The impact of electricity on economic growth in South Africa

Since 1994, with many of its sanctions lifted, South Africa became a stronger economic power house in Africa leading the continent‘s industrial output and mineral production and generating a large proportion of Africa‘s electricity. The South African economy has since been growing at a fast pace which has also led to an increase in the demand for electricity. South Africa‘s generating capacity has remained constant through a consistently increasing demand, leading to an electricity shortfall. An immediate threat to South Africa‘s continued economic growth is a capacity constraint in terms of energy supply. Increasing economic growth coupled with the rapid industrialisation and mass electrification programme of the last decade, as well as planned and unplanned maintenance and coal stock pile problems led, in January 2008, to demand out stripping supply. With electricity being an important component of economic development, it is vital that the impact of the supply of electricity on the economic growth of the country be well understood. Currently few studies have been done on the analysis of this relationship in South Africa specifically and how this relationship impacts specific sectors of the economy that contributes to the total GDP of the country. This study has assumed rigorous application of Granger technique with proper statistical verification of assumptions, selection of relevant variables and provides trusted statistical forecasts. In an attempt to understand this relationship, an Econometric model has been developed to assess the impact of electricity supply and price on the economic growth of South Africa. In the empirical analysis section of this study it was found that with a forecast for GDP, past values of electricity prices and coal sales may be used to forecast electricity supply. It was also found that if we have a forecast value of future electricity price we can use past values of electricity supply and coal sales to forecast GDP for the next quarter. We also found that electricity supply is granger caused by GDP; electricity price; and total coal sales. And that economic growth is granger caused by electricity supply; electricity price; and total coal sales. It was concluded that in order for government to improve the economic growth of South Africa, a major focus on the energy industry is needed to ensure sustainable supply capacity. The energy sector, as was shown in the study, has a major impact in the functioning of the Gross Domestic Product of the country