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Industry empowerment

A recent spate of power failures in South Africa have proven costly to the country’s industry. With the national utility Eskom taking much of the blame, businesses are looking for solutions away from the national grid.

Cornelis van der Waal, Frost and Sullivan, Africa

The development of an economy is closely related to a country’s ability to supply enough energy to industries requiring it. A good example of this is China where the demand for oil and coal has soared over the last ten years, as has their economic growth and this to some extent has driven high fossil fuel prices across the globe.

Another developing economy that has seen healthy growth in the last five years is South Africa. After the country was accepted back into the international community in the mid 1990s much development happened and the economy was able to expand. Although there are still many challenges for organizations that want to operate in this country there are also many opportunities. Current Gross Domestic Product (GDP) growth rate is close on five per cent, inflation is in check at four per cent and many of the destabilizing social factors that hinder growth in other African countries are not present in South Africa. The country has a democratically elected government, much emphasis is being placed on the eradication of corruption and the government’s delivery of quality services is increasing.

The parastatal company Eskom, one of the largest utilities in the world, generates nearly all of South Africa’s electricity. Eskom’s 35 060 MW of nominal generating capacity is primarily coal fired (34 532 MW). The capacity further includes one nuclear power station at Koeberg (1930 MW), two gas turbine facilities (342 MW), six conventional hydroelectric plants (600 MW), and two hydroelectric pumped-storage stations (1400 MW). Although Eskom has three mothballed coal fired facilities (3800 MW), it produces adequate electricity for domestic use and exports power to Botswana, Lesotho, Mozambique, Namibia, Swaziland, and Zimbabwe.

Future needs

If economic growth continued at current levels of 5 per cent over a 20 year period, electricity demand would increase on average by 2-2.8 per cent per annum (excluding new installations). According to Eskom’s own calculations it is expected that it will run out of capacity in 2007. Due to the dire need for additional capacity and the ten year lag time to produce new generating stations, it is not a question of whether the blackouts will occur, but when and how frequently. The inability of Eskom to deliver guaranteed power, as well as the uncertainty that this creates, is forcing companies to invest in gensets as a precaution. Hence, gensets sales have increased significantly since 2005 and are expected to continue to do so, especially if there are further large power outages.

Since 1991, when Eskom started its rural electrification programme, over 3.1 million new households have been connected to the national grid. Despite concerted efforts by government to increase the numbers of rural households with electricity, those remaining without electricity live in poverty and they are often unable to afford basic services. Approximately 20 per cent of South Africa’s rural population (approximately 400 000 households) is not expected to get utility grid electricity for at least 20 years. The most important reason for this is a lack of funding and the inability of these consumers to pay for electricity. On top of this there is a dire need to improve poorer urban areas.

The government’s plans to increase electricity availability under its rural electrification programme are not expected to include the purchase of gensets nor the funding of their running expenses. It will only get involved in rural electrification through national grid expansion and the limited supply of photovoltaic equipment in conjunction with the private sector.

A charged market

South Africans until recently were in the fortunate position that electricity capacity has been greater than demand, and the use of gensets was primarily for backup power. Companies that did purchase gensets would use them only occasionally, sometimes as little as 400 hours over a 20-year period. With such low utilization time few companies invested heavily in gensets and South Africa only made up a small percentage of Africa’s total genset sales.

South Africa is responsible for 23 per cent of Africa’s total GDP (in 2005) and genset sales in South Africa only accounted for 12 per cent of total African genset sales according to Frost and Sullivan estimates. However, with the demand for electricity increasing and the lack of new development in capacity, many companies have been forced to provide their own electricity. As a result of this, genset sales increased at a rate of 13 per cent in 2005 and are expected to increase at a rate of 20 per cent in 2006.

An MTU 12V4000 G21 genset was delivered to the South African communications provider Telkom in 2005
Click here to enlarge image

Although genset power is at least three times more expensive than Eskom power there are a number of benefits for prime genset users. The most important is guaranteed power during critical phases of production (or service delivery). Many South African companies are trying to enter international markets as export companies, and even a couple of hours of downtime could have serious implications for large orders. Relationships could be permanently damaged if companies do not deliver on expected due dates, and these hard-earned contracts could easily be forfeited.

Genset drivers

There are a number of factors driving genset sales in South Africa. The first is the problems experienced with continuous electricity delivery by Eskom as mentioned above.

A second factor is the current strength of the rand and South African companies’ ability to purchase international capital goods. Current expectations are that the rand will weaken gradually against the US dollar, and therefore companies waiting to invest in a genset are motivated to do it under current conditions.

A third factor is the healthy GDP growth experienced, especially within sectors that have traditionally

been large genset users. For many years South Africa has neglected to invest sufficiently in infrastructure projects, but a number of projects are currently underway and are boosting construction sectoral growth. To name a few: the Gautrain project near Johannesburg, the Koega port development in Port Elizabeth, the Berg River water scheme near Cape Town, the upgrade of the rail and road infrastructure, the development of six new sport stadiums for the 2010 football World Cup that is to be hosted in South Africa and a boom in the residential property development market.

