. (2015, 5 June). Norway confirms $900bn sovereign wealth fund's major coal divestment. The Guardian, www.theguardian.com/environment/2015/jun/05/norways-pension-fund-to-divest-8bn-from-coal-a-new-analysis-shows Centre for Science and Environment and Technology; Presentation,” The Indian Power Sector”, August 2015 CRU International Limited: Various reports and tables Cetorelli, N., Gambera, M., 2002: Banking Market Structure, Financial Dependence and Growth, International Evidence from Industry Data; The Journal of Finance 56, 617--648.

Cho, Joong-Wan., “Foreign Direct Investment: Determinants, Trends in Flows and Promotion Policies”, Economic and Social Commission for Asia and the Pacific.

CRU International Limited: Various reports and tables Crisafulli V, “10 Steps to a Comprehensive Business Retention Program”, National Main Street Centre of the National Trust for Historic Preservation.

Conningarth Economists, “Macroeconomic Impact Assessment of the Production of Pebble Bed Modular Reactors” Coppel, J., J-C. Dumont and I. Visco (2001), “Trends in Immigration and Economic Consequences”, OECD Economics Department Working Papers, No. 284.

C Department of Energy (DOE) of the Republic of South Africa. 2013. Integrated Resource Plan for Electricity (IRP) 2010-2030: Update Report 2013. 21 November.

Department of Energy (DoE), 2011. Integrated Resource Plan for Electricity, 2010–2030. Pretoria: Department of Energy, Republic of South Africa. (2013, 21 November). Integrated Resource Plan for Electricity (IRP) 2010– 2030. Update report 2013, www.doe-irp.co.za/content/IRP2010_updatea.pdf Department of Energy (DoE), 2011. Integrated Resource Plan for Electricity, 2010–2030. Pretoria: DoE. Department of Minerals and energy website, publications and documents De Serres, A. (2003), “Structural Policies and Growth: A Non-technical Overview”, OECD Economics Department Working Papers, No. 355, OECD, Paris.Department of Environmental Affairs (DEA), 2011a. National Climate Change Response White Paper. Pretoria: DEA, Available at Deloitte, “The socio-economic impact of importing LNG into the West Coast of the Western Cape”, Report prepared for the Western Cape Department of Economic Development and Tourism 11 February 2015 D’Olier R, Cunningham J and Coward R, Nuclear Power Plant Construction Infrastructure Assessment, Donnelly Lynley, Mail and Guardian, “Gas needs to be at centre of debate” “South Africa's energy plans need to take account of the pros and cons of using various types of gas”, 14 Jun 2013 DoE. Department of Minerals and energy website, publications and documents Department of National Treasury, Carbon Tax Policy Paper, May 2013 Department of Trade and Industry website, publications and documents De Serres, A. (2003), “Structural Policies and Growth: A Non-technical Overview”, OECD Economics Department Working Papers, No. 355, OECD, Paris.

Department of Environmental Affairs (DEA), 2011a. National Climate Change Response White Paper. Pretoria: DEA, Available at Development Bank of Southern Africa, “The impact of infrastructure investment on poverty reduction and human development”, Discussion paper no 4, June 1998 D’Olier R, Cunningham J and Coward R, Nuclear Power Plant Construction Infrastructure Assessment, Electrical Power Research Institute (EPRI). 2012. Power Generation Technology Data for Integrated Resource Plan of South Africa - Technical Update, April 2012.

Energy Information Administration, “International Energy Outlook 2008”Energy Information Administration, “International Energy Outlook 2008” Energy Research Centre (ERC), 2007. Long-Term Mitigation Scenarios: Scenario Document. Prepared for the Department of Environment Affairs and Tourism (DEAT) by the Scenario-building Team. Pretoria: DEAT, October 2007.Eskom Annual Reports and websiteEnergy Information Administration, Independent Statistics & Analysis, “Oil and Natural Gas in Sub-Saharan Africa”, August 1, 2013 Engineering News Research Centre Energy Research Centre (ERC), 2007. Long-Term Mitigation Scenarios: Scenario Document. Prepared for the Department of Environment Affairs and Tourism (DEAT) by the Scenario-building Team. Pretoria: DEAT, October 2007.Eskom Annual Reports and website Economic Risk Consultant

101 101

Structural Change and Economic Dynamics, 10 (1999), 177-194.

