Insurers and reinsurers plying their trade in South Africa have finally taken steps to protect their balance sheet from the potential collapse of the country’s electricity grid. One after the other, major insurers have confirmed that they will not pay claims resulting from this specific peril because it is considered an uninsurable event. Put another way, keeping such risk on their books would represent a major risk to the industry’s long-term sustainability. Imagine, for example, the business interruption (BI) claims that might follow a national blackout that could last for seven days or longer?
Local insurers have clearly distinguished between loadshedding, which is a co-ordinated and managed “sharing” of the available electricity across the grid to prevent its failure, versus the apocalyptic-level power outage that might ensue were loadshedding to fail. Hollard Insure and Santam Limited started communicating with their brokers around the grid failure exclusion early in 2023. Hollard, for example, notified brokers of its electricity grid failure exclusion that would be applicable to both commercial and personal lines policyholders.
Although the meaning of “electricity grid failure” and “loadshedding” should be clear from our opening paragraph, we thought it appropriate to share the insurer’s definition, to demonstrate how the notion of “plain English” still escapes the technocrats that pen insurance contracts. The insurer defined electricity grid failure as “an interruption to or suspension of electricity supply, in any manner and from any source, and for any reason (including damage and any inability and/or failure on the part of the supplier) which affects an entire municipality (including local, district, regional or any other level that is created by law) or province or the country at substantially the same time, including any interruption, power surge or suspension at the reconnection or reinstatement of electricity supply”. Short and sweet, not.
Loadshedding, meanwhile was described as “the intentional, total or partial, withholding of electricity supply (from any source) by any party other than the insured implemented in phases which do not affect a municipality (including local, district, regional or any other level that is created by law) or province or the country at substantially the same time”. To shed further light on this definition for readers who are not familiar with South Africa’s electricity supply constraints, loadshedding is performed on a rotational basis and does not affect an entire municipality at the same time.
Each stage of loadshedding affects a handful of suburbs in each municipality at different times of the day. For example, the writer’s suburb, which is part of the Tshwane municipality, would experience one or two 2-hour power outages per day on Stage 2 loadshedding; and usually three such outages under Stage 4. Today (a combination of Stage 3 and 4) we were ‘switched off’ at 2am; 10am and again at 6pm. PS, readers may also be interested to learn that the country suffered through 220-odd days of loadshedding in 2022 and has been pegged at Stage 2 or worse each day in 2023, year-to-date by 8 February.
What does an electricity grid failure exclusion mean for insureds? Quoted on Moneyweb.co.za, Hollard spokesperson Warwick Bloom said: “While grid failure remains unlikely, it is unfortunately a possibility, and reinsurers have indicated that they will not provide reinsurance cover in this eventuality; this means that electricity grid failure [as defined above] is an uninsurable event”. He adds that Hollard is attempting to make the exclusion clear for policyholders. The effective date of the change, which applies to both existing and new policyholders, will be 1 April 2023. New policy schedules and policy wordings will be issued to accommodate this change.
Santam has taken similar steps and will stop providing cover for electricity grid failure claims from the same date. “The unprecedented levels of loadshedding and pressure from global reinsurers that require Santam to reduce its exposure to business interruption claims arising from failure of public utilities and public telecommunications has led to the insurer implementing a general electricity grid failure exclusion on all policies,” the insurer said in a statement.
Africa Ahead has seen Santam’s new personal lines policy wording. It adds “failure of the national electricity grid” to its general exclusions, noting: “We will not cover any loss, damage, legal liability, cost or expense of whatsoever nature directly or indirectly caused by, contributed to by, resulting from, arising out of, in connection with a national (including regional, municipal, local and/or private) interruption, failure or suspension of the electricity grid of South Africa for whatsoever reason, whether due to damage, an inability and/or failure, whether partial or total, of the utility supplier to generate, transmit or distribute electricity, or otherwise.” Incidentally, Santam uses the phrase “electricity grid failure or interruption” in its commercial policy wordings.
It should be noted that most of the country’s general insurers have already taken steps to limit their exposure to power-related damage claims, by either increasing the excesses payable on these claims, or restricting the sum insured. This is the expected result of massive surges in such claims due to loadshedding, with power surges commonplace when electric sub-stations are switched off and on again two or three times per day.
Climate change activists who insist that renewable solar and wind power can fulfil a country’s base load requirements should spend a few days conducting business in South Africa.
The country, arguably the victim of multi-decade mismanagement of its ailing coal-fired power fleet, is today stuck in a perpetual cycle of rolling power cuts, christened loadshedding, and which is something that has become uninsurable. State-owned power utility, Eskom SOC Limited, has now subjected local businesses and households to some or other stage of loadshedding on each day of 2023 (up to 30 January) following on from 220-plus days of similar restrictions in the prior year.
PS: The writer is not making a case for coal-fired base load electricity-generation capacity but merely illustrating the impact of a mismatch between base load delivered by whatever means, and electricity consumption or demand. In other words: South Africa offers a case study into what happens when a country is unable to produce and distribute enough electricity to its citizenry. The writer also concedes that South Africa is not alone in facing this challenge, with countless other African countries suffering from electricity shortages. In all cases, businesses and citizens are forced to rearrange their lives around an electricity availability table or similar.