The mining industry also is booming as a result of high commodity prices. In addition the country’s tourism sector is firmly established and both need to provide continuous service without relying solely on Eskom grid power.

Obstacles for suppliers

Despite the many opportunities in the South African genset market there are also a number of restraints that are curbing further growth.

South African consumers are very price sensitive and will shop around until they find the best price. Coupled with this is the fact that South African genset users have not been using their gensets for prime power, and hence brand loyalty in this sector is very low. The challenge for genset dealers is to find innovative ways to create brand awareness and foster long-term loyalties. Possible ways to do this include tying customers in with long term service contracts, bulk discounts and favorable finance plans.

The competitive landscape in South Africa has been fairly stable over the last 20 years. Three large players who have a combined market share of 55 per cent dominate the local market. Six or seven other players have a combined market share of around 32 per cent while the rest of the market is divided by a number of small genset distributors. It is difficult for new players to enter the market.

Oil prices have a major impact on the planned use of gensets by customers. As the single largest expense for genset users after purchase is fuel expenses, alternative technologies become very attractive as oil prices increase.

The use of gas technology is not nearly as prominent in South Africa as it is in Europe or America, and therefore gas genset sales make up less than five per cent of all gensets sold in the country. However, there are a number of projects in the southern African region where gas is being discovered and this could increase the use of this technology. Some of the projects include:

  • The Temane and Pande gas fields in southern Mozambique. An 865 km pipeline has been constructed to bring this gas into South Africa, and will be used to produce fuel and chemicals by Sasol
  • The Kudu gas fields currently being developed by the Namibian government. There is a high likelihood that this gas will be piped down the west coast of South Africa to Cape Town and Port Elizabeth where it will be used to power large gas turbines operated and owned by Eskom
  • In the Lephalale region of South Africa’s far north-west, massive deposits of coal bed methane, found in similar quantities and quality to wells in other regions, have attracted the attention of major South African and Botswana-based exploration companies. Using advanced gas generator technology, which is now being brought to the market, the conversion of gas into electricity will enable this once agricultural area to develop as a rich source of electricity for South Africa’s increasingly stretched Eskom power grid.

Alternative options

Besides gas technologies there are a number of other technologies that could compete with gensets. However, none of these can currently compete with gensets on cost, efficiency or quantity of output. But once technologies such as solar powered units, fuel cells or renewable energy sources become financially viable they will start taking diesel genset market share.

South Africa is a signatory to the Kyoto agreement, although very little is done to control emission levels. However, there is stringent legislation in the EU and US and since most gensets used in South Africa come from these two destinations so South African customers reap the benefit of the advances in technology. As soon as technologies are found that can actively compete with gensets on price it is expected that South African companies will also make use of these.

Tourist hotspots have been deploying gensets to guarantee supply. Cummins supplied this set at Bass Lake Lodge, a game farm near Pretoria
Click here to enlarge image

Import duties were originally designed to protect local trade people. Although it is still a highly contested issue, it is widely agreed that tariffs are more negative than positive and should be reduced to increase trading opportunities and give end users the benefit of production efficiencies.

Current duties on complete gensets range from 10 to 22 per cent in South Africa and have a significant impact on how gensets enter the country. The most popular way is for individual components to be shipped into the country to be assembled and modified in local factories. A second method is for companies to produce complete gensets in South Africa. However, this only makes a very small proportion of all gensets sold in South Africa. A third option is to ship complete gensets into South Africa and pay the tariffs. Asian genset producers are increasingly using this method. The lower quality of products still finds a place in the market with bargain shoppers. These gensets seldom conform to European standards, and higher emission and noise levels are common in these machines.

South African users

South Africa’s genset market can very clearly be sub-divided between occasional users and prime (or continuous) users. A growing category also includes users that utilize their gensets on a daily basis, during peak energy use periods. Discussions are underway between Eskom and businesses about the use of gensets by companies during peak times to reduce the demand on the national grid. The idea is that Eskom will then finance the cost of the diesel.

According to Frost and Sullivan calculations the South African genset market was worth R450 million ($72 million) in 2005 and will be worth R535 million or nearly $88 million in 2006.

Growth forecasts

The expected growth in the South African genset market in 2006 is 20 per cent. After this the demand for gensets will decrease until 2009 when it is expected to increase in the run-up to the 2010 football World Cup.

The current driver for genset sales will also change over the next ten years, and the largest current driver, i.e. the inability of Eskom to guarantee electricity, will become less relevant as Eskom increases its generating capacity.

Three major distributors dominate the South African market: Barloworld (which distributes Caterpillar and Perkins products), Cummins and FG Wilson. These three companies have a combined market share of 55 per cent and it is expected that these companies will increase market share.

It is further expected that more entrants will come from Asia, and although products are not always on the same quality levels as they are from more developed countries these gensets will still have market share due to their cheaper cost.

The South African genset market is expected to continue its strong growth trend and holds significant short-term growth opportunities for companies that can deliver on the needs of customers. However, the long term growth prospects are expected to be in line with long term GDP growth of the country of up to eight per cent.

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