ENERGY

Overview

Government Intervention: The South African economy has been experiencing frequent bouts of load shedding (the local term for rolling blackouts) which has negatively impacted local industry and economic growth. To tackle this long-standing problem, Mineral Resources and Energy Minister, Gwede Mantashe, outlined plans in September 2020 for a new phase of power-generation procurement, to secure 11,813 MW of extra capacity. However, as the first additional power is unlikely to come on stream until mid-2022, further load-shedding will be required in the short term.  President Ramaphosa in a surprise move announced on June 10 the easing of licensing regulations for self-generation of electricity from 1 Megawatt  (MW) to 100 MW potentially releasing as much as 5,000 MW or more of renewable energy onto the grid by 2024. The new regulations will come into force in August 2021.

Current Status: In South Africa, approximately 85 percent or 42,000 MW, of the nation’s electricity is generated via coal-fired power stations. Despite environmental concerns, coal will continue to provide the majority of South Africa’s power for the next decade, although the share from renewables will grow rapidly. South Africa is the world’s 14th-largest emitter of greenhouse gases and seeks to improve its poor environmental performance. After a sharp fall in 2020 because of the coronavirus (Covid-19) pandemic, energy consumption is expected to recover, with an average annual rate of growth of 0.3 percent over the forecast period (2021-30) according to The Economist’s report in March 2021. The modest pace of expansion will reflect improvements in energy efficiency, as well as continued sluggish growth in the South African economy.

State Owned Utility: Eskom, the vertically integrated, state-owned power company, generates approximately 95 percent of electricity used in South Africa, as well as a substantial share of the electricity generated on the African continent. It sells to Botswana, Lesotho, Mozambique, Namibia, eSwatini Zimbabwe. South Africa has an electrification rate that is amongst the highest on the continent, with rural electrification around 66 percent, while electrification in urban areas is approximately 93 percent.

Government Intervention: The South African government announced plans to unbundle Eskom into three separate entities responsible for generation, transmission, and distribution. This move was prompted by an urgent need to address the utility’s significant debt levels, which was reported in to have reached ZAR380bn ($26.bn).

REIPPPP: Despite Eskom’s debt challenges, South Africa operates a highly successful, Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) for utility-scale transactions.  Further, South Africa’s rooftop solar photovoltaic (PV) market has seen significant growth over the past several years with an installed capacity potentially as high as 250 MW.

South Africa Integrated Resource Plan (IRP)

Policy: The South African Government’s National Development Plan (NDP) is the blueprint for infrastructure development to 2030.  The NDP lays out a framework for future power generation in South Africa, while energy policies in South Africa are driven primarily by the Department of Mineral Resources and Energy’s (DMRE) Integrated Resource Plan (IRP). The IRP is DMRE’s estimate of electricity demand growth and what energy generation types should be procured to meet that demand, along with the generation capacity, timing, and cost.  The IRP is an electricity infrastructure development plan based on least-cost electricity supply and demand balance, taking into account security of supply and the environment (minimize negative emissions and water usage).

After several delays, the Minister of Mineral Resources and Energy finally signed the Integrated Resource Plan (IRP) on October 17, 2019.  It covers the period until 2030. The IRP envisages a total addition to electricity capacity of 29,500 MW by 2030, led by renewables (notably 14,400 MW from wind and 6,000 MW from solar photovoltaic).

Policy Direction: As a result, the government announced a procurement package in September 2020, which represents a major acceleration of the goals set out in South Africa’s latest Integrated Resource Plan. This was government’s way of trying to respond to the problem of persistent electricity shortages in the country by announcing a new phase of power-generation procurement totalling a projected 11,813 MW.

The bulk of the new capacity will be distributed as follows:

• Renewables (6,800 MW)
• Gas (3,000 MW)
• Coal (1,500 MW)
• Pumped storage (513 MW)

All projects will be undertaken by independent power producers (IPPs), with output being sold to Eskom. Ambitiously, the authorities aim for the new capacity to be in place by 2022.

