Are Renewables SA's Ticket To Cheap Power?
8 June 2018 | SA Views | Alan Cameron
 


South Africa has sunshine and wind in abundance. These energy sources, once converted into electrical charge and distributed, are constantly replenished. In addition, the renewable energy process that South Africa has started on is employment intensive.  

This is the offering of the renewable energy sector: cheap electricity and more jobs.

After years of policy uncertainty under President Zuma, frequently changed energy minister appointees, efforts to fast-track nuclear power supply and other dirty dealings involving the Gupta family’s coal supply to Eskom’s coal-fired power stations, Energy Minister Jeff Radebe signed renewable energy agreements with independent power producers (IPP) on 4 April 2018.

This allows 27 projects worth R55.92 billion of direct investment in mostly rural locations to boost and revitalise long-term investor confidence, create more than 61,000 jobs, and add 2,305 MW of capacity to the national grid, explains SA Photovoltaic Industry Association Chairperson Davin Chown.

Job creation benefits of renewables

The high level of foreign and domestic investment in this sector is logical when looking at the payback cycle which, in South Africa, can be double the rate of a renewable power plant in Europe. The speed at which it can be up and running is a key advantage: while a large solar farm is very quick to install, a solar system for a village or housing complex can be switched on in a few weeks, notes University of Cape Town’s Professor Anton Eberhard.

This pace of ROI has the International Renewable Energy Agency predicting that within 12 years renewables will supply 36% of the world’s electricity, and support more than 24 million jobs in the sector.

Similarly, in South Africa’s renewable energy IPP programme, the bids were assessed on price but importantly also on a range of economic development points, including job creation, socio-economic development, preferential procurement and enterprise development. These points were mostly surpassed, said Eberhard.

Of South Africa’s 57 already completed renewable energy projects, 20,689 job years were expected to be generated during construction but instead 29,046 were achieved. The numbers of local residents employed during this time were more than double the figures stated in project bids, with 83% more black South Africans employed than predicted. And, of the skilled roles in the construction and operations phase, 67% and 77% were respectively fulfilled by black South Africans.

The requirement to source local equipment saw several technology and component manufacturers establishing local facilities, with IPPs spending more than R67.1 billion on local equipment, about half of the projects’ total equipment value. 

The good news for local job creation doesn’t stop at that impressive trajectory. In the spirit of the renewable energy auctions entered into by the IPPs, previously marginalised and disadvantaged groups and communities reportedly now own on average 31% of projects that have already reached financial close, and on average own 11% of the equity of projects with an 18% shareholding by black people in construction contractors.

South Africa’s innovative approach catalyzed renewable sector

By the end of last year, South Africa had selected projects with a combined production capacity of 6.3 gigawatts, of which 3.2 GW had already been connected to the grid. Eberhard notes that the average lead time was only 1.6 years, one-sixth of nuclear power’s usual timing and, during the first half of 2015, new renewable capacity saved the national economy R4 billion more in fuel (and avoided load-shedding) than it cost in the first place.

The renewable energy independent power producer procurement programme has since 2011 seen five open-auctions, awarded by the Department of Energy to IPPs. They enter 20-year power purchase agreements with Eskom as well as an implementation agreement with the government, who back Eskom’s financial commitments to pay an agreed tariff for power on a take-or-pay basis (indexed to the rate of inflation over the duration of the contract).

Since the start, solar PV electricity and wind energy prices have reduced by almost 80% and 50% respectively, with renewable costs in SA close to being some of the most competitive in the world during the latest auction, where the price of 4.7 US cents per kilowatt-hour was achieved.

Globally, solar PV and onshore wind-generated power is sold between 3 to 5 US cents/kWh with no state subsidies and completely funded by the private sector. In comparison, nuclear power sells at between 9 to 15 US cents/kWh.

