South Africa Sets The Stage In The Renewable Energy Market - By Ross Bruton
South Africa Sets The Stage In The Renewable Energy Market - By Ross Bruton
The renewable energy sector within Southern Africa is significantly undeveloped. Although northern countries of the SADC region rely largely on Hydro power as their primary source of base load power, mitigating extensive carbon emissions, the development of true renewable power generation through the implementation of wind, solar, or waste-to-energy generation technology is only beginning to take shape to any significant degree within South Africa.
Although small developments into grid connected renewable energy projects are taking shape in Namibia and Lesotho, the market for the majority of the SADC region, outside of South Africa, rests almost entirely in small power units for community and rural development including small cogeneration facilities, household PV solar panels and solar water heaters.
The South African Renewable Energy Market
In order to understand the growth in the implementation of renewable technologies within South Africa and the driving forces behind market development, one has to first understand the socio-political and economic factors that created the environment for market growth.
Large Reliance on Coal Power
South Africa has an abundance of coal deposits that the energy sector in the country has exploited for the past century. Coal power is currently the country’s primary source of base load power, accounting for almost 90% of the country’s total generation capacity. Due to the abundance of coal, the cost efficiencies of coal fired generation above that of other generation technologies, and a nationalised monopoly on the generation market in the country, the South African government has, in the past, been able to offer consumers a history of significantly low electricity rates in an attempt to drive foreign direct investment into the country. Coal fired generation has therefore always been the favoured means of electricity generation within the country.
However, due to current international trends in carbon emission reductions as well as the finite supply of coal deposits in the country, government has recognised that coal fired generation is no longer a sustainable source of primary electricity production for the region. This is compounded by the fact that, due to the large reliance of South Africa’s electricity industry on coal, the country is one of the largest producers of carbon emissions on the continent.
A Drive Towards Decreased Emissions
Due to the significant emissions released by the country in relation the rest of the African continent and the need for positive international investor confidence in the country, South Africa gave commitments at the Copenhagen Conference of 2009 to the significant reduction of emissions from the country of 30% by 2020. This firm stance on emission reduction has been reflected in the country’s integrated resource plan (IRP) for 2010 to 2030. The document places substantial focus on the development of renewable and nuclear technologies as the next progression for base load power in the country away from traditional coal power. In fact, upon the completion of the Kusile coal fired power station, Eskom has not indicated any further plans for coal power generation for the next 20 years. Instead, 33% of all additional power infrastructure development within the country over this period is to be attributed to renewable and 25% to nuclear power. By 2030, coal is only expected to contribute 43% to the total electricity generation mix, almost half the current contribution by the technology.
No Security of Supply
For the past three years, South Africa has been in the grip of a national electricity supply crisis. Due to poor planning by government at the end of the 1990s and early 2000s, the development of additional generation capacity was not sufficient to support growth in electricity demand spurred on by a rapidly growing economy. In 2008, the growing supply/demand deficit resulted in the implementation of emergency demand response initiatives by government through national grid load shedding. Improperly planned and managed load shedding cost the country billions in lost GDP revenues and crippled many industrial sectors.
Eskom’s Lack of Funds and Resources
The massive investment required of approximately R800 billion to accomplish the country’s electricity generation build program, together with a looming electricity crisis for the 2010 to 2016 period, has forced Government to begin the deregulation of the electricity sector through the development of an independent system and market operator (ISMO) for free and competitive trade of electricity within the country. Until the ISMO is fully separated and operational, Eskom has incentivised the development of the independent power producer (IPP) market through the granting of power purchase agreements (PPA) as part of initiative programs such as the Medium Term Power Purchase Program (MTPPP) and the Renewable Energy Feed In Tariff (REFIT) program.
It is therefore evident, that due to funding constraints faced by Eskom, that the development of the renewable sector within South Africa is expected to be primarily driven through private investment, with government focusing on the development of larger base load power in the coal and nuclear power market.
Recognition of the Private Sector’s Role in Energy Security
Prior to the energy crisis in 2008, there was limited investor interest in the development of the renewable energy market within the country due to: low electricity tariffs decreasing the commercial viability of project investment, a monopolistic market structure with a history of inefficiency and anti-competitive policies, no assurances by Eskom regarding the quantity and period of electricity purchase, and no government incentives for foreign direct investment into the sector. Only once peak demand in the country grew to levels that compromised the security of supply to the region, did government begin to consider the contribution the private sector could make to the security of electricity supply to the country.
However, it was only in 2010 that central government allowed private sector power providers into the market through the signing of six power purchase agreements.
Before this time, the only entry of private power generators into the market was through the provision of electricity directly to the distribution grids of local municipalities. This power however was not incorporate into the national grid and only worked to alleviate pressure on supply within their relative regions.
Renewable power generation projects developed prior to 2010 included the Bethlehem Hydro Project, Darling and Klipheuwel wind farms and the eThekwini Waste-to-Energy Project.
What does this Mean for the Renewable Energy Market within South Africa?
High electricity demand within the country coupled with clear policies and commitments set by government in the development of the renewable sector, and a lack of electricity supply security has set the stage for dramatic market growth in the renewable sector over the next twenty years. Due to attractive incentive programs provided by government for renewable energy development and limited funding available to Eskom for generation capacity growth beyond its current build program, this development is expected to be primarily driven through investment from the private sector.
These macro-environmental factors have stimulated an increase in the level of investor interest into large scale renewable energy developments.
Within the IRP 2010, government has allowed for 4.5 GW of electricity to be allocated to wind power production by 2019, and a further 600MW to solar power by this time. Between 2020 and 2030, a further 7,2 GW is expected to be added from renewable sources.
It is clear from the IRP 2010 document that the South African government has a strong intention to diversify a currently coal dominated generation mix toward a more emission friendly environment - through the rapid development of the renewable sector and planned implementation of a nuclear build program post 2020. With global trends in environmental awareness placing pressure on large developed economies to put in place long term policies on emission reductions, the question remains: What is the best course of action for South Africa?
One of the drawbacks of renewable technologies is the significant capital expenditure required for project implementation. Due to the current limited funding available to Eskom, any planned generation projects undertaken by the utility are likely to be funded through loans or electricity tariff increases imposed on consumers.
According to the most likely scenario for energy sector development in the country over the next 20 years (revised balanced scenario, IRP 2010), electricity tariffs are expected to increase from41c/kWh in 2010, to over 80c/kWh in 2014, and approximately R1.10/kWh by 2019. This would represent a significant restraint to economic growth and have serious negative effects on socio-economic factors such as job creation and SME development.
Although these considerations need to be taken into account, the development of renewable energy is important for the growth of a sustainable foundation of carbon free, base load power within the country and will inevitably form an integral part of South Africa’s energy mix.
Ross Bruton is an industrial analyst at Frost & Sullivan.