Coal

Status Update: Coal has traditionally dominated the energy supply sector in South Africa. Presently, about 77 percent of South Africa’s primary energy needs are provided by coal. Over the course of the past decade, Eskom has been developing two new coal-fired power plants, the Medupi and Kusile power stations, both supplying approximately 4,800 MW for a combined capacity of more than 9 GW.  Eskom announced on August 2, 2021 the Medupi power plant was finally completed while portions of Kusile remain under construction.  The IRP plans to decommission just over 10,000 MW of coal fired power plants by 2030 and replace them with a mixture of renewables and gas.

Legal Issues: It was reported in March 2021 that unit 3 of the 4.8GW Kusile coal power plant had started commercial operations, after undergoing various tests and optimization procedures since first being completed in April 2019. The government has also stated that the Kusile power plant is expected to be online by 2023. In December 2020, the Pretoria High Court overturned the environmental approval of the planned 1.2GW Thabametsi coal-fired power plant after successful appeals by environmental groups. This follows arguments that the power plant would have been one of the most polluting power stations in the world. At the same time, the environmental groups are also lobbying for the planned Khanyisa coal power project to also be cancelled. This poses a downside risk for future thermal power projects planned for South Africa.

Emissions: South African state-owned utility, Eskom, stated in November 2020 that it was planning to reach carbon neutrality by 2050. This is planned under its Just Energy Transition program, with the aim of moving away from coal power. While this target is nearly three decades away, there’s a reasonable doubt on the prospects of success given Eskom’s continued high reliance on coal power considering that they are also still constructing the Medupi and Kusile coal power plants of over 4GW each. Opposition from trade unions and vested parties in the coal sector will also prove an obstacle to these plans by Eskom.

Renewable Energy

Government Initiative: Renewable energy is increasingly regarded as an attractive source of power in the country. To diversify its energy mix and attract more IPPs to the sector, South Africa has developed a renewable energy independent power producer program, namely the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), which has proven very successful in bringing renewable energy projects to commercial operation. To date, REIPPPP has successfully procured 6.4 GW from 112 IPPs across seven bid windows.

After numerous rounds under REIPPPP, the program has seen a significant decline in costs by approximately 55 percent for wind (ZAR 1.51 to ZAR 0.62 per kWh) and 76 percent (ZAR 3.65 to ZAR 0.62 per kWh) for solar PV, which make the technologies cost-competitive with new-build coal.  Furthermore, renewable power sources account for just under 3 percent of South Africa’s national electricity supply, from a baseline of zero in 2010.

Investment: The program has leveraged approximately $135.6 billion in investment across South Africa, and projects include wind, solar (both PV and concentrating solar power), small hydro, landfill gas, and biogas as sources of energy. Of this, 25.8 percent is from foreign financiers and investors across the globe. To date, the United States is the largest source of foreign direct investment (FDI) in the renewables space, and several U.S. companies have shown strong interest in this program and have participated in tenders issued by the South African Department of Energy. In March 2021, the government announced the start of Bid Window 5 of the REIPPPP, with the deadline for the submissions set for August 2021. The projects are also expected to reach financial close by mid-2022.

Financing: The New Development Bank (NDB) has signed a $180 million loan agreement with ESKOM Holdings for Renewable Energy Integration and Transmission Augmentation Project in South Africa. The NDB loan will carry a sovereign guarantee. The Project Finance Facility will support the development of grid connection infrastructure for renewable energy projects. It will also back renewable energy development and reduce dependence on fossil fuels. The project is envisaged to integrate 670MW of renewable energy into the Eskom grid. Latest grid connection infrastructure will be used for renewable energy schemes and augmentation of the Eskom transmission network to the identified areas. The project will boost electricity supply to the targeted areas.

Opportunities: According to a research house BMI, non-hydropower renewables will be the fastest growing source of electricity generation in South Africa between 2019 and 2028. Struggling thermal capacity at Eskom and the government’s commitment to REIPPPP contracts suggest good growth opportunities. Wind power will be the primary source, accounting for 60 percent of renewables output by 2028. The large presence of the coal power sector means renewables’ contribution to total electricity output will remain below 10 percent during this time.

