Harnessing the elements: Renewables are set to provide a greater contribution to the energy mix

Currently heavily reliant on coal-fired power stations that have contributed to the country’s ranking as the world’s 13th-largest emitter of greenhouse gases, South Africa’s energy master plan aims to significantly increase the contribution of renewables to electricity generation. From a very limited current contribution, the Integrated Resource Plan (IRP) 2010-30 aims to increase installed capacity generated by renewables to 17.8 GW by 2030. This represents 42% of additional new capacity, with renewables taking the largest share ahead of nuclear and other sources. The government hopes that alternative energy sources will help to expand the country’s reserve margin in light of ever-increasing demand and avoid power shortages of the sort that strongly affected the South African economy in 2008. It is also hoped that developing the renewable energy sector will help to generate employment and contribute to economic growth, as well as fulfil the country’s commitment to climate change targets.

RENEWABLES: Renewable energy sources in South Africa are largely underdeveloped, despite significant potential. The state power utility, Eskom, ran several pilot programmes bringing solar-powered electricity to schools, clinics and homes in the 1990s, but these were shelved relatively quickly. A small demonstration wind facility was built in 2002, while the Darling Wind Farm – another learning platform with 5.2-MW capacity– began supplying energy in 2008. Eskom owns two small-scale hydro facilities and two hydro pumped storage stations. Solar water heating is more developed, supported by a government subsidy to encourage uptake.

South Africa is well positioned in terms of wind and solar resources, with some of the highest solar irradiation rates in the world and strong onshore wind. The Northern Cape, for example, has been identified as having some insolation rates that exceed certain areas where Desertec plants are set to be located in North Africa. A government assessment estimated South Africa’s total wind generation potential to be 60 TWh per year. The country has an impressive wave-energy resource and although in-country biomass and hydro energy resources have limited potential due to a lack of water, there are significant opportunities to import hydropower from neighbouring countries such as Mozambique and the Democratic Republic of Congo.

The 2003 White Paper on Renewable Energy set the country’s first major target for renewables, with a goal of 10,000 GWh to be produced by 2013. While the government stressed its commitment to achieving the target, the programme only really began to take shape in 2009, when tariffs were published for nine different renewable technologies. Released by the National Energy Regulator of South Africa (NERSA) in March 2009, the Renewable Energy Feed-in Tariff (REFIT) attracted widespread interest from independent power producers (IPPs). Feed-in tariffs are designed to encourage investment in renewable energy sources by creating guaranteed prices for energy supply, rather than using consumer tariffs. With state power utility Eskom named as the power purchaser, the tariffs cover a number of technologies, including wind, concentrated solar power (CSP), photovoltaic (PV) and biomass.

Significant interest from the market was recorded, with 384 responses from developers received for 20,000 MW of REFIT projects and 4000 MW of co-generation projects. In capacity terms, 70% were wind, 15% PV and 10% CSP. Despite this interest, the formal procurement process was repeatedly delayed. A further stumbling block, and dent to investor confidence, was a NERSA decision in March 2011 to lower the proposed tariffs, which previously would have given project developers very generous rates of return. According to Mark Tanton, the chairman of the South African Wind Energy Association, renewable energy developers had already invested $49m in making their projects REFIT-ready.

MOVING FORWARD: Soon after NERSA’s decision, South Africa’s renewables sector was given a major boost with the August 2011 launch of its first formal procurement process. A request for proposals (RFP) invited interested parties to submit a proposal for the finance, construction, operation and maintenance of renewable energy generation facilities, using technologies including onshore wind, PV, CSP and biomass. The RFP called for bids for 3725 MW of renewables capacity, to come on-stream by 2016, of which 1850 MW was for onshore wind and 1450 MW for solar PV.

Constituting the first round of the government’s IPP Procurement Programme, the RFP opened up opportunities for IPPs as outlined in the country’s new IRP. The South African cabinet approved the IRP 2010-30 – which outlines the country’s electricity generation strategy for the next 20 years – in March 2011, after public consultation on the draft in late 2010.