Eskom Annual Reports and website Eskom information and presentations Eskom. (2016, 31 March). Integrated report, www.eskom.co.za/IR2016/Documents/Eskom_integrated_report_2016.pdf Eskom, Presentation, “Eskom Approaches to Current and future power generation” 20 August 2015 FleetNuclear Energy Institute, New Nuclear Plants: An Engine For Job Creation, Economic Growth Fontagné, L. and M. Freudenberg (2001), “Intra-Industry Trade: Methodological Issue Reconsidered”, CEPII, Working Paper, No. 97-01.

Freeman M, “Do you want to stimulate the economy” Gundlach, E. (1996), “Demand Bias and Structural Change: Reply”, Kyklos, Vol. 49, 2, 215-217.

Gerhard Kuhn, Christo van Zyl, Tebogo Lefifi, Ashley Petersen, Chris Khumalo ,March 2002 Goldsmith, R., 1969; Financial structure and economic development; Yale University Press. New Haven, CT. Greater Fredericton Region Community Growth Strategy: 2004-2007 Greenwood, J., Jovanovic, B., 1990: Financial development, growth and the distribution of income; Journal of Political Economy 98, 1076--1108.

Hadley Centre observations datasets, Met Office Hausfather, Z. 2013 What’s behind the good news declines in US CO 2 emissions? Yale Forum on Climate Change, May 29, 2013. Hill Dr T: “A case study of local economic development in Richards bay / Umhlathuze”, University of kWaZulu-Natal Ms. Claire Goodenough, Siyamisana Development Consultants April 2005 Hill Dr T: “A case study of local economic development in Richards bay / Umhlathuze”, University of KwaZulu-Natal Ms. Claire Goodenough, Siyamisana Development Consultants April 2005 2013. Hietkamp Sibbele, South Africa National Energy Development Institute, presentation, “Natural gas use in South Africa” 23 May 2013 Hill Dr T: “A case study of local economic development in Richards bay / Umhlathuze”, University of KwaZulu-Natal Ms. Claire Goodenough, Siyamisana Development Consultants April 2005HSRC. Altman M., Leveraging Services for Growth, Employment and Equity”. March 2005 Humphrey, D., Kim, M. & Vale, B., (1998), “Realizing the Gains from Electronic Payments: Costs, Pricing and Payment Choice”, Norges Bank Working Papers 1998/1.

Hadley Centre observations datasets, Met Office Hausfather, Z. 2013 What’s behind the good news declines in US CO 2 emissions? Yale Forum on Climate Change, May 29, 2013. Hietkamp Sibbele, South Africa National Energy Development Institute, presentation, “Natural gas use in South Africa” 23 May 2013 Hill Dr T: “A case study of local economic development in Richards bay / Umhlathuze”, University of KwaZulu-Natal Ms. Claire Goodenough, Siyamisana Development Consultants April 2005 Horgan, J. (2016, 7 July). Germany’s energiewende sticks it to the poor. The American Interest, www.the-americaninterest.com/2016/07/07/germanys-energiewende-sticks-it-to-the-poor/ HSRC. Altman M., Leveraging Services for Growth, Employment and Equity”. March 2005 HSRC, Mayer, M J., “Trade in Services: The Global context”, March 2005.

HSRC. Mayer, M J., “Policy Scan and Gap Analysis: Government Initiatives to Promote Trade in services”, March 2005.

