The Investor February 2024

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ShareFinder’s prediction for Wall Street for the next 3 months (top) and the JSE (bottom).

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By Richard Cluver

Writing in the Wall St Journal recently, journalist Juliet Chung made an interesting comparison between the performances of a number of US university trust funds. The figures in the table on the right might just give ordinary investors pause for thought.

Chung’s point of departure was that Baylor University, a private Baptist Christian research university in Waco, Texas, is outperforming all but one of the top college funds because its portfolio managers, “Do things by the book.”

In a column headed ‘The Small University Endowment That Is Beating the Ivy Leagues,’ she wrote that “Many universities allocate their money among different assets and adjust periodically. Baylor, led by a former trader, seizes on market moves frequently to boost or cut exposure.

She quotes the leader of the team, investment chief David Morehead, as follows: “The only thing I’m doing is what the market tells me to do: If the market goes up, we take some money back. If the market goes down, we give it money. It is finance 101.”

Morehead regularly touts Baylor’s performance compared with other endowments to its outside fund managers and he takes particular pride in beating the ‘Ivies,’ which Baylor has largely done over the past five years despite those endowments’ larger staffs. Besides Morehead, Baylor has four investment staffers, all women.

What really intrigued me, however, was – apart from the fact that one would assume that the top US universities have access to some of the finest minds in the investment business worldwide – that anyone could think that the performance of any of those funds was anything to write home about!

As my own point of departure, I always seek to compare trust fund performance with the performance of the leading market indices. After all, that is what everyone else does. So here let us note that Wall Street’s most widely regarded measure of market performance is the S&P500 Index which, over the same five-year period that the university trust funds’ performance was measured, achieved compound annual average growth of 12.5 percent and paid a long-term average dividend yield of 1.84 percent. That Total Return of 14.34 percent underscores the fact that NONE of those trusts funds even equalled the long-term average of the benchmark US share market index.

The best of them, Brown University was 7.25 percent shy of the benchmark while the average underperformance was 30.34 percent below at 9.9 percent

To confirm that contention, please consider what the S&P500 has done over the same period in the following graph:

 Now, against that 9.9 percent compound average portfolio graph average, it might be churlish to publish what the ShareFinder-created New York Prospects portfolio has achieved since its inception in December 2019, but as you can see in the graph below, that green trend line represents compound 27.6 percent which equates to a relative 278.78 percent better performance than that of the average college trust fund. Admittedly the Prospects Portfolio began seven months later than the other growth periods, but I do not think such a wide margin would be much affected by such a time period.

But the real point I am seeking to make is that in selecting the shares which should form the basis of the Prospects portfolios, the process built into the ShareFinder algorithms are nothing more that the basic finance 101 rules which Baylor University’s David Morehead referred to in the Wall Street Journal interview.

ShareFinder looks for two important characteristics which I have constantly advised long-term investors to do and that is to seek out the shares of companies which have achieved superior dividend growth over extended periods of time and then, of these, which by virtue of comparing their dividend yield with that of comparable dividend-growth companies, the software determines which are significantly under-priced and thus represent potential recovery situations.

You do not have to be a financial genius to recognise why the process works. But what does surprise me is the fact that ShareFinder portfolios have consistently outperformed their competitors for decades now? I mean, it really is just Finance 101!

Perhaps the one real difference between the ShareFinder and the Morehead approach is that we resist making too many changes because we recognise that most investors hate Capital Gains Tax with a passion and so we try to spare them that pain. Clearly too, it is an approach that works! In my latest book, Wealth, I have spelled out that process in more detail.

In the light of this, I could not resist telling you which shares ShareFinder currently selects on the JSE: Top of the pops is Capitec, followed by Afrimat and SAB Cap. And for those who are prepared to take a bit of a risk it calculates that the most under-priced are Kal Group and Mix telematics.


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Choose Your Own Economy

By John Mauldin

If you’re a parent or grandparent, you may know of the “Choose Your Own Adventure” storybook series. Written in second person, they make “you” the hero. The reader makes choices as the story unfolds, leading to one of several possible endings.