Following public consultation, the policy-adjusted IRP nearly doubled the expected installed capacity to come from renewable sources from an initial 11.4 GW in its earlier iteration to 17.8 GW, as a result of their increasing competitiveness. It also disaggregated the various renewable energy technologies to separate solar PV, CSP and wind options. The final document specified that of the 17.8 GW of capacity sourced from renewables, solar PV and wind should both account for 8.4 GW, and CSP should account for 1 GW. In addition, the roll-out of these technologies was brought forward to help stimulate local industry.

BIDDERS: Despite assurances from the government that the procurement process would take place under the 2009 REFIT guidelines and that the lower tariffs would only affect the second phase of procurement, REFIT was largely abandoned in June 2011 in favour of a competitive bidding process with 2009 REFIT rates used as a ceiling. While the government’s shifting position increased investor uncertainty, interest in the first bidding round remained high. A total of 400 bid registrations were recorded, with 53 firms – including major international players in renewables – submitted proposals ahead of the November 2011 deadline.

The Department of Energy announced its preferred bidders in December 2011. Of the 53 bids, amounting to 2128 MW capacity, 28 were selected as preferred bidders, with a total capacity of 1416 MW. The remaining capacity of the targeted 3725 MW – of which 3625 MW has been made available for large-scale renewable projects – will be allocated during the next procurement phases. The bids were divided between three technologies: wind with 633.99 MW, solar PV with 631.53 MW and solar CSP with 150 MW.

The largest wind project by nameplate capacity is the 135-MW Cookhouse Wind Farm in the Eastern Cape, which is being developed jointly by African Clean Energy Developments, African Infrastructure Investment Managers – a company held by Old Mutual Investment Group and Macquarie Capital – and AFPOC. The largest CSP plant is the 100-MW KaXu Solar Project, to be developed by Spain’s Abengoa Solar. The firm will also build a 50-MW solar tower – Khi Solar One – which will be its first outside Spain. Abengoa Solar will be majority shareholder, while South Africa’s state-owned Industrial Development Corporation will hold the balance. The largest solar PV projects are two 75-MW facilities: the Kathu Solar Energy Facility and the Solar Capital De Aar project. Irish renewable developer Mainstream was especially successful in the tendering process, winning all three of its bids, and will build the Jeffreys Bay wind farm and two solar projects in the Northern Cape.

NEW ERA OF IPPS: The critical role of the private sector in the development of renewables in South Africa is clearly envisaged by the IRP, with IPPs supplying the national grid through power purchase agreements with Eskom. While the government has in the past encouraged the entry of IPPs into the power sector, stating in 2003 that power generation should be split 70:30 between Eskom and IPPs, Eskom has continued to dominate electricity generation in South Africa.

This was in large part due to Eskom’s monopoly and its historically low tariffs. IPPs could only sell to large private sector clients directly or to Eskom, whose low tariffs meant that IPPs had to sell electricity at a reduced rate. But in 2010, Eskom raised electricity prices by 25%, with similar increases expected over the following two years. While Eskom remains the sole purchaser of power, the tariff increases have helped make investment more attractive for IPPs.

In total, South Africa is looking for investments in the region of $36bn by 2030 to fund its renewables targets. Financing is a key challenge, especially given that renewable energy sources remain more costly than traditional power sources. The government established the South African Renewables Initiative (SARi) in 2010 to develop financing mechanisms to support large-scale procurement in South Africa. In December 2011, the SARi International Partnership was also launched, to help connect the South African government with possible international partners and development finance institutions. Already several World Bank loans have been extended to Eskom to help fund renewables projects. In addition, the procurement programme has been structured to accommodate some project financing, which helps to reduce risk for investors. The country’s energy sector needs to undergo a radical shift if it is to cope with rising demand and reduce its reliance on coal.