Gas Generation

While a large portion of the planned generation is based in the renewables space, a key issue has been the move towards natural gas as a fuel source. Currently, efforts are being made to develop west-coast offshore gas and explore shale gas reserves. The aim is to have liquefied natural gas (LNG) infrastructure in place to power combined-cycle turbines by 2021. Although the country has vast untapped shale resources, which is estimated to generate up to 130,000GWh of electricity per year according to the South Africa’s National Planning Commission, exploiting the country’s shale gas deposits will still require the development of an adequate policy and regulatory framework.in addition to the required physical infrastructure needed to transport and process any output that is eventually produced. Looking further out to 2030, a mix of shale gas and imported LNG could be a growing part of the power generation mix. Studies on shale gas potential in South Africa’s Karoo Basin also indicate that total shale potential could be up to 30 times less than originally estimated, which, though still a sizeable amount, would weaken the investment case for domestic gas extraction.  The environmental implications surrounding future extraction in the Karoo are controversial however and would likely face resistance from environmental groups.

The South African Department of Energy is tasked with the procurement of 3,126 MW of power from gas in the period 2019–2025. This is to be baseload and mid-merit energy generation capacity needed from gas-fired power generation to contribute toward energy security. The Department’s “Gas IPP Program” has been initiated through the IPP Office. At present, the IPP Office is concentrating on the LNG-to-Power IPP Program. The demand for natural gas is expected to expand by an average of 5.2 percent per year in 2021-30, boosted by government efforts to encourage its use and reduce reliance on coal. Under the IRP, gas-fired generating capacity is projected to rise by 3,000 MW.

The switch from diesel to gas is particularly applicable to developments at the domestic Ibhubesi gas field. This field is being developed by Sunbird Energy and is set to feed a 1,350MW power plant at Ankerlig, which currently runs on diesel. Eskom released an RFI towards this but has not yet released an RFP to solicit bids.

The offshore gas find in February 2019 by the French firm Total points to a potential upside for increases in gas-fired power in South Africa. It was reported in early February that the firm had discovered a large gas-find equivalent to approximately 1bn barrels of oil 180km off the coast of Mossel Bay in South Africa in the Outeniqua basin.

Nuclear

Nuclear power accounts for just over 6 percent of South Africa’s electricity output. Eskom operates the country’s only nuclear plant, at Koeberg, near Cape Town, where two reactors completed in the 1980s have a combined generating capacity of 1,830 MW. The IRP launched in 2019 appeared agnostic on the need for additional nuclear-power capacity,  however, in May 2020 it was announced that the procurement of 2,500 MW of new nuclear capacity was being considered. According to Minister G. Mantashe, this could take the form of small modular reactor (SMR) projects led by private companies and consortia.  In June 2020 the Department of Mineral Resources and Energy published a Request for Information (RFI) to potential investors—the first preparatory step on what is likely to be a long road to securing additional nuclear capacity.

Energy Services

According to GreenCape’s Energy Services 2021 “energy services” (ES) Market Intelligence Report, the rising electricity prices, national energy insecurity, dropping technology costs, supportive energy policies, and incentives are prompting consumers to explore alternative energy options driving the growth of the Energy Services (ES) market in South Africa, and creating a thriving value chain. To address this, the government amended the electricity generation regulations and following that the President announced in June 2021 that “the amended regulations will exempt generation projects up to 100MW in size, from the NERSA licensing requirement, whether or not they are connected to the grid. This will remove a significant obstacle from investment in embedded generation projects,”. He also pointed out that businesses who generate their own electricity will be allowed to wheel electricity to the grid, “subject to wheeling charges and connection agreements with Eskom and relevant municipalities”.

The national embedded generation market for installations and operation and maintenance of rooftop solar PV has grown in the past 12 months. Local solar PV data suggests an installed capacity increase by as much as ~110 MW throughout South Africa (possibly as high as 250 MW). It is expected that the total annual available market could continue to grow at this rate to a saturation point of ~500 MW installed per year on an ongoing basis. This market could reach a total of 7.5 GW of installed capacity by 2035. The commercial and industrial (C&I) sector has been leading investments in this sector, with ~70 percent of new rooftop solar PV installations nationally in this sector.