That format is disturbingly similar to a lot of economic forecasting. The economist—who of course envisions himself a hero (don’t we all, at least privately?) — chooses models or datasets that lead to places potentially quite different from those who make other choices. The differences grow wider as the stories unfold. The endings, while unique to each economist, are satisfying because they always reflect those initial choices. There’s no right or wrong ending… just the one you created.

Except…….The economy isn’t a storybook. It’s the real world and it affects everyone. Its direction depends in part on the policy choices of central bankers and government leaders. To make good choices, they need to know with reasonable confidence what proposed policies will do.

In other words, they need accurate economic forecasts. Economists aren’t very good at delivering those. But economists are very good at creating models which central bankers, government bureaucrats, and politicians prefer. I believe that today’s economists serve the same function once performed by astrologers or shamans. Rather than looking at sheep entrails and telling the king what he wants to hear, they prefer the far more “scientific” method of selectively choosing data which has the wonderful ability to tell a politician his preferred policy is correct.

Do you want a model that tells you we need to raise taxes? Carefully select the correct data and your models will reflect that policy choice. You think we should cut taxes? Easy to create a model for that. Spend more on your preferred government programme? Or eliminate one you dislike? Simply choose the correct data and your model will confirm your sponsor’s wisdom.

Many economists have physics envy. They want to model the economy in all its complexity, which in fact is a statistical impossibility. Every forecast (even and maybe especially mine!) should be taken with a grain of salt. And with some economists you’ll need the whole saltshaker. Maybe more than one…And recent experience says the profession’s forecasting skills are getting worse, not better. Today we’ll talk about why this is such a problem and what, if anything, we can do about it.

Compounded Confusion

Before going further, I want to be clear: Forecasting is hard. Everyone who tries to do it, no matter how thorough and sincere, makes mistakes. Economies are incredibly complex systems. To at least some degree, their direction seems purely random. Adam Smith referred to “the invisible hand” at a time when the world economy was far simpler than today’s.

https://images.mauldineconomics.com/uploads/newsletters/IMAGE_2_20240216_TFTF.png And then we get unpredictable, unprecedented events which seemingly happen all the time and can change everything. We should also note “the economy” is a misnomer. We have a bunch of different individual economies whose condition can vary wildly. You can be doing well while the national averages say the country is in recession. Or you can lose your job and go bankrupt while “the economy” is booming. It’s like the old joke that says when your neighbour loses his job it’s a recession. When you lose your job it’s a depression.

No forecast can accurately capture everyone’s individual experience or prospects. At best, they can describe broad tendencies. And in large countries, “broad” can hide a lot of variation. Even a forecast that nails the national picture can still have little practical bearing on your personal and regional situation. In Q3 of 2023, US real GDP grew at a 4.9% annual rate, according to the Bureau of Economic Analysis which also breaks this down by state. Growth in that same quarter ranged from 9.7% in Kansas down to 0.7% in Arkansas. Note that there is no simple heuristic that can explain the differences. It’s not a red state/blue state thing. It is not coastal versus flyover country.

A forecast that predicted strong GDP growth was right in some places and dismally wrong in others. That shouldn’t surprise us; the US is a big country with a lot of regional variation. But that variation necessarily makes forecasting difficult.

The same applies to unemployment, by the way. The headline unemployment rate was 3.7% in December 2023. By state, it varied from 1.9% in Maryland and North Dakota up to 5.4% in Nevada. Whether the labour market is tight or slipping depends on where you are. The variations become even more significant when you break it down to city and county levels. A large employer in a small county can be significant.

I mention local variation because the Federal Open Market Committee includes regional Fed presidents who are supposed to represent their region’s needs. But the data can vary, further complicating the policy choices.

Then there are models. Economists — , government, and private — use models to make their forecasts. They plug in variables and examine how they affect each other. Think of a spreadsheet but vastly more complex. Yet they still can’t include the giant range of important factors.

The people who design these models, because they put a lot of effort into them, naturally want to trust the output. This leads to overconfidence. That is especially true when you get a lot of economists basically trying to achieve the same outcome using the same assumptions and theoretical philosophies.

Even if you could get Austrian and Keynesian economists to agree, the models would still depend on data developed by various government and private services, which has problems. I have often written about the vagaries of measuring inflation, unemployment, GDP, manufacturing output, and on and on. Yet lacking better choices, we still use this data and actually ascribe significance to it.