With free sun and wind powering the renewable energy revolution, wind and PV plants are not hindered by toxic pollution disposal, expensive long-term obligations, and unsustainable water-intensive processes. Within 22 years the sector is expected to see more than 70% of all global power generation investments. In fact, these increasingly low generation costs will see a ratio of 35:1 in the increase of renewable capacity until 2040 when compared to nuclear power.

It is inevitable that coal and nuclear will be viewed as expensive legacy infrastructure, as the focus of professional training, investment and resultant sector growth turns to renewables.

The developing economies of Africa are in a perfect position to leap-frog into the sustainable revolution of renewable-powered microgrids. One way it will be seen is when, for example, homes in a village are connected to a localised energy source (such as rooftop solar PV or a wind turbine) as well as the national grid. Through backup battery storage, microgrids can also function autonomously. 

Will SA see electricity savings quickly enough?

"It is unlikely [that] the price of Eskom-supplied electricity will come down," said Frank Spencer, Renewables Business Development, CONCO Power Projects, "but the use of utility-scale renewables does already reduce the rate that electricity prices go up."

"The real issue is that renewable energy IPPs can in many instances deliver electricity cheaper than Eskom and municipalities, and so there is a threat of reduced revenue to both Eskom and local government as consumers build their own plants, like rooftop solar," he told me during an interview. South Africa’s municipalities operate on a subsidy model whereby the profit margin made by selling Eskom-generated electricity at a premium subsidises the cost of maintaining the grid as well as electricity tariffs.

"If tariffs go up, that drives even more grid defection," Spencer continued. “The reality is that municipalities and Eskom need to change their business models from that of selling units of electricity, to enabling services for private generators."

Municipalities are caught between a rock and a hard place, said David Long, Secretary General for the South African Independent Power Producer Association, who suggests that consumers won’t see an impact of IPPs on their rates bill, "because municipalities are heavily dependent upon making excesses on selling Eskom’s electricity, which they use to cross-subsidise other municipal services."

Microgrids set to undermine Eskom’s sustainability

While the energy-generation future looks bright, energy expert Ted Blom suggests that everyone involved in it takes off their sunglasses and faces up to the fact that South Africa’s electricity crisis is not over yet.

"The bottom line is South Africans are not getting the cheapest energy," he said. "Given this mess and the lack of energy reliability we are going to see a very liberated energy sector in this part of the world," he warned at the Africa Utility Week conference last week in Cape Town. "This means people are going to employ survival strategies and will do what they have to do to survive the [ongoing] electricity crisis."

Despite President Cyril Ramaphosa’s new administration, there still exists a "lack of funds and lack of professional direction because the new Eskom board has no real energy experience and are guided by those that plundered Eskom and drove it into the ground," he said, comparing the situation under the new administration to “changing chairs on the Titanic".

Blom said in terms of his roadmap for South Africa’s energy future, the country will see a rise in what he calls DIY-electricity. "We are going to have a situation where households and light industries which are not energy intensive will do their own thing because their needs are not met now. They can do it far cheaper if they do it on their own in a collaborative way. So microgrids are bound to explode [in popularity]."

The threat there is that those who can afford to unplug themselves from Eskom will do so, leaving those who cannot afford unsubsidised electricity as the main users of the grid. Blom expects that the current structure of Eskom will not be able to exert the required cost-saving measures, and so, “with the lack of pressure on utilities we will see a cost runaway and a dilapidated grid with no money to fix it and eventually a meltdown. It might happen in one day or in ten years," he said.

image2


Alan

Alan Cameron

Alan Cameron is an independent stakeholder management consultant working from Cape Town. Follow him on Twitter: @cameron_an.


Disclaimer:
The information contained in this article is for informational purposes only and must not be regarded as a prospectus for any security, financial product or transaction. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial issue. Investors should consider this research/article as only a single factor in making their investment decision. We recommend you consult a financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs. The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Sharenet.

Share This Story

 
 
Market Statistics are calculated by Sharenet and are therefore not the official JSE Market Statistics. The calculation/derivation may include underlying JSE data.
© 2018 SHARENET (PTY) Ltd, Cape Town, South Africa