The rapid uptake of solar PV over the past three years has caught national regulators by surprise and has highlighted the need for new national policies and regulations to guide and regulate the solar PV market. At a local level, there will also be a need for policy and regulation to govern the safe uptake of solar PV.  Municipalities will need the support of the national energy regulator and national and provincial government to do this. Progress has already been made at a municipal level, with 35 municipalities across South Africa having introduced rules and regulations to allow Small Scale Embedded Generation (SSEG) to connect to and feedback on the municipal electrical grid. Of these, 21 municipalities in the Western Cape are allowing SSEG, of which, 15 have National Energy Regulator of South Africa (NERSA)-approved tariffs in place.

With increasing demand in embedded generation, the South African energy storage market is expected to grow to ZAR14.5 billion by 2035, becoming a keystone of the future energy services market. This will create opportunities for investors, manufacturers, suppliers, and energy end-users in the energy storage value chain.

Energy efficiency also presents a significant opportunity to investors and businesses in all sectors. The estimated annual total available market currently stands at ZAR3 billion, reaching an estimated ZAR21 billion by 2035.

Business Insider South Africa: https://www.businessinsider.co.za/nersa-licence-change-jeff-radebe-eskom-sseg-renewable-energy-projects-flood-2019-5

Electricity Distribution

The issue of aging network infrastructure remains a concern for the distribution network as it compounds the supply and limits South Africa’s ability to expand electricity access. The South African Department of Energy has completed a study to estimate the backlog, and work is currently under way to determine the most effective way to fund the rehabilitation of these networks and assets going forward.  Eskom estimates that it will need 8,000km of transmission infrastructure by 2030 to bring more renewable energy online.

Bankability of Utility

Poor governance and a compromised executive team at Eskom saw the utility run into serious liquidity challenges at the start of 2018. In addition, there has been discussion among industry stakeholders on how to deal with the utility’s “death spiral.”

Public Enterprises Minister Pravin Gordhan has confirmed that Eskom’s business model is up for discussion as government seeks to reduce the fiscal risk currently posed by the utility and to reposition the state-owned enterprise (SOE) for future sustainability.

Discussions could look to enhance Eskom revenue in the short-term through both higher sales and, controversially, tariff increases.  Yet further tariff increases (which have increased by over 300 percent in the past eight years for some consumers) could spur more consumers to find ways of using less electricity, possibly even through full or partial defection from the grid.

The National Energy Regulator of South Africa (Nersa) has also warned of a “utility death spiral,” whereby price elasticity of industrial demand is emerging as a primary driver of the lack of demand. This has served to exacerbate a “vicious cycle” in which increasing electricity prices drive declining sales, thereby resulting in the utility having to recover the same cost base from a shrinking customer base.

U.S. Initiatives

Power Africa.  Launched in 2013, Power Africa is a market-driven, U.S. Government-led public-private partnership to double access to electricity in Sub-Saharan Africa. It also serves as a one-stop shop for private sector entities seeking tools and resources to facilitate doing business in Africa’s power sector. In 2016, the Electrify Africa Act unanimously passed both houses of Congress and was signed into law, institutionalizing Power Africa and establishing two goals:  to add 20,000 MW of generation capacity and expand electricity access to 50 million people in Sub-Saharan Africa by 2020. In bringing together more than 140 of the world’s top companies, development institutions, and financial entities, Power Africa employs a transaction-centered approach to directly address key constraints to project development and investment in the power sector. These interventions aim to mitigate investment risk and accelerate financial close by facilitating project bankability, providing technical and transaction support to engaging with host-government counterparts:  https://www.usaid.gov/powerafrica/toolbox.

Power Africa in South Africa.  This interagency team is working to support the country’s effort to introduce large-scale renewable energy and natural gas (for power and other uses) into the economy, while assisting the government in their effort to strengthen and expand the regulatory framework.  Additionally, Power Africa plans to provide transaction advisory support to municipalities, developers, and finance partners.

Sub-Sector Best Prospects

Products and services with immediate need or potential in South Africa include:

• Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
• Energy Services
• Energy Efficiency and Demand-Side Management (DSM) Technologies.
• Oil/Gas, LNG Provision, Exploration Equipment, Extraction, Pipeline, and Fuel Conversion.
• Transmission and Distribution Equipment.
• New Plant Equipment and Related Systems.
• Process Automation and Systems Control Equipment.
• Off-Grid Solutions, e.g., Fuel-Cell Technology.

Resources

Department of Mineral Resources and Energy (DMRE)

Eskom Holdings Limited