At the same time, not having models isn’t necessarily better. What’s the alternative? Subjectively looking at whatever data you think is important invites “confirmation bias.” That’s when people unconsciously pay more attention to data that confirms what they already believe. It affects almost everyone and is incredibly difficult to avoid.

Much like compound interest, all this produces compounded uncertainty. The data that goes into forecasts isn’t necessarily reliable, the models that process the data into forecasts aren’t necessarily reliable, and the policymakers who look at the forecasts are subjective humans with varying and often conflicting priorities. Getting any useful policy out of this multi-layered contraption is tough.

Misleading Theories

The flaws in forecasting were illustrated in real time in just the last few years. Admittedly, COVID and all the changes surrounding it were outside the bounds of anyone’s experience. That’s one of the problems, though. Both models and subjective forecasts look at past experiences and assume the future will resemble them. That’s not necessarily a good assumption.

When inflation began rising in 2020, it was perhaps reasonable to think the various pandemic disruptions were causing transient price increases. Government spending certainly added fuel to the fire. Larry Summers made himself persona non grata for a while by saying the last round of government stimulus money would create inflation, and he was right. (I said the same thing, but I’m not Larry Summers.) The Fed delayed responding until after the February 2022 Ukraine invasion, which sparked undeniable inflation that—to models and economists—seemed likely to last a while.

The Fed responded with a tightening campaign that past experience said would probably push the economy into recession. It didn’t, unless we count those two mildly negative GDP quarters as a “technical recession.” Unemployment and consumer spending paid no attention, either.

Maybe some model somewhere predicted this, but I’m not aware of it. The far more common reaction was aggressive pessimism. My friend Ed Yardeni took his own profession to task in a recent report he called Why Were Economists So Wrong? Here’s Ed:

“Both 2022 and 2023 were years of living dangerously. Pessimism about the economic outlook was in fashion. Most commentators on the economy concluded that the high inflation problem was persistent rather than transitory and that the Fed would have no choice but to engineer a recession to bring down inflation. A few of the naysayers anticipated that this would unleash a debt crisis that would cause a severe financial calamity and a very deep economic recession.

“Now that we have survived both years without the widely anticipated financial and economic debacle, pessimism has abated. There are still a few economic prognosticators predicting a recession in 2024, but far fewer than over the past two years. So now might be a good time to draw some lessons about the economy and the financial system from the many misleading theories and models that fuelled so much pessimism.”

https://images.mauldineconomics.com/uploads/newsletters/IMAGE_3-1_20240216_TFTF.png From there Ed went into a long litany of examples—not just economists but also fund managers, wealthy investors, and CEOs predicting imminent recession and/or financial crisis. They weren’t entirely wrong; we did have that mild technical recession and some bank failures. But many expected much worse. And the data they cited at the time fully supported that view. Yet it was wrong—or at least has been so far.

For example, here’s an October 2022 headline from The Wall Street Journal. These forecasts could not possibly have been more wrong. The “Next Year” (meaning 2023) brought neither recession nor significant job losses. Now we’re in early 2024 and still wondering when the Fed will cut rates.

The article’s text is more specific but still no better:

“The US is forecast to enter a recession in the coming 12 months as the Federal Reserve battles to bring down persistently high inflation, the economy contracts and employers cut jobs in response, according to The Wall Street Journal’s latest survey of economists.

“On average, economists put the probability of a recession in the next 12 months at 63%, up from 49% in July’s survey. It is the first time the survey pegged the probability above 50% since July 2020, in the wake of the last short but sharp recession.

“Their forecasts for 2023 are increasingly gloomy. Economists now expect gross domestic product to contract in the first two quarters of the year, a downgrade from the last quarterly survey, whereby they pencilled in mild growth.

“On average, the economists now predict GDP will contract at a 0.2% annual rate in the first quarter of 2023 and shrink 0.1% in the second quarter. In July’s survey, they expected a 0.8% growth rate in the first quarter and 1% growth in the second.

“Employers are expected to respond to lower growth and weaker profits by cutting jobs in the second and third quarters. Economists believe that nonfarm payrolls will decline by 34,000 a month on average in the second quarter and 38,000 in the third quarter. According to the last survey, they expected employers to add about 65,000 jobs a month in those two quarters.”