The consequences of an unstable power supply are chilling. In South Africa, repeated days of loadshedding mean that local municipalities cannot run their water and sanitation infrastructure for enough hours, with potable water reservoirs running low and untreated sewage running into rivers and oceans. Erratic electricity supply also poses food security threats, as illustrated by recent images of dead chickens and spoiled milk.
In one example, a farmer from the North West province shared photographs of 40,000 birds lost to suffocation due to power disruptions; in another, a KwaZulu-Natal (KZN) dairy farmer filmed 12,000 litres of milk being discarded. Countrywide, small, medium and micro-enterprises (SMMEs) are feeling the pinch, adding thousands of rands per month in operating overheads to run diesel or petrol generators for up to 10 hours each day.
These are the on-the-ground realities that seem lost on the climate change “champions” that gather at the glamourous United Nations Conference of the Parties (COP) each year to thrash out their lofty goals for global reductions in carbon emissions. In their world, solving for climate is a zero-sum game that involves eradicating coal-, oil- and gas-based energy and simply replacing such infrastructure with similar capacity solar or wind plants.
A zero-sum game is defined by Wikipedia.org as “a mathematical representation in game theory and economic theory of a situation which involves two sides, where the result is an advantage for one side and an equivalent loss for the other”.
Unfortunately, as Europe has learned from trying to wean itself off Russian gas (and South Africa through loadshedding), energy sustainability is not a zero-sum game. It seems that South Africa is cottoning on to this reality, championing the term “just energy transition” during its interactions at COP27, and at every opportunity since.
This explains why in late January 2023, President Cyril Ramaphosa affirmed government’s long-term commitment to fossil fuels. Commenting at a KZN provincial executive committee (PEC) meeting of the African National Congress (ANC), he said: “Even as we are entering all these discussions to energy transition, I have made it clear to those I meet on international platforms that there is no way at all in South Africa we can go and shut down the coal-fired power stations.”
His comments were made against the backdrop of the recent (or near) completion of two mega coal-fired projects, Kusile and Medupi. These multibillion-rand, multi-megawatt projects were budgeted and built to run for 40-50 years at a minimum.
Put another way, the president’s promise of a mix of coal, gas, hydro, wind, sun, nuclear and biogas for the country’s energy future does not mean that the current dependency on coal, which delivers upwards of 80% of South Africa’s total electricity, will alter dramatically, and certainly not over the short term.
As already illustrated, the stakes in the environmental versus social sustainability “game” are high. On one hand, clampdowns on coal-fired plants may help to reduce global carbon emissions and deliver benefits decades from today. On the other hand, doing so places the economic and social wellbeing of the country at risk due to job losses, lower economic growth and threats to food security, all consequences of electricity in short supply.
The PEC meeting also contained some sinister warnings for the country’s long-suffering taxpayers, with the President conflating Eskom’s poor performance and (this is one of the few times you will hear it from this writer) sensible government red tape.
Reported on Polity.org, President Ramaphosa claimed that red tape was both hampering Eskom’s work and delaying independent power providers (IPPs) from adding electricity to the grid. “When we are now supposed to [repair power plants or add an IPP to the grid] there is this regulation, law and processes; when Eskom has to buy a boiler, they have to go to the Treasury and get permission. It is a long process,” he said. The red tape around licensing is fair game but the notion that simply abandoning common sense procurement protocols will somehow resolve a crisis steeped in mismanagement is absurd.
There are growing concerns in some sectors that the ongoing bungling at Eskom opens the door for the country to enter an insanely expensive 20-year-long emergency (sic) deal with Turkish-owned Karpowerships for the provision of additional gas-fired power-generating capacity. Gwede Mantashe, Minister of Mineral Resources and Energy, is already reported as saying that South Africa “does not have the luxury to choose” whether or not to enter into this arrangement… And this writer reckons the Minister would happily append “consequences be damned” to that comment. For the uninitiated, these power ships would be anchored offshore, at strategic locations, to provide up to 2000MW of gas-fired electricity to the grid.
Returning to the sustainability question, one has to wonder how these ships will source the gas required to run at 85% availability which is allegedly the “use it or lose it” take-up that South Africa would have to commit to from the arrangement.
My guess is these ships will become another taxpayer-funded white elephant, running only when they can scrimp some gas supply, and charging as if they were burning it 24/7. After all, a sustainable diesel supply is already among the issues facing Eskom, which is often “on the hunt” for diesel for open-cycle gas turbines that can burn through around nine million litres of the fuel per day.
To conclude, dear reader, sustainability is not a zero-sum game (and especially not in the short run). The shift to renewables to secure environmental outcomes for future generations will cause short-term economic and social hardships today. And as for procuring emergency coal- or gas-fired electricity supply in Africa: well, the combination of manufactured urgency and vested political interests make that process as far from a zero-sum game as you are every likely to encounter.