Humphrey, D., Kim, M. & Vale, B., (1998), “Realizing the Gains from Electronic Payments: Costs, Pricing and Payment Choice”, Norges Bank Working Papers 1998/1.

Humphrey, D., Pulley, L. & Vesala, J., (1996): Cash, Paper, and Electronic Payments: A Cross-Country Analysis, Journal of Money, Credit and Banking, 28 (4).

Industrial Development Corporation of South Africa, “Economic and Socio-Economic Impact of Large Industrial Projects on the South African Economy”, Department of Research and Information: Industrial Development Corporation, “Aluminium Pechiney at Coega, Macroeconomic impact on the South African economy” International Atomic Energy Agency, “Energy electricity and nuclear power estimates for the period up to 2030” International Energy Agency, Various publications International Energy Agency, World Energy Outlook 2008 IRP 2010-2030, Final report, March 2011 Economic Risk Consultant

102 102

International Monetary Fund: “Republic of Mozambique: Poverty reduction strategy paper progress report” Review of the economic and social plan for 2003, IMF Country report no 04/135.

Inter American Development Bank, “Foreign Direct Investment Policies” International Monetary Fund: “Republic of Mozambique: Poverty reduction strategy paper progress report” Review of the economic and social plan for 2003, IMF Country report no 04/135.

Inter American Development Bank, “Foreign Direct Investment Policies” Intergovernmental Panel on Climate Change (IPCC), 2007. Climate Change 2007: Synthesis Report. Geneva: IPCC. Intergovernmental Panel on Climate Change (IPCC), 2013. Climate Change 2013: Synthesis Report. Geneva: IPCC. Intergovernmental Panel on Climate Change (IPCC), 2012. Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation Geneva: IPCC Jeffrey R, Twine A, Jahed M, “Guidelines for Intervention Policy in the Service Sector of the South African Economy” (November 2005) Jeffrey R, “Solving Energy Poverty, Unemployment, and Growth Challenges in South Africa”Cornerstone, The Official journal of the World Coal Industry Association, Volume 4 Issue 4 2016 Jenkins, Carolyn & Thomas, Lynne, “Foreign direct investment in Southern Africa: determinants, characteristics and implications for economic growth and poverty alleviation”, Crefsa, London school of economics: London, October 2002 Kane J: “Public Sector Economic Development, Concepts and Approaches”, North East Midwest Approaches, November 2004 Keewatin Publications, Financing Nuclear Exports Kenley C Kingler R and Co, U.S. Job Creation Due to Nuclear Power Resurgence in the United States International Atomic Energy Agency, “Energy electricity and nuclear power estimates for the period up to 2030” IRP 2010-2030, Final report, March 2011 Koko, M (2016, 20 October). The hidden costs of renewable energy projects. Fin24, www.fin24.com/Economy/Eskom/thehidden-costs-of-renewable-energy-projects-20161020 Lassen, K and Thejll, P. 2005 Multidecadal variation of the East Greenland Sea Ice Extent; AD 1500-2000. Scientific Report 0502, Danish Meteorological Institute Lloyd Philip, “Nuclear the best option for efficient low carbon power”, Aug 17, 2015 Levine, R. Loayza, N., Beck, T., 2002: Financial intermediation and growth, causality and causes; Journal of Monetary Economics 46, 31--77.

