By Saliem Fakir · 17 Sep 2014
There are three aspects of energy supply that lend themselves to shifting the diversification of a national economy. The mix of supply should reduce dependence on any source, especially if the source creates a foreign dependence or a systems path-dependence that eventually leads to wider risks for the general economy.
In South Africa, coal is becoming too constraining. Our long-term dependence on coal for the majority of our energy, both electricity and liquid fuels, makes it hard to adjust to a change in economic and resource supply conditions, if 90% of our electricity comes from coal.
It is one of the reasons we need to diversify our energy sources, as we can’t only hedge against present costs, but also future costs especially if coal or oil prices in the future are likely to be higher or supply unpredictable.
The supply needs to be matched with better use of the resource in terms of economic growth and GDP output. And finally, a change in technologies should be done on scale such that it cleaves open new sectors. It should create a new manufacturing and industrial base.
In other words, the source of energy not only allows for more investment flow as greater energy supply allows more projects to be connected on the supply system, but also the type of energy used allows for new specialisation and capability in the economy.
The South African economy post-1994 has not really been built on strengthening capability and depth of diversity as far as the industrial base goes. It has been talked about and perhaps has really only gotten some momentum during the Zuma era with the development of the Industrial Policy Action Plan (IPAP).
Prior to this much of economic policy boiled down to managing inflation through the Reserve Bank’s inflation targets. Budget austerity with some fiscal stimulus through infrastructure spend still remains the predominant pre-occupation of the National Treasury.
This has earned the ire of the labours unions and leftists who wanted austerity removed and more support from the state towards industrial policy.
South Africa has a track record in industrial competence. These linkages were built during the apartheid era in what is commonly referred to as the mining-energy-industrial complex. You could add to this the military dimension as well, because the apartheid regime’s focus was to link industrial capability in order to strengthen its war machine. Energy too played a big role if you consider the creation of SASOL where coal not only supplied the coal power stations but was also converted into liquid fuels and other chemicals used in fertilizers and plastics.
These efforts of extending the value of coal demonstrated that where the state has the will, with strong co-ordination and development of the right skills base it can unlock a great deal more than just exporting coal or any other energy source.
There is a certain mistaken belief that industrial policy is a leftist preoccupation. Economic history tells you that it is properly the place of economic nationalists starting with Alexander Hamilton’s “infant industry” model in the USA, Friedrich List’s similar ideas in Germany and much later, non-European successes in Asian countries where the governments were not leftist at all.
When economies mature and fully develop, it is often forgotten how important industrial capability was for countries as these interventions added value to their natural resources. The competencies they developed with the diversification of the economic base not only withstood external economic shocks with time, but it provided the basis for the development of the service industry.
It is possible to envisage a long-term industrial strategy around renewables that taps into our abundant solar resources as well as fuel cells that allows for stronger linkages with the platinum minerals resource to introduce new capabilities in the economy. To succeed you will need focused national flagship companies to be able to support these developments with international partnerships.
However, there is a caution.
South Africa’s track record in frontier technologies is not particularly great because we simply do not have the depth of financial resources that allows for state participation for the long haul, as we have many other pressing priorities as well. This was clearly shown in the disastrous pursuit of the Pebble Bed Modular Nuclear Reactor, which had to be abandoned with billions of rands spent and little to show for it.
If we are to succeed, it is more likely in areas where we have a natural endowment, such as the strength of our natural resources, some skills, possibly in the manufacture of certain components and where the ability to produce good results is reasonably achievable within a short period of time.
Diversification of industrial competence is important to enable economic resilience because you learn new capabilities and you can export more than your raw material. But it has to be thought through prudently rather than ideologically.
It has to make sense and in the end it is not only about job creation, but optimising the value of investments in mining and infrastructure by ensuring that large spending in one part of the economy also opens the space for new economic activity in other parts of the economy. A prioritisation of renewable energy is one of the openings that will give us the opportunity to reduce our dependency on mining. However, we will have to think through which parts of the value chain we can maximise to our advantage rather than attempt to tackle every aspect of industrialisation.
The extraction of fossil fuels costs money and yields detrimental environmental impacts furthermore their use has disastrous side-effects like global warming. Solar energy has none of these negative environmental consequences and it is free and nobody can deny that we have an abundance of solar energy available. To me it is a no-brainer that we don't place renewable energies right at the top of our national new energy priority list.