(2001) South Africa

• Indicator 7: Energy Intensity

• Vector Value calculations and values
• Discussion and notes to SEW or next year's Observer-Reporter

As mentioned in the overview of South Africa, the South African economy is highly energy-intensive, comparable to the economies in transition in Eastern Europe and the former Soviet Union or the oil-producing countries in the Middle East. The reasons for this include the structural dependence of the economy on energy-intensive industries such as mining and metals, as well as the higher specific energy intensity of some industrial processes than in OECD countries (Thorne 1995).

Two different versions of this indicator are useful to report. The first is to report total primary energy consumption divided by GDP at nominal exchange rates. This gives a comparison with other countries on how much energy they use to generate a unit of GDP. Because of differences in the purchasing power of currencies across countries, however, using nominal exchange rates can understate GDP, and so overstate the energy intensity. A second version of the indicator, therefore, is to report commercial primary energy (ie excluding biomass) per unit of GDP at purchasing power parity (PPP) exchange rates.

The value for 1 on this indicator is the 1990 global average energy intensity of 10.6 MJ/US$. The value for the zero on the vector is 1.06 MJ/US$, or 10% of the 1990 world average. South Africa's energy intensity in 1998 was 37.6 MJ/US$ GDP, or 22.7 MJ/US$ GDP at PPP (DME 2000; IEA 2000a). This means that the vector value for South Africa is considerably greater than 1, or almost 4 if exchange rate GDP is used.

Metric (actual data) for 1998: 37.6 MJ/US$ GDP or 22.7 MJ/US$ GDP PPP
Vector values for 1998: 3.81 (using exchange rates) or 2.26 (using PPP)

 Discussion

The White Paper on Energy Policy recognises that the South African economy is highly energy-intensive, but also that low energy prices (one of the reasons for high energy intensity) have provided a competitive advantage for South African industry. South Africa has some of the lowest energy prices in the world, and the cost of electricity production is among the world's lowest (SANEA 1998). Many of the policy proposals included in the White Paper, such as greater diversity of energy supply sources, promoting renewable energy and energy efficiency in a range of sectors, and the development of a natural gas market, have the potential to reduce energy intensity. The White Paper also calls for 'cost-reflective pricing' - in other words to move energy prices to reflect their true marginal cost of production. Current electricity prices, for example, largely reflect the fact that Eskom's power stations are already paid off and were financed at very low interest rates. Future investments, however, will likely come at much higher cost and may reflect private sector demand for higher returns if part of the industry is privatised. The price signals that people receive today, therefore, including investors in energy-intensive industry, do not reflect the marginal cost of electricity - or what it will cost to generate the next additional amount of electricity that requires new generation plant.

Furthermore, a key element of South African industrial strategy is the establishment of so-called 'spatial development initiatives', which refer to locations where government hopes to facilitate industrial development through public-private partnerships, the improvement of infrastructure, the establishment of strategic anchor projects and the creation of industrial clusters and industrial parks. The two main types of spatial development initiatives are 'industrial' and 'eco-tourism'. The former includes initiatives such as the Maputo Development Corridor and the KwaZulu/Natal SDI. The key to success for these spatial development initiatives is investment in energy-intensive anchor projects, such as the proposed zinc smelter near Port Elizabeth. The risk of these policies is that, while they may promote industrial development in the short run, they carry a high risk of 'locking in' the economy into energy-intensive industries, when environmental, economic and social pressures may push South Africa in the opposite direction. The reason for this 'lock in' is that, once a major investment like a smelter is made, there are very limited opportunities to improve the energy efficiency or also the production process. Recent investments in steel and aluminium bear this out - while the processes may be optimised for that technology, the wholesale switch to a more efficient technology is very costly after construction (Visser et al. 1999).

In terms of data sources, ideally the GDP values should come directly from the South African National Accounts. Data from the International Energy Agency have been used here because of the difficulty in accessing appropriate exchange rate and purchasing power data. Given that the IEA and World Bank reports are based on submissions from individual governments, however, it is unlikely that there are significant differences. Moreover, reporting data in an international currency makes it easier to compare South Africa with other countries. Care will have to be taken, however, that fluctuations in the exchange rate do not distort the results.

Notes to SEW or next year's Observer-Reporter:

Total energy consumption is available from DME, while IEA and World Bank report GDP figures in US dollars (exchange rate and PPP). In addition, more attention should be given to how non-energy sector policies will affect this indicator (eg transport policy, housing policy, industrial and regional development).