The 66 economists in WSJ’s survey included a wide variety of backgrounds, philosophies, and methodologies, and none was remotely close to correct. They should ask themselves why. Prior to the last few years, blue chip economists almost without fail never predicted a recession, often when we were already in one. This time they predicted recessions that didn’t happen. So far, at least, their record is still something like 0 for 300.

Giant Consequences

I’m sure these economists want to do better. The rest of us would certainly benefit from reliable forecasts, even imperfect ones. So, it’s worth asking what they missed. Ed Yardeni listed 10 misconceptions that helped produce these poor forecasts. I’ll list some of them and add my comments.

Misconception #1: Tight monetary policies always cause recessions.

That’s how it should work. Tightening rates weakens demand by making major purchases more expensive to finance. This leads to layoffs which further reduce demand as unemployed workers cut their spending. Producers have to cut prices, bringing inflation back down.

That’s a tried-and-true formula. This time it didn’t work that way. Why not? I think the main reason is that the private sector is much less leveraged than it used to be. The economy has a lot of debt, but it’s highly concentrated in the federal government. Raising rates affects spending decisions only to the extent the higher rates affect the borrower’s cash flow. Across the economy, this was minimal except to the Treasury.

Misconception #3: Consumers are running out of excess savings.

The various COVID stimulus programs gave households a lot of money while the uncertain situation made people cautious to spend. They have been slowly working through their savings, though, and the theory was that this drawdown would reduce aggregate consumer demand, possibly causing recession. That hasn’t happened. Yardeni says the reason is that consumers have other sources of purchasing power because the tight labour market has pushed wages higher, even after inflation. Moreover, the wage increases have been strongest for front-line service workers who have a higher propensity to spend. At the same time, the rapidly retiring Baby Boom generation is spending more on restaurants, vacations, and healthcare. This raises demand for workers in those industries which have to respond with yet higher wages.

Misconception #5: Inverted yield curves predict recessions.

The 3M/10Y yield curve inverted in November 2022, which historically should have meant a recession about 13 months later on average. It’s now been 15 months and a recession hasn’t started yet, nor does one appear imminent. (I know, I just jinxed us!)

My friend Campbell Harvey, who pioneered this indicator, said in a recent report a soft landing is still possible if the Fed aggressively cuts rates soon. That also doesn’t seem likely, which in Dr. Harvey’s view makes recession more likely. But in any case, this cycle seems to be stretching the inversion indicator well past average. Yardeni thinks this is because the Fed has learned to rapidly launch new credit facilities in response to events like the Silicon Valley Bank failure.

Misconception #9: The rest of the world doesn’t matter much.

This hasn’t been noted as much but is important. China’s real estate woes (Evergrande, etc.) slowed the Chinese economy and, most important, reduced global energy and commodity demand. This helped dampen inflation. So the lesson there is that events outside the US can matter in both directions. The war’s outbreak sparked inflation and China’s problems reduced it. The Fed had nothing to do with either.

Now ask yourself: Could any model—or for that matter, any human brain—anticipate how all these once-reasonable assumptions would fall by the wayside at once? I don’t see how.

As we approach this decade’s midpoint and the 2030s draw near, I think we should expect more and more surprising events. The “rules” we’ve all come to think are reliable will become steadily less so. Some of these surprises may be good ones, like the “no landing at all” economy. That would be nice. My speculation, as I’ve shared with a few friends, is that the massive government debt is forming an economic black hole. As science fiction fans know, math works differently inside a black hole. The change to a different mathematics happens at something called the “event horizon.”

I think it is possible the combination of COVID and all of its ramifications, government stimulus, and even more so government debt, has created a black hole and we are approaching an event horizon where all our past observations of the economy are losing relevance. Whether or not (to use the familiar warning) past results were ever indicative of the future, they certainly aren’t now.

At the very least, we will have to get through this period with an economic navigation system that isn’t working as well as its operators think. And it wasn’t especially reliable in the first place.

This isn’t just entertainment. People who make important decisions affecting all of us are flying blind, too. This raises the risk of policy errors with potentially giant consequences.

