This article was written by Andrew Gilder (senior associate, ENSafrica)
Introduction - climate change as an investment driver
As the world focuses on the impending climax of the climate change negotiations, scheduled for December in Paris, it is useful to consider the business cases underpinning some of the necessary interventions for the global response to climate change.
There is a current and conveniently available set of information to assist. Country Parties to the United Nations Framework Convention on Climate Change (UNFCCC) have recently been submitting their Intended Nationally Determined Contributions (INCDs) to the UNFCCC Secretariat in anticipation of the finalisation of a notional “Paris Agreement” which will delimit the international climate change legal regime from 2020.
INDCs are statements of national intention for domestic actions in support of the UNFCCC’s dual goals of climate change mitigation and adaption; and, they are revealing for what they indicate about a country’s climate change policy trajectory, including the investment-spend required to secure national objectives.
In the mitigation context, the South African INDC reads like a summary for policymakers of the intended evolution of domestic energy infrastructure. The INDC states that the country “…is putting in place a mitigation system to realise the opportunities of a low-carbon economy while being mindful that an inclusive and just transition requires time and well planned low-carbon and climate resilient development”, and claims “substantial” recent investment in renewable energy
In some respects the South African INDC is interesting for what it does not say. For example, while renewables have seen a significant ramp-up in recent years it is also true that baseload electricity generation remains entirely dependent on coal which constitutes about 80% of the final energy mix. Such coal-heavy power production places the country in the global top twenty per capita emitters of greenhouse gas, a situation that will persist into the foreseeable future. The INDC anticipates that emissions will grow for the next decade, peaking in 2025, and will then plateau for a further ten years before declining in absolute terms from 2035, and elaborates a national target to achieve a decarbonised electricity sector by 2050, at an estimated cost of US$ 349 billion.
Renewable energy opportunity
An enormous renewable energy opportunity lies in the dynamic between the country’s continued high reliance on fossil fuel, with coal reserves anticipated to last for hundreds of years at current usage, and the objective of decarbonising the electricity sector by the middle of the century. While it is true that recent years have seen a “substantial” increase in renewable investment, the percentage contribution of renewables to final energy consumption remains in the region of 18%, which suggests that the potential for growth of these sources of energy is exponential - provided that the facilitating environment is similarly enhanced.
Before returning to this point, the effect of renewables on the economy is interesting to observe and has been reported upon in two reports from the Centre for Scientific and Industrial Research (CSIR) in 2014 and 2015.
The CSIR’s perspective considers the net savings to the South African economy resulting from increased uptake of renewables in the national grid. In 2014 these savings amounted to 800 million South African Rand (ZAR) but has increased ten-fold to ZAR 8.3 billion, so far, in 2015 . The reports arrive at these calculations by considering two cost savings to the broader economy arising from renewable energy investment, namely, the cost savings:
- arising from the replacement of diesel and coal generation by solar and wind energy (avoided fossil fuel generation); and,
- achieved through avoiding “unserved energy” which would have occurred but for the presence of solar and wind in the grid.
Unserved energy” is a euphemism for planned grid power outages implemented by the national power utility, Eskom (a vertically integrated state-owned entity), in order to stabilise the grid in situations where power demand threatens to overwhelm supply.
The more generally used term is “load shedding”, something with which South Africans have, reluctantly, had to come to terms. Winter chills have been known to stretch power demand to within only a few percent of national installed capacity, an unacceptable situation which has the potential to cause grid instability and, in worse case scenarios, failure of part or all of the grid.
Eskom overwhelmingly dominates all aspects of electricity generation, transmission and distribution and, consequently, controls the national (and only) transmission grid through which all electricity, renewable and non-renewable, must be wheeled. Consequently, Eskom is essential to the development of the renewable energy industry because grid-access is key to having renewable energy, at scale, available to consumers.
Renewable energy procurement
South Africa’s power generation mix is determined in terms of the Integrated Resources Plan 2030 (IRP) which stipulates the volume of electricity that will be generated from particular fuel sources. Although the IRP is required to be updated every two years, the most recent iteration is that of 2010, which provides that new electricity generation shall be composed as follows:
- 9.6 Gigawatts (GW) of nuclear;
- 6.3 GW of coal;
- 17.8 GW of renewables; and
- 8.9 GW of other generation sources.
Notwithstanding that the IRP is a policy document without the force of legislation, the Department of Energy (DoE) relies very firmly on these determinations of new electricity generation capacity and has used the renewable energy contribution as the basis for the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
The REIPPPP is a competitive bidding process for renewable energy developers seeking to take advantage of a government funded Feed-In Tariff (FIT) to support project implementation. After a FIT false-start under the now defunct Renewable Energy Feed-In Tariff, REIPPPP has seen four bidding rounds successfully concluded with 92 projects having been approved - a total of 8.1 GW (mainly wind & photo-voltaic) - and with more bidding rounds on the way.
In May 2015 the DoE announced that an additional 6 300 Megawatts of renewable energy would be procured under REIPPPP. It is anticipated that a Request for Proposals for a fifth round will be released in the second quarter of 2016.
Local content and grid stability
While REIPPPP has been very successful it should be understood that any renewable energy procurement programme would be successful when measured against the previous zero-base of renewables in the South African grid. At present, only projects procured during the first bidding windows are coming online, but there is furious building activity underway to commission other plants as soon as possible.
Two other features of the REIPPPP are important for companies interested in following the investment opportunity:
- Firstly – on the positive side, in accordance with macro-economic policy, the objectives of which are poverty alleviation and job creation, REIPPPP has very pronounced local content requirements. For example, all projects must have South African entity participation of at least 40% and must provide audited confirmation that no more than 60% of project capital investment (debt and equity) consists of foreign currency. In addition, there are requirements for socio-economic and enterprise development. One of REIPPPP’s successes regularly referred to by government is the ZAR 9.1 billion, over a period of twenty years, that has been committed for these purposes by the 92 approved projects.
- Secondly – on the negative side and returning to the abovementioned comment on the need for an enhanced facilitating environment to reach the ambitious targets – Eskom initially announced that notwithstanding the successful conclusion of a fourth bidding window, it would be impossible to permit fourth round projects the necessary inter-connection due to the grid instability that this would cause. In order to rectify this situation Eskom recently announced that it will spend ZAR 213 billion to strengthen the national transmission grid over the next decade. Unfortunately, the National Energy Regulator of South Africa has refused Eskom’s request that this funding be part of its government allocation and it is unclear where the financing will be sourced.
Despite the challenges posed by current reduced grid interconnection capacity, it should be recognised that Eskom remains the largest and most stable power utility on the African content and that it will remain a significant player in the evolution of the African electricity landscape. The REIPPPP example of how renewable energy can be swiftly and efficiently procured is inspiring in an economy so reliant on coal and it is to be hoped that similar processes can be implemented in other African jurisdictions as the world moves into an increasingly carbon-constrained future.
With the upcoming round 5 due in 2016, information on REIPPPP, including bidding requirements on financing and required authorisations, can be found on the DoE’s website.