Lindgren C., Balino J., Enoch C., Guide, M., Quintyn, Teo, L., 2000. Financial Sector Crisis and Restructuring, lessons from Asia; International Monetary Fund Occasional Paper No. 88, January, Washington DC. May A: Renewable Energy; What is the cost? https://andymaypetrophysicist.com/renewable-energy-what-is-the-cost/ May A: Exergy and power plants. https://andymaypetrophysicist.com/2017/03/18/exergt-and-power-plants McKinsey (2002), Reaching Higher Productivity Growth in France and Germany, McKinsey Global Institute, Washington, D.C. McKinnon, R. I., 1969: Money and Capital in Economic Development; Brookings Institution, Washington DC. Martin, R. (2016, 9 June). Modi and Obama shake hands, but India’s path to clean energy remains long. MIT Technology Review, www.technologyreview.com/s/601649/modi-and-obama-shake-hands-but-indias-path-to-clean-energy-remainslong/ Mathews Charlotte, “Gas from coal could relieve power woes” 18 Aug, 2015 Macalister, T. (2016, 7 July). Estimated cost of Hinkley Point C nuclear plant rises to £37bn. The Guardian, www.theguardian.com/uk-news/2016/jul/07/hinkley-point-c-nuclear-plant-costs-up-to-37bn Mckinsey & Company, Mckinsey Global Institute, “South Africa’s big Five: Bold priorities for inclusive growth”, September 2015 Mining Weekly, “Movement on gas IPP programme, as coal deadline is extended”, 20 may 2015 Mining News Research Centre NAAMSA Nickell, S., S. Redding and J. Swaffield (2004), “The Uneven Pace of Deindustrialization in the OECD”, paper produced for the Labour Markets and Globalisation Programme of the ESCR, CEPR, London.

Nicoletti, G. and S. Scarpetta (2003), “Regulation, Productivity and Growth”, Economic Policy, Vol. 36, pp. 11-72.

Nicoletti, G., S. Scarpetta and O. Boylaud (1999), “Summary Indicators of Product Market Regulation with an Extension to Employment Protection Legislation”, OECD Economics Department Working Papers, No. 226, OECD, Paris.

Economic Risk Consultant

103 103

Nicoletti, G. and D. Pilat (2004), “Regulations and Services sector Performance”, in: P. Cahuc and M. Debonneuil, Emploi dans les services, Paris.

Nuclear Energy Agency, Nuclear Education and Training “Cause for Concern” Nuclear Energy Institute, “Economic Benefits of the Exelon Pennsylvania Nuclear Fleet” Nuclear Energy Institute, “Economic Benefits of the PPL Susquehanna Nuclear Power Plant” FleetNuclear Energy Institute, New Nuclear Plants: An Engine For Job Creation, Economic Growth Nuclear Energy Institute, Nuclear Energy, Job Creation and Economic Growth Nuclear Energy Agency Website National Oceanic and Atmospheric Administration, Trends in Atmospheric Carbon Dioxide National Energy Regulator of South Africa (NERSA). 2013. Revenue Application - Multi Year Price Determination 2013/14 to 2017/18 (MYPD3), 28 Feb. 2013.

National Treasury (NT), 2010. Reducing greenhouse gas emissions: The carbon tax option. Discussion Paper, December 2010.

Pretoria: National Treasury.

Nickell, S., S. Redding and J. Swaffield (2004), “The Uneven Pace of Deindustrialization in the OECD”, paper produced for the Labour Markets and Globalisation Programme of the ESCR, CEPR, London.

Nicoletti, G. and S. Scarpetta (2003), “Regulation, Productivity and Growth”, Economic Policy, Vol. 36, pp. 11-72.

Nicoletti, G. and D. Pilat (2004), “Regulations and Services sector Performance”, in: P. Cahuc and M. Debonneuil, Emploi dans les services, Paris.

Nordhaus, W.A. 2007 A Review of the Stern Review on the Economics of Climate Change J. Economic Literature 46 pp686702Nuclear Energy Agency Website National Planning Commission, National Development Plan, 11 November 2011 National Oceanic and Atmospheric Administration, Trends in Atmospheric Carbon Dioxide OECD. Wölfl, A. (2003), “Productivity Growth in Service Industries – An Assessment of Recent Patterns and the Role of Measurement”, STI Working Paper 2003-07, OECD, Paris.

OECD (2003c), ICT and Economic Growth – Evidence from OECD Countries, Industries and Firms, OECD, Paris.

OECD (2004c), “Trade and Migration: Building Bridges for Global Labour mobility”, OECD, Paris.