As I’ve said in my own annual outlook letters, forecasts matter even when they’re wrong. They guide our thinking in ways that can either help or hurt. And if I’m right about the coming cyclical crises, it will be a very bumpy ride.



The rose garden of good government seems far away

By BRIAN KANTOR

They never promised us – nor did we realistically expect – a public sector in SA that performs as well as they seemingly do in say Scandinavia. What we have in SA is however widely recognised as an almost complete failure. The government offers little defence of its current practice – only long agendas for reform. Which raises the question – why does the SA public sector perform quite so badly?

One feature of the SA public sector deserves notice. The financial rewards it offers its officials – salaries, medical and pension benefits and secure tenure, are clearly very attractive when compared to the private sector; Such that there is very little movement from public to private employment.

The regret of the government is that the limited flow of taxes has provided minimal scope for raising the numbers of teachers, nurses or humble pothole fillers. For those that have jobs are given more– in the form of regular above inflation increases in their salaries. While the hospital wards and classrooms become increasingly crowded and the roads impassable and the lights are off rather than on.

Given the superiority of public employment and given the abject failure of the economy and the labour market to absorb many more men and women of working age into formal employment, the issue of just how the favoured jobs in the public sector are allocated becomes especially important to understand.  Recruiting strictly on the merits of potential recruits is clearly not the overriding modus operandi in SA.  Observing racially prescribed quotas are one of the binding constraints. And a key performance indicator by which institutions and their leaders are measured.

ANC Cadre employment is another important objective of government employment policy. That, notwithstanding the implications drawn by the Zondo Commission of Enquiry, is a practice that has not been disavowed by the President.  And yet, should cadre deployment not be the overriding mission and practice of the HR specialists in government, nor merit their North Star, the tempting gap between the supply and demand for highly prized employment opportunities with governments, of all kinds and agencies in SA, is very likely to be filled by unorthodox procedures in exchange for a finder’s fee or some equivalent.

The opportunity to capture some of the ongoing rents will not have escaped those with bargaining power or influence. Historically in other regimes, shop-stewards, backed by Unions with the power to strike down essential services, have exercised such powers when allocating limited and well-paid jobs as on the Docks or the construction sites or among the waste removers. Nepotism may be another description for it.  As they say nature, including homo economicus, abhors a vacuum. 

If employment in the public sector is not explained by objective measures of ability to perform important functions – by qualifications carefully vetted and by psychometric measures of potential etc objectively administered – and when advancement is based upon years of service, and not key performance indicators (KPI’s) of the kind common in the private sector, how are the officials so appointed, likely to behave, all the way up the hierarchy? As may be presumed of all in the workplace, they will behave mostly in a self-interested way.  You do get what you pay for.

Absent any link between merit, performance and reward, accepting the grave responsibility for carefully spending hard earned taxes, or of being a conscientious public servant for its own reward, is much less likely to be the outcome. Denying the capture of highly valuable contracts with government, opening the tender honestly, whistle blowing when procurement rules are flaunted, becomes essentially quixotic, even dangerous. Going the extra mile when nursing or teaching or policing all becomes much less likely.  After all, where else is the citizen to go for a permit or essential documentation, or the poor to go for schooling or medical care or protection?  They are easily treated as supplicants rather than valuable customers. Producers rather than consumer’s interest will prevail.

The case for meritorious public service is essential to the purpose of good government. Introducing much more of it in SA will however have to overcome powerful interests in the established favour and crony driven system. It will take the recognition, resentments and ultimately the votes of the victims of poor service to do so.

• Kantor is head of the research institute at Investec Wealth & Investment,



2024 – Once again electricity

By JP Landman

Recently there were several important developments regarding the major issue facing the country: electricity.

By far the most important was the release of the long-term electricity plan, the Integrated Resource Plan 2023 or IRP 23. This is a still a draft. After public comments, it will be gazetted to replace IRP 2019. Even as a draft, it is a wholly unsatisfactory document that lets the country down in a crucial area of development. More about that later.

The government also announced three bid windows for 5 000MW of renewable energy, 2 000MW of gas, with another one for 1 000MW of gas, specifically in Nelson Mandela Bay, to come later in the year as well as 615MW of battery storage. A request for proposals (not a bid window) for 2 500MW of nuclear power is also envisaged for 2024. A nuclear power station takes 10 to 15 years to develop. This will not make any difference between now and 2030 and we will revert to the issue once the proposals are in and we know what is at stake.

