By Bhavtik Vallabhjee
According to data released by Eskom, more than 4 gigawatts of rooftop solar had been installed in South Africa by the end of May 2023.
If one considers that less than 1 gigawatt was installed in March 2022, it’s clear that, given our glorious sunshine and lack of space constraints in South Africa, solar power is increasingly becoming a dominant renewable energy technology in South Africa and will be a key part of the energy mix in the years to come.
There’s a palpable energy as new players come to the market with new technology and innovation.
Despite this rapid rollout, the ordinary South African is frustrated when load shedding continues to weigh on their ability to run their business or negatively impacts their quality of life. Couple this with underground gas explosions and water infrastructure that is under pressure, and it is understandable that South Africans literally cannot seem to see ‘light’ at the end of the tunnel.
For those who are feeling overwhelmed by the current conditions, it is important to appreciate just how rapidly the energy ecosystem in South Africa is maturing and why we will start to feel the benefits coming through in the not-too-distant future.
While infrastructure projects typically have long lead times before achieving financial close, the energy sector in South Africa is maturing and we are seeing this as the driver of three key themes:
The first is that, in addition to a number of Greenfield (higher risk) utility-scale or captive projects, as the sector has matured, we are witnessing a number of infrastructure assets changing hands through M&A opportunities as secondary markets evolve. This is important as, despite some of headwinds described above, there appears to be decent appetite from international and local investors alike in power and infrastructure assets across the continent. In fact, there is probably more demand for operating assets than there are ready assets available for sale.
The second trend which is accelerating in South Africa, driven by increased private sector participation, is the rise of “captive” power projects. Despite new-build generation capacity gradually being rolled-out, it is important to pay more attention to the distribution and transmission of energy. The backlog for the rollout of the expansion and strengthening of South Africa’s transmission grid has been estimated to be circa R210 billion.
While some may argue that mining is a sunset industry in South Africa (SA), this sector contributes a formidable 7.5% to the gross domestic product of SA (or around R500 billion in 2022).
Captive power projects are mostly being rolled-out by the Energy Intensive User Group entities (mining companies, smelters, and large industrial users) where they take responsibility for their own embedded generation and drive energy self-sufficiency for their own operations.
This reduces dependence and strain on existing Eskom infrastructure. We see this as a game-changer in the South African energy sector as more private sector entities attempt to de-risk their operations by diversifying their reliance away from the state utility for their power needs and take ownership for their own generation and transmission needs ‘inside the fence’.
The third trend relates to improved technology in terms of Battery Energy Storage Systems (BESS), which is in part being driven by innovation in the automotive sector for electric vehicles (EV). The likes of Tesla and others are investing significantly in Research and Development (R&D) in energy storage – and as storage technology becomes more efficient and as it is rolled-out more mainstream, we can expect the cost of same to fall significantly over the next several years (according to Bloomberg New Energy Finance estimates).
Renewable Energy has always been seen to be ‘intermittent’ (or variable, and dependent on the vagaries of the weather). Energy storage adds a different dynamic: the ability to store and despatch power as and when needed.
Add to this roof-top solar generation from commercial buildings, residential dwellings, warehouses, greenhouses and carparks – it becomes apparent that the energy landscape is about to change in SA – and is on the cusp of very interesting times. After all, necessity is the mother of all invention!
These three trends open a world of possibility when it comes to reimagining our energy markets. We are seeing the conceptualisation in Africa of electricity trading markets which allow for market imperfections between supply and demand of electricity to be exploited by electricity traders or brokers who see an opportunity to sell power from a generator that has surplus power to consumer/ user in deficit, that needs power. Perhaps a true merchant power market may not be imminent.
Sponsor returns have been under pressure in the last few Rounds of Renewable Independent Power Producer Programme (REIPPP) in SA.
The ‘opportunity cost’ or the cost of unserved energy could be dramatic on an enterprise’s bottom line. With that in mind, more latterly we are seeing some purchasers of power (in the short-to medium term) prepared to sign-up to higher tariffs than Eskom’s megaflex tariff to secure rapid deployment and reliable access to power to ensure that their operations are not curtailed.
While South Africans are still feeling the impact of load shedding, it is clear that we are witnessing a transformation in the South African energy market. Despite many of the naysayers predicting a collapse of the grid over the winter months, we are starting to see the load shedding situation being better managed with new generation from rooftop solar aiding the situation.
Over the last 12 years of REIPPP’s 5 bid Rounds, we have had more than R210bn in Foreign Direct Income (FDI) being injected into the South African economy via new power projects. As Independent Power Producer (IPP) participation in the electricity sector increases, this number will continue to grow. As South Africans, it is critical that we adopt a mindset that we all have a vested interest as stakeholders in our country’s infrastructure.
Whether we are commerce and industry, banks, law firms, technical consultants, NGOs or consumers, we all have a role to play in the future of our electricity sector. Together, we can overcome our short-term challenges. The future is indeed bright.
Bhavtik Vallabhjee, the head: Power & Renewables, Absa CIB.