The Ripple Effect of South Africa's Energy Crisis

South Africa is struggling through an energy crisis. Scheduled blackouts, known to locals as ‘load shedding’ are crippling South African businesses and the larger economy, but how is this failure to resolve this issue rippling into the rest of the continent and what effect is it having on the startup boom?

​South Africa has restrictions on privatisation of energy suppliers with ESKOM being the near-sole provider of electricity for the country at 95% (making up 45% of the continent’s energy supply). You can read at length about how this energy crisis started but we would like to focus on the specifics of how it is affecting the economy and therefore the startup sphere.

The International Monetary Fund has forecast a sharp decline in South Africa’s GDP growth, foreseeing a decrease of more than half for 2023 at 1.3%, citing both power shortages, a weaker external demand and “structural constraints” as the root cause. Executive director of ETM Analytics, Quieten Bertenshaw, estimates that had load-shedding never occurred, the country’s economy would be 17% larger than it is in 2023. The continuation of irregular power supply is cripping small businesses and stagnating broader economic growth sparking an increase in unemployment rates at 33% countrywide.

To combat this sharp downturn, President Cyril Ramaposa, has declared a national state of disaster to allow the Government to implement practical measures to provide much needed support to the businesses most drastically affected. This relief consists of non-repayable business grants offered by the South African Government to small and micro businesses, the advantage of which is an influx of funding without the need to repay the grant nor interest on any money received.

Due to inconsistent power supply, with many cities experiencing up to 12 hour periods of inconsistent power, businesses across the country are folding due to the increasing costs of implementing additional measures to ensure continued productivity coupled with a lack of funding to support these additional expenditures. The flip side of this is vastly more positive. With government and private businesses looking to more green energy solutions, startups operating within the green energy sector are more important than ever. With an increase in demand for independent energy suppliers for both business and consumer, the market is booming for those innovating within this sector.

In December 2021, the South African government allocated $2.8 million in contracts for 25 renewable energy projects in the private sector to meet with the ever growing demand for reliable energy and potentially increase South Africa’s electricity generation capacity by up to 5%. In February 2023, venture capital and private equity firm Grovest announced its Section 12B fund to offer further support. The fund offers significant tax deductions to investors who support alternative energy startups with the hopes of raising as much as R500 million (over $26 million) in its first year of operation.

The fund comes at the perfect time as many green energy-focused startups are experiencing a decrease in venture capital inflow, with many looking outside of the venture capital and angel investor market to secure funding.

While the demand for alternative energy is at a high, the activity within the startup ecosystem is relatively low within this sector. According to Disrupt Africa’s 2022 South Africa Startup Ecosystem report, energy startups make up the smallest portion of the country's startups with areas like fintech, edtech and ecommerce seeing continuous growth.

With South Africa’s languishing national grid, Greentech startups are well placed to be the next boom in African startups with their ability to help grow the country’s strength in alternative energy. The next few years will be a testament to the combined power of supplied capital and existing innovation within this space and has the potential to provide much-needed support to the rest of the continent's struggles with inconsistent energy supply.

The African Development Bank has reported that more than 640 million of the 1.4 billion people on the continent are without access to electricity, despite long-running incubation programmes that stretch from Zimbabwe to Egypt focused on providing electricity to the areas most often neglected in energy planning.

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