Another important piece of information came from energy analyst, Chris Yelland. Based on Eskom data, he calculates that the utility’s energy availability factor (EAF) declined from 58% in 2022 to 54.7% in 2023. This is a stark summary of the relentless decline at Eskom and makes a mockery of EAF targets of 65% and 70% set at various stages by management and politicians.

The IRP comes to the bleak conclusion that, even with new capacity (including 3 000MW gas from Eskom), load shedding can be expected to continue into 2027. Publishing a “plan” that includes load shedding for another four years can only be called negligent planning. Common sense dictates that such a plan must set out a path towards plugging the supply deficit and eliminating load shedding.

The prognosis of load shedding continuing until 2027 is premised on a very realistic EAF of 49% to 51%. The only scenario in IRP 23 where load shedding is overcome, is with an EAF of 66% to 69%. Given the trend in Eskom’s EAF, that is clearly wishful thinking. Relief from load shedding can only come from new investments. This is where IRP 23 really lets the country down.

There is general agreement that South Africa needs 60 000MW of new capacity over 10 years – about 6 000MW per year. The Presidential Climate Commission, for example, recommended 50 000 to 60 000MW of new renewable capacity over 10 years, plus 3 000 to 5 000MW of new gas. But for the seven years to 2030, IRP 23 only provides for a total of 28 000MW to be added, leaving a shortfall of 22 000 to 32 000MW. For a country in an electricity crisis, this is wholly visionless and without urgency.

Inexplicably, IRP 23 does not include the 5 000MW renewables from Bid Window 7, released in December. It also does not include 5 000MW from a future Bid Window 8, which the minister still has authority to issue. That will cut the deficit by 10 000MW.

IRP 23 also states that more solar and wind power from the private sector is expected to be connected after 2027, but does not bring any numbers into the plan. This week, Nersa revealed that, in 2023, nearly 4 500MW new capacity were installed across 392 plants. A log we keep of private projects announced in the media comes to about 11 000 MW to be added in the next three to four years. Incomplete as the log may be, one cannot just ignore the private sector contribution.

IRP 23 – renewables, gas and coal

Of the 28 000MW of new capacity over the next seven years, which the IRP foresees, 69% will be renewables (wind & solar), 21% gas, 5% dispatchable capacity (essentially storage capacity in whatever technology) and 5% coal.

The 5% for coal refers to the last two units at Kusile and Medupi that will come online during the IRP period. Essentially, there is no new coal. Two 750MW coal plants provided for in IRP 2019, which the minister never activated, do not reappear in IRP 23. The IRP notes that the GeoScience Council and World Bank are undertaking a study at a site in Leandra in Mpumalanga to explore clean coal technologies. Should such technologies indeed be developed, coal could feature again in the period after 2030.

Although it is in IRP 23, I excluded from the 21% gas calculation 1 200MW of gas from Karpowership. The day after the IRP was released, Eskom announced that it had cancelled the transmission grid capacity reserved for Karpowership and two other providers as they could not reach financial closure for their projects by 31 December. Hopefully, this is the end of the inappropriate Karpowership deals, even though the IRP draft still includes it.

Another example of reality outstripping the plan is the provision for 3 000MW gas from Eskom. Industry insiders put the cost of that project at R30 billion and more. However, the R254 billion Treasury bailout of Eskom prohibits any further capex, apart from essential maintenance. It also prohibits further debt taken on by Eskom. It is unclear how the drafters of IRP 23 think the Eskom project will materialise.

As the IRP now stands, it is already outdated on this 4 200MW of gas. Presumably, that would be fixed in the final draft.

Missed opportunity to spur re-industrialisation

At 69% of new capacity, renewables dominate the bid windows. Sadly, that is not enough. Quite apart from the fact that 32 000 more MWs are needed, the miserly allocation for renewables undermines industrial development.

In 2024, for example, IRP 23 envisions only 1 000MW of solar renewables to be installed; in 2026 only 1 040MW; in between, in 2025, there is a spike to 3 000MW. With such a limited and fluctuating uptake, how can industrialisation and localisation of renewable power components take place?