OECD (2005), “Growth in services- Fostering Employment, Productivity and Innovation”, Meeting of the OECD Council at Ministerial, OECD, Paris.

OECD (2000) “Global Investment Trends and Policies: an OECD Perspective, Ambassador Marino Bald, Airmen, September 2000.

OECD (2001), “Foreign Direct Investment and Sustainable Development”, New Horizons and Policy Challenges for Foreign Direct Investment in the 21st Century, Mexico City, November 2001.

OECD (2003e), The Sources of Economic Growth in OECD Countries, OECD, Paris.

OECD (2005), “Enhancing the performance of the Services sector”, OECD, Paris.

Oulton, N. (1999), “Must the Growth Rate Decline? – Baumol’s Unbalanced Growth Revisited”, Bank of England, London, 1999.

Otto, Alexander et al 2013 Energy budget constraints on climate response Nature Geoscience 6, 415–416 Palo Alto, CA: 2010Power Generation Technology Data for Integrated Resource Plan of South Africa. EPRI,. Petras J: “Foreign Investment: Social Costs, Political Risks and Economic Alternatives” PBMR 2008 Annual Report Peneder, M. (2003), “Industrial Structure and Aggregate Growth”, Structural Change and Economic Dynamics, 14 (2003) 427448.

Peacock, B. (2016, 24 July). Renewable power “just raises Eskom’s costs”. Sunday Times, www.timeslive.co.za/sundaytimes/businesstimes/2016/07/24/Renewable-power-just-raises-Eskoms-costs Petras J: “Foreign Investment: Social Costs, Political Risks and Economic Alternatives” Pretorius, Leon Gilbert, “The political economy of South African foreign direct investment in Pretorius, Leon, “South African investment in Mozambique: a case study of Mozal and its implication for regional implication and development in Southern Africa, 2000.

Port Elizabeth Regional Chamber of Commerce: Discussions Rainy and McNamara: “Industry Linkages and the Structure of the Local Economy” Rio Tinto annual reports and website Economic Risk Consultant

104 104

Rodrik D: “Growth Strategies” Harvard University, August 2004.

Rodrik D: “Industrial Policies for the Twenty First Century” Harvard University, September 2004.

Rodrik D: “Understanding South Africa’s Economic Puzzles (September 2006) Rousseau, P.L., Wachtel, P., 1998: Financial intermediation and economic performance, historical evidence from five industrialized countries; Journal of Money, Credit and Banking 30, 657--678.

Rio Tinto annual reports and website RU International Limited: Various reports and tables Scarpetta, S., A. Bassanini, D. Pilat and P. Schreyer (2000), “Economic Growth in the OECD Area: Recent Trends at the Aggregate and Sectoral Level”, Economics Department Working Papers, No. 248, Paris, June 2000.

Soubbotina, Tatyana P with Sheram Katherine A, Ch 9 Growth of the services sector, Beyond Economic Growth: Meeting the challenges of global development, The international Bank for Reconstruction and Development/The World Bank Sasol Annual financial statements 2008 Sasol 50 Years of Innovation Serfontein, D.E. Nuclear power more profitable than coal if funded with low cost capital: A South-African case study. Paper – HTR 2014-1-11183. In: Proceedings of the HTR 2014, October 27 - October 31, Weihai, Shandong Province, China.

Serfontein D. E.”Cost comparison for load-balanced dispatchable power options for South Africa” January 2015 Serfontein, D.E. (SCOPUS Author ID-number: 35105827100). 2014. Nuclear power more profitable than coal if funded with low cost capital: A South-African case study. Paper – HTR 2014-1-11183. In: Proceedings of the HTR 2014, October 27 - October 31, Weihai, Shandong Province, China.

