HomeIndustry SectorsFinance and PolicyImportant year coming up for energy industry in SA

Important year coming up for energy industry in SA

The period 2013 – 2014 is expected to be an important year in the energy industry in South Africa. The first generation activity at Medupi is expected, clearer guidance on nuclear and shale gas is expected, the renewable energy (RE) industry will continue its significant expansion, and the country’s department of energy (DoE) will unveil its long term energy roadmap – this on the back of a challenging 2013.

The South African economy has been slowing down over the last 18 months, predominantly as a result of the spill over effect of the global economy. Various growth adaptations have been seen over the past 12 months, based on South Africa’s current tepid growth figures. With Libya (11.6%), Sierra Leone (9.6%) and Chad (9.5%) reaching excellent growth in 2013 GDP figures, South Africa has fallen into the lowest 10 countries in terms of GDP growth, at a rate of 2.8%.

The average growth (per African country), as per a recent report by a leading bank, is pegged at 4.8% for 2013. This low figure of growth for South Africa is seen by Frost & Sullivan as a motivator to the South African government to put in place plans and policies to drive growth during 2014. The anticipated spurt in growth initiatives is something companies active in the energy space should be aware of.

However, from a negative point of view, shortages of electricity, together with a lack of competitiveness and a rapid devaluation of the South African rand, have been significant reasons for why the country has experienced a decline in foreign direct investment. And despite the on-going efforts of the national utility to get its mega power plants on-line, it has become clear that these projects have been delayed and that electricity generation increases will be postponed. The net result of which has been a decrease in business confidence in the country. This, coupled with disappointing productivity improvements, has further pressurised the manufacturing and industrial segments in the country.

The declining rand has brought some relief to manufacturers in South Africa. However, importers have seen a significant increase in rand costs of their imports. Since the majority of energy equipment in South Africa is imported, the relative rand value of most equipment has increased. This at a time when South Africa is investing heavily in the energy industry across generation transmission and distribution segments.

One positive impact of increasing energy costs and decreasing availability has been the significant roll-out of energy saving initiatives driven by the national utility (Eskom) across the residential, commercial and industrial sectors. Large numbers of new efficient technologies have been implemented and South Africans will continue to reap the benefits of more efficient energy use for many years. Significant opportunity remains for more efficiency in energy intensive devises such as pumps, motors, compressors, municipal and commercial lighting, HVAC systems, and most heating and cooling processes.

OEMs manufacturing in South Africa will have to explore regional markets to expand their activities. Finding the right distribution model into the continent remains one of the largest success criteria. Africa’s overall economic expansion, continuing at a rate in excess of 5%, is clearly driving opportunity for local manufacturers. The vital question is which micro markets are best suited to a company’s value proposition? Finding ways of marrying a company’s product and service line with a local market is often the tipping point when it comes to whether success is achieved during geographic expansion. The time of saying “we are expanding in Nigeria” are over, and have been replaced by “we are expanding by setting up our head office in Port Harcourt, rather than Lagos, since our largest transformer market is found in the Port Harcourt area and the strong levels of competition in Lagos has saturated the market.”

While companies ride the positive-negative see-saw of the South African and wider African economy, the overall outlook for companies in the energy space in South Africa is “realistically optimistic” and although it is not expected that the industry will expand at double digit rates, a solid outlook for industry remains encouraging. With the large amount of activities on the cards for 2014, it holds that companies that are robust in adapting their services and value proposition to address shifting market demand, will be the best suited to address ad hoc market needs. Tracking markets have always been vital, but over the next five years it is predicted to be one of the key drivers of a company’s success in Africa.

Companies that can find innovative ways of balancing the positive and the negative aspects of the South African economy in line with their business, is expected to find innovative ways of driving internal growth.

By Cornelis van der Waal, business unit leader for the energy & environment unit, and Johan Muller, senior industrial consultant at the Frost & Sullivan Africa practice.