If we play our cards right, green energy can play a huge role in re-industrialising the country. The opportunity is right in front of us, but who will build a factory to produce solar panels or wind components if uptake is going to be so limited and fluctuating? We learnt that lesson when Brian Molefe suspended renewable energy contracts in 2016 and a solar panel factory in KZN had to close down.

Now what?

There is one big difference between IRP 2019 and IRP 2023, and this is the regulatory context. The changes announced by President Ramaphosa in 2021 and 2022 created a liberated electricity market where private players can do their own thing, irrespective of what the minister publishes in an IRP. Over the last two years, we have seen private players, from households to big corporates, using this freedom to create their own supply. Traders and energy exchanges are also emerging to buy and sell power, further expanding supply and consumption.

Over the last year, many companies have started embracing renewable power, partly to beat load shedding, but also to move towards being carbon neutral. Anglo American SA, for example, are aiming for 5 000MW of renewable power by 2030, to be carbon neutral by 2040; 5 000MW is as much as a whole government bid window. Similar stories are unfolding at many other companies.

Even the country’s biggest coal producer, Exxaro, will not invest in more coal assets and are rather hunting for renewable assets. Earth & Wire, a private sector “utility”, has already signed agreements to provide many thousands of MWs to various buyers. The genie has left the bottle.

Reflexivity, the theory that an action carries in it a counteraction, is also at work here. The more IRP 23 states that load shedding will continue to 2027, and the more it works with unrealistic gas assumptions, the more people will note the failures and make their own arrangements. It would be better if there was one national plan that mobilised the public and private sector to play their respective roles to eliminate load shedding and undertake the long-term development of the energy sector. But IRP 23 is not that. So, we will have to rely on private sector initiatives to get us over the line. This is happening.

Transmission capacity

The transmission grid is still a concern, but fortunately also a priority, both in terms of money and attention.

National Treasury has signed two agreements with European lenders for concessional loans to be used for transmission expansion. The terms of the government’s bail-out of Eskom for R254-billion are creating a bottleneck now, because of the prohibition on capex programmes mentioned above. That, of course, impacts investment in transmission. The new National Transmission Company, for whom a new board was announced this week, will be fully operational from 1 April, and the European money will probably go to that company to proceed with expanding transmission.

Eskom Transmission currently envisions that 1 675 km of new lines will be built by 2027 and 12 500km thereafter. Power Operations & Leadership Association of Southern Africa (Polasa), an industry organisation, has called this a “famine and feast” scenario and argued for some of the projects to be brought forward. Electricity Minister Kgosientsho Ramokgopa, who was recently given responsibility for the transmission network, acknowledged the problem in his first news conference of the year. He set a goal of building 6 000 km over three years and said he had a mandate to look for private capital to co-finance that.

Economic impact

Due to electricity and logistics constraints, 2024 will again be a tough year economically. Nobody is expecting the economy to grow at the population growth rate of 1.8%. This means that 2024 will be the 11th year in which the economy grew more slowly than the population and the country is getting poorer. We already have a decade of declining per-capita incomes behind us.

That, of course, impacts unemployment, poverty, the ability of the government to collect taxes, having sufficient resources for development. It affects everything. Electricity must be resolved, and logistics cleared. Only then can the country again enjoy a rise in per capita incomes.

So what?

  • The further decline in Eskom’s EAF to less than 55% for 2023 underlines the futility of wishing for higher efficiency numbers to deal with load shedding. It is truly a case of “hope over experience” – particularly with power stations that are getting older with each passing year;
  • The only sustainable way to energy security is massive investment in new capacity. The country needs between 50 000 and 60 000MW of new capacity by 2032. IRP 23 only envisages 28 000MW and that includes a dubious gas project by Eskom. It leaves a huge supply gap;
  • Fortunately, regulatory reform since 2021 has opened the way for private sector involvement in electricity. Load shedding, rising tariffs and ESG concerns are spurring that involvement on. This should help to plug the supply deficit;
  • Getting out of the electricity crisis is a big opportunity for South Africa to stimulate investment, growth, and re-industrialisation. IRP 23 does not seize this opportunity; and
  • The Just Energy Transition plan is a much better road map for the country’s evolving energy sector. We will monitor how that is implemented.



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