Siemens. (2013). South Korea: A paradigm shift in energy policy, www.energy.siemens.com/hq/pool/hq/energytopics/publications/living-energy/pdf/issue-08/essay-south-korea-SeungIlCheong-Living-Energy-8.pdf Sloan, J. (2016, 19 July). Energy price reveals folly of renewables. National Wind Watch, www.windwatch.org/news/2016/07/19/energy-price-reveals-folly-of-renewables/ Soubbotina, Tatyana P with Sheram Katherine A, Ch 9 Growth of the services sector, Beyond Economic Growth: Meeting the challenges of global development, The international Bank for Reconstruction and Development/The World Bank South African Foundation, South Africa’s business presence in Africa, “South Africa in Africa: Development partner or investment predator”? Occasional paper no 3/2004.

South African Institute of Race Relations (SAIRR) South African Reserve Bank's, Labour Markets and Social Frontiers, 2003-04-5 South African Reserve Bank: Quarterly Bulletins.

South African Reserve Bank.

(2016).

Full quarterly bulletin, No. 281, September 2016, www.resbank.co.za/Publications/Detail-Item-View/Pages/Publications.aspx?sarbweb=3b6aa07d-92ab-441f-b7bfbb7dfb1bedb4&sarblist=21b5222e-7125-4e55-bb65-56fd3333371e&sarbitem=7470 Soubbotina, Tatyana P with Sheram Katherine A, Ch 9 Growth of the services sector, Beyond Economic Growth: Meeting the challenges of global development, The international Bank for Reconstruction and Development/The World Bank South African Foundation, South Africa’s business presence in Africa, “South Africa in Africa: Development partner or investment predator”? Occasional paper no 3/2004.

Sporton, B. (2016, 30 March). The power of high-efficiency coal. World Coal Association, www.worldcoal.org/power-highefficiency-coal-0 Statistics South Africa: Labour Force Surveys.

Statistics South Africa. (2016). Electricity generated and available for distribution: July 2016, www.statssa.gov.za/publications/P4141/P4141July2016.pdf Stern, N, 2006. Stern Review on the economics of climate change. London: HM Treasury; Cambridge: Cambridge University Press.

Stafford, N. 2013 Australia plans to scrap carbon tax early Chemistry World 23 July 2013..

Stern, N. and Taylor, C. 2009 Climate Change: Risk, Ethics and the Stern Review Science Magazine's State of the Planet 20082009, American Association for the Advancement of Science, pp161-165 Stiglitz JE: “Globalization, Technology and Asian Development”, Asian Development Review, Volume 20, 2003, Number 2 Stigliz JE: “Current Economic Issues and their Impact on Developing Countries”, Jakarta, December 2004.

Stiglitz JE: “Development Policies in a World of Globalization”, Columbia University Stiglitz JE: “Globalization and Public Finance”, Athens, December 3 2004.

Economic Risk Consultant

105 105

Stiglitz, Joseph, Knowledge for development: economic science, economic policy and economic advice, Address to the world bank’s 10th annual bank conference on development economics, 20th April 1998, Washington.

Stille, F. (2002), “Output and Labour Productivity in Services Industries: Problems of Measurement and International Comparison”, Research notes, DIW, Berlin.

Structural Change and Economic Dynamics, 10 (1999), 177-194.

Suryadi, B., & Velautham, S. (2016, 9 June). Coal’s role in ASEAN energy. ASEAN Centre for Energy, www.aseanenergy.org/blog/coals-role-in-asean-energy/ The international Bank for Reconstruction and Development/The World Bank, “Beyond Economic Growth: Meeting the challenges of global development,” The Perryman Group, The impact of Exelon’s proposed construction and operation of a nuclear power facility on business activity in Victoria County and Texas” The World Bank Report, “Doing Business in 2006: Creating jobs” The World Bank: Urban Development Unit, The World Bank: “Local Economic Development: A primer Developing and Implementing Local Economic Development and Action Plans” The Economist, Many editions of “Pocket World In Figures”, London, The Economist, 6 July 2002: “Why do the Arabs lag behind” The Economists Forecasts United Nations Conference on Trade and Development (UNCTAD), “An investment guide to Mozambique: opportunities and conditions”, June 2001.

