Business is on its own if grid fails

It is unlikely that insurance will cover the damage or that the government will bail out companies

‘Stage six load-shedding is a major blow to an economy that is already battling to achieve growth, because of some global headwinds, but primarily because government is still not taking the tough decisions on structural reforms and priority interventions to increase investment and stimulate growth.’

As South Africa grapples with a worsening energy crunch, which has forced Eskom to implement stage six load-shedding to avoid collapsing the grid, nervous businesses are wondering: in the event of grid failure, who would be liable for the damages incurred?

Head of research at Avior Capital Markets Warwick Bam said he had no knowledge of whether the South African Special Risks Insurance Association (Sasria), a public entity, provided cover for grid failure.

“Just like [uncertainty] when Covid-19 began, grid failure is something that has not been envisaged in the local insurance industry … But there is movement by insurers and reinsurers abroad,” Bam told the Mail & Guardian.

Eskom’s plan to revive the grid, should it collapse, has come under increased scrutiny, raising questions about what the government would do in what the utility calls “the unlikely event” of a national blackout.

Grid failure is the total or partial loss of power on the network, usually caused by a fault that affects the distribution of electricity, causing grid instability. Bam said Sasria would not be liable for any payouts in the event of a total grid failure, because loadshedding is not an insurable risk.

“Sasria would not come into this because they actually have a narrow ambit and they are not well capitalised after the unrest,” Bam said, referring to the riots in Kwazulunatal and Gauteng in July last year.

The state insurer provides coverage for damage caused by special risks, such as politically motivated malicious acts, riots, strikes, terrorism and public disorder.

Sasria has so far paid more than R24-billion in claims for the July 2021 violence. The treasury had to inject R22-billion to assist with settling claims, the insurer said recently.

Responding to questions from the M&G, Andiswa Madolo, Sasria’s marketing manager, said it would not be liable should there be complete blackouts. “Sasria does not cover consequential loss as a result of a severe level of load-shedding or complete blackout.”

Sasria is also not covering for loadshedding-incurred damages now, Madolo confirmed. “After the July riot claims, Sasria does not yet have the capacity to include other categories of disasters.”

Bam said in the event of a massive power blackout, there would have to be a legal case to determine the cause, for example sabotage, adding: “Only then would the government be in a position to investigate but there is no policy for that at the moment.”

Setting aside the impact of a total grid collapse, load-shedding — which Eskom applies to avoid such a collapse — already comes with damaging interruptions to business activity, which has seen many companies incurring financial losses.

But the only claim available to these companies at the moment is business interruption insurance from private insurers, Bam said.

According to corporate law firm Adams & Adams, legally, businesses cannot do much to hold Eskom responsible for the effects of loadshedding. This leaves them without support and fending for themselves.

Cas Coovadia, chief executive of Business Unity SA, said the worstcase scenario coming from the persistent load-shedding would “essentially be a total meltdown, where we don’t have any electricity”.

He said businesses would stop operating in the event of grid failure although, by now, after 15 years of grappling with rolling power cuts, many have armed themselves with backup power sources, such as generators or renewable energy. But, he noted, “if the grid goes down, the renewables would also go down”.

“Eskom has consistently said that one of the reasons why they have load-shedding is to avoid a total shutdown on the grid. If there isn’t load-shedding, then they aren’t managing that properly, and we could have a total shutdown of the grid and that is just unfathomable from an economic point of view and for citizens,” Coovadia said.

Business Unity South Africa has estimated the current bout of loadshedding is costing about R4-billion in lost production a day.

“The country cannot afford this and it is exacerbating an already strained socioeconomic situation.”

“Small and medium businesses are experiencing severe difficulties, and many may not be able to recover from this. Also, the disruption to the day-to-day lives of ordinary citizens is severe … stage-six load shedding is a major blow to an economy that is already battling to achieve growth.”

Asked whether the government would cover losses in the event of a total grid collapse, Coovadia noted it had limited financial resources.

“We need to look at it in the context and reality that we are a country that is not growing and that has a fiscal problem. We don’t have unlimited funds to either put into Eskom or bail out business. If there is a total grid failure can the government bail out business? Intentionally they can but do they have the funds to do that? Probably not.”