Estimating the economic cost of load shedding in South Africa
Purpose of the study
In early 2020, Eskom commissioned Nova Economics to provide the national utility with reliable and accurate estimates of the economic cost of load shedding (CoLS) in South Africa between 2007 to 2019. The main objective of this study was to update Eskom’s previous estimate of the CoLS (2009) and to explore how the costs of outages were distributed across different sectors of the economy.
Background and context
In October 2007, the lights went out and South Africans experienced the first, of what was to become a series, of nationwide load shedding episodes. This marked the beginning of a national electricity supply crisis that has persisted for over a decade. Load shedding refers to the deliberate shutdown of parts of the electricity distribution network to avoid damaging the electricity grid and to safeguard against a national blackout. Load shedding is implemented, as a last resort, to reduce electricity demand, preserve grid-stability, and prevent the collapse of the system.
Load shedding has caused significant disruption in the daily lives of South Africans and has come at a significant cost to the economy. We analysed data supplied by Eskom’s system operator and found that load shedding occurred during 33 months between 2007 and 2019. These load shedding episodes were concentrated in three main periods – from late 2007 to 2008, from 2013 to 2015, and most recently from 2018 to late 2020.
Approach
We estimated the CoLS using econometric techniques to analyse the historical relationship between load shedding and GDP. Our estimates captured the variation in GDP growth that could be attributed and 2019[1]. These estimates do not include the longer-term costs of load-shedding on the trend in GDP growth (e.g. related to reduced business and investor confidence).
Key findings
We estimated that Load shedding cost the South African economy nearly R35 billion in the 12 years between 2007 and 2019. To put this into perspective, this is roughly equivalent to the amount the 2008/9 financial crisis subtracted from trend GDP (albeit over a much shorter period). Our results suggested that the cost of load shedding (CoLS) is R9.53/kWh (expressed in rand per kilowatt-hour and based on the 2018/19 period). This was similar to Eskom’s previous estimate of R8.95/kWh[2], which was produced by Deloitte in 2009.[3]
We found that the CoLS was unevenly distributed across the economy – four of the nine industries, namely manufacturing, transport and communication, retail trade, and agriculture, bore 80% of the total cost. The manufacturing sector alone, shouldered nearly 40% of the total cost. By contrast, the more service-oriented sectors, including financial and business and community, social and personal service were largely unaffected. There are several reasons why service-oriented industries are likely to be more inherently resilient to power outages – they are far less electricity-intensive, are more flexible and so can sometimes shift production and can switch relatively easily to alternative sources and/or back-up generation.
Impact of the study
Estimates of the CoLS can be used to inform energy-policy and to guide strategic-decision making. For example, estimates of the CoLS. Estimates of the cost of power outages are used internationally to make socially optimal investment decisions (that minimise the net cost to society).
[1] Expressed in 2020 prices.
[2] Expressed in 2020 prices.
[3] Deloitte, “Modelling the impacts of electricity disruptions, Chapter 3, Report on Eskom and the Electricity Sector,” (2009).
Link to summary presentation Eskom_CoLS_Results_final_2