The DPLG Department of Provincial and Local Government RSA: “Robust and Inclusive Municipal Economies” Policy Guidelines for Implementing Local Economic Development in South Africa” Thomas, Dr Rosalind, “FDI & SME Linkages - The case of Mozal 1 & 11, IDRC private sector development task force conference, April 2005.

Tol, R.S.J. and Yohe, G.W. 2006 A review of the Stern Review World Economics 7 pp233-250 UNCTAD World Investment Reports.

Twine A, Econometrix, Karoo Shale Gas Report, January 2012 UNCTAD World Investment Reports.

UNCTAD: “World Investment Report 2000: FDI from Developing and Transition Economies: Implications for Development”.

UNCTAD, 2002, “World Investment Report 2002, Transnational Corporations and Export Competitiveness”, UNCTAD/WIR/2002.

UNCTAD, 2003, “Effectiveness of Foreign Direct Investment Policy Measures”, Expert meeting on Effectiveness of Foreign Direct Investment Policy Measures, Geneva, June 2003.

University of Minnesota, 2002 United Nations Development Report United Nations Conference on Trade and Development (UNCTAD), “An investment guide to Mozambique: opportunities and conditions”, June 2001.

Valverde S.C., del Paso R.L, Fernández F.R.: Banks, Financial Innovations and Regional Growth, Department of Economics, University of Granada, Spain Valverde S.C., Humphrey D.B., del Paso R.L.: Effects of ATM’s and Electronic Payments on Banking Costs: The Spanish Case Banking Wakelin, K. (1998), “Innovation and export behaviour on the firm level”, Research Policy 26, 829-841.

Weißbach D.a,b,*, G. Ruprecht a, A. Huke a,c, K. Czerski a,b, S. Gottlieb a, A. Hussein a,d; a Institut für Festkörper-Kernphysik gGmbH, Leistikowstraße 2, 14050 Berlin, Germany; b Instytut Fizyki, Wydział Matematyczno-Fizyczny, Uniwersytet Szczeci_nski, ul. Wielkopolska 15, 70-451 Szczecin, Poland; c Institut für Optik und Atomare Physik, Technische Universität Berlin, Hardenbergstraße 36, 10623 Berlin, Germany; d Department of Physics, University of Northern British Columbia, 3333 University Way, Prince George, BC V6P 3S6, Canada: “Energy intensities, EROIs (energy returned on invested), and energy payback times of electricity generating power plants” source: Weißbach, et al. (2013) , World Bank 2013 World Development Indicators & Global Development Finance World Coal Association (WCA). (2016, 15 March). Coal in the energy mix of Vietnam, www.worldcoal.org/coal-energy-mixvietnam Economic Risk Consultant

106 106

WCA. (2016). Energy in India.

WCA, w.advancedenergyforlife.com/sites/default/files/03.08.16%20WCA_Factsheet_India.pdf 20. WCA. (2015). India’s energy trilemma. WCA, www.worldcoal.org/file_validate.php?file=WCA%20report%20%20India%27s%20Energy%20Trilemma.pdf World Health Organisation Global Burden of Disease, doi:10.1016/S0140-6736(12)61766-8.

World Nuclear Association. (2016, October). Renewable energy and electricity, www.world-nuclear.org/informationlibrary/energy-and-the-environment/renewable-energy-and-electricity.aspx World Nuclear Association World Development Report Yelland, C. (2016, 22 July). Understanding the cost of electricity from Medupi, Kusile and IPPs. Daily Maverick, www.dailymaverick.co.za/article/2016-07-22-understanding-the-cost-of-electricity-from-medupi-kusile-and-ipps/#.WCVYvl96Uk Experts, scientists and eminent knowledgeable persons disagreeing with IPCC pronouncements and policies https://wattsupwiththat.com/2017/02/25/richard-lindzen-petition-to-president-trump-withdraw-from-the-un-conventionon-climate-change/ www.eenews.net/assets/2017/02/23/document_gw_07.pdf

Economic Risk Consultant

107 107

GLOSSARY ASEAN: bn: CBM: CCGT: CCUS: CEA: CNG: COO: COUE: COP: CO2: CPI: CSP: DBG: Degrees C: DOE: EU: FDI: FI: FET: FPL: GDP: GFI: GHG GW: GWh: GOS: GVA: NVA: HELE: IEP: IEA: IPCC: IRP: kW: kWh: LBPL: LCOE: LOLP: LPG: MA: MBL: MW: MWh: OCGT: pa: PPI: prob: PV: QES:

Association of Southeast Asian Nations Billion Coal Bed Methane Combined Cycle Gas Turbine Carbon Capture Use and Storage Construction Engineers Association Compressed Natural Gas Chief operating Officer Cost of Unserved electricity Conference of the Parties Carbon Dioxide Consumer Price Index Concentrated Solar Power Deep Biogenic Gas Degrees Centigrade Department of Energy European Union Foreign Direct Investment Fixed Investment Further Education and Training Food Poverty Line Gross Domestic Product Gross fixed investment Global greenhouse gas Giga Watt Giga Watt hour Gross operating Surplus Gross value added Net Value Added High Efficiency Low Emissions Integrated Energy Plan International Energy Agency Intergovernmental Panel on Climate Change Integrated Resource Plan for Electricity Kilo Watt Kilo Watt hour Lower Bound Poverty Line Levelised Cost of Electricity Loss of Load Probability (LOLP) Liquefied Petroleum Gas Master of Arts Master of Business Leadership Mega Watt Mega Watt hour Open cycle gas turbine Per Annum Producer Price Index Probability Photo Voltaic Quarterly Economic Survey

Economic Risk Consultant

108 108

QLFS: REIPP: SA: SARB: SEIFSA: TCF : TW: TWh: USA: $: UAH: UBPL: UCG: UNCTAD: UNFCCC: WCA: WHO:

Quarterly Labour Force Survey Renewable Energy Independent Power Producer Procurement South Africa South African Reserve Bank Steel and Engineering Federation of South Africa Trillion Cubic Feet Terra Watt Terrawatt hours United States of America US dollar University of Alabama in Huntsville Upper Bound Poverty Line Underground Coal Gasification United Nations Conference on Trade and Development United Nations Framework Convention on Climate Change World Coal Association World Health Organisation

Key terminology: Key (major) objectives of South Africa: poverty alleviation, reducing inequality and raising standards of living or reducing poverty, inequality and unemployment Goods-producing sectors: Generally mining, manufacturing, industrial, agriculture and agricultural processing Variability: Variability, interruptibility and intermittency have the same meaning

Economic Risk Consultant

109 109

DISCLAIMER AND COPYRIGHT Disclaimer Rob Jeffrey obtains information for its analyses from sources which he considers reliable, but does not guarantee the accuracy or completeness of any analyses or information contained any report or presentation.

Rob Jeffrey makes no warranties, expressed or implied, as to the results obtained by any person or entity from use of its information and analysis, and makes no warranties or merchantability or fitness for any purpose. In no event, shall Rob Jeffrey or in his personal capacity be liable for direct, indirect or incidental, special or consequential damages, regardless of whether such damages were foreseen or unforeseen. Rob Jeffrey shall be indemnified and held harmless from any actions, claims, proceedings, or liabilities with respect to its information and analysis.

Copyright Copyright 2017, Rob Jeffrey. No portions of any reports, publications or information produced by Rob Jeffrey in whatever form (electronic, hardcopy or otherwise), may be reproduced or published in any manner without his prior written approval.

Economic Risk Consultant

110 110