South Africa’s renewables procurement programme is no longer the only game in town for developers
BIDS IN
South Africa’s auctions scheme was praised for its role in growing the country’s renewables base before it ran into difficulties GOLDEN RULE
Developers frustrated by the auction process are hoping to target the distributed energy market following a proposed change in licensing rules KEY QUOTE
It’s a positive sign for large energy users in South Africa because now they can build their own power generation up to 100 MW and reduce their dependence on Eskom
South Africa’s energy transition is finally making some headway again after more than half a decade of paralysis. However, renewable energy developers awaiting the results of South Africa’s fifth Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) bid round, due imminently, are keeping their options open. Given the programme’s recent patchy history, many believe a recent rule change—yet to come into effect—for distributed energy may end up being the best way to get their projects built. In August 2021, the South African Department of Mineral Resources and Energy amended the country’s 2006 Electricity Regulation Act, allowing embedded generation projects up to 100 megawatts (MW) to be built without a licence. Embedded generation is the term the department uses to describe small-scale power systems connected to the distribution network—what would be known as distributed energy in most other markets. The licence exemption for projects up to 100 MW, up from just 1 MW previously, could really shake up the market for independent power producers (IPPs) in South Africa. “It’s opening up the market outside of REIPPPP,” says Chris Ahlfeldt of Blue Horizon Energy Consulting Services in Cape Town. “It’s a positive sign for large energy users in South Africa because now they can build their own power generation up to 100 MW and reduce their dependence on Eskom.” The state-owned electricity company Eskom features prominently in any conversation about South Africa’s energy market. Concerns over the reliability of Eskom’s ageing coal generation fleet led to the launch of the REIPPPP in 2011. At the time, the idea of developing renewable energy capacity by holding regular auctions was still new. 
REPLACING COAL The REIPPPP, which replaced a two-year-old feed-in tariff system, aimed to give Eskom access to low-cost renewable energy to supplement and ultimately replace coal plants that were at risk of failure. To begin with, the programme was celebrated for its regulatory approach and focus on socio-economic development, with projects having to meet strict requirements around local co-ownership. It saw 4 gigawatts (GW) of onshore wind, photovoltaic (PV) solar, concentrated solar power, biomass and small hydro capacity being awarded across four auction rounds between 2011 and 2015. “As a result of this programme, South Africa has achieved more investment via IPPs in four years than in the rest of Sub-Saharan Africa over the past two decades,” gushed a report by the University of Cape Town’s Graduate School of Business. “Bid tariffs have fallen sharply over the course of the programme and most recently awarded projects are now amongst the lowest priced grid-connected renewable energy projects in the world,” it added. Just as importantly, by 2016 at least four solar companies had established manufacturing centres in South Africa to satisfy demand from REIPPPP projects. Then things started to go wrong. Developers reported that the Department of Energy was dragging its feet over signing letters of dispensation, a prerequisite for getting a generation licence from the National Energy Regulator of South Africa. Then, in 2016, as South Africa’s economy tottered under the leadership of President Jacob Zuma, Eskom called a halt to new power purchase agreements (PPAs) for the offtake of energy from plants developed under the REIPPPP. The move, attributed to grid reliability concerns, left developers with nowhere to sell their energy. Meanwhile, a fifth REIPPPP bid window, originally slated for 2015, failed to materialise. EMBEDDED ATTRACTION At the time, owing to the regulatory hurdles, there was only around 5 MW of private PPA capacity in the country. But the market for embedded generation was beginning to boom mostly because the market was free of red tape, despite the 1 MW cap. The next few years saw increasing momentum behind embedded generation and further delays to the REIPPPP as South Africa’s currency, the Rand, and then Eskom faced hardships. Zuma was caught up in a corruption scandal linked to Eskom and towards the end of 2017 it seemed the state utility would go bankrupt. It was not until 2018, with Zuma facing pressure to step down and Eskom’s financial position secured via a ZAR 5 billion ($338.5 million) bridging loan, that South Africa’s Minister of Public Enterprises signed off REIPPPP PPAs dating back to 2014, allowing many of the renewable energy sites to finally proceed to construction. During Eskom’s troubles and the near moratorium of renewables development in the country, coal plants continued to dominate the market. But by 2019 it was clear South Africa’s coal fleet was now not only costly but also unreliable. Two new plants, Medupi and Kusile, failed to prevent the continuation of rolling blackouts that had become a regular feature of life in South Africa since 2007. The Medupi plant did not enter full commercial operation until July 2021, before being rocked by an explosion a couple of weeks later. REIPPPP DELAYS Despite this obvious cue for the development of more renewable energy, progress towards another REIPPPP bid window remained sluggish. After six years of waiting, IPPs finally welcomed bid window 5 of the REIPPPP in March 2021. If there were hopes that the process would at last run smoothly, though, they were dashed as the deadline for bids neared in August, when Eskom issued a Generation Connection Capacity Assessment that showed there was practically no grid capacity left in South Africa’s Northern Cape—one of the most sought-after locations by IPPs because of its ample solar and wind resources—for new renewables projects. The report “tripped up a lot of big players,” says Jock Brown of Broadreach Energy, an IPP based in Cape Town. Given Eskom’s history, it is tempting to attach underhand motives to the timing of the report. Brown thinks the explanation could be more prosaic, however. “Eskom is in a really tight spot, currently trying to get cheap debt through concessional financing, to green production,” he says. “My suspicion is the report is more linked to that.” REIPPPP bidders have learned quickly they should be prepared for almost anything and are wary of issues still plaguing the market. The grid restrictions put the viability of cost-effective projects into question, Eskom’s issues have yet to be resolved despite plans for it to be broken up and the government’s green credentials are found wanting. At the same time, South Africa needs to upgrade its energy system urgently. Excluding Medupi and Kusile, Eskom’s coal fleet has an average age of 41 years and its availability has dropped from 90% at the start of the 2000s to just 64% today. GRID WOES Eskom believes the country needs an extra 4 GW of generating capacity, but even if that level of generation could be conjured up tomorrow it is far from certain it could be connected to the grid. “One of the biggest problems is that the strengthening of the grid is strongly linked to the debt levels of Eskom,” says Brown, “and the debt levels of Eskom are linked to the generation build that’s been such a disaster.” Eskom simply does not have the cash to upgrade the distribution network, Brown says, and until it does “it’s going to be very difficult to do a lot with the electricity grid.” 
GET INTO EMBEDDED The difficult regulatory environment for utility-scale projects is why companies such as Broadreach Energy are focusing on the embedded generation sector and its demand for solar energy. Following the August 2021 amendment to the Electricity Regulation Act, the analyst firm IHS Markit upped its solar forecast for South Africa and now expects the market to add 8.8 GW of PV between 2021 and 2025. Most of that will still be from utility-scale plants procured through the REIPPPP and other government auctions, but as much as 23% could be in the form of commercial and industrial-scale distributed capacity, with a further 7% from residential systems. “We’re seeing a boom in rooftop installations,” says Josefin Berg of IHS Markit. South Africans installed 500 MW of rooftop PV in 2020, she says, with the trend gaining momentum because of coronavirus lockdowns combined with continuing power cuts. “Working from home, you can’t deal with rolling blackouts,” Berg explains. ANOTHER HURDLE? Troubles with government auctions look set to drive moves towards more embedded generation for the foreseeable future. The rule change in August gives power users a way of sourcing energy outside of Eskom’s blackout-prone infrastructure and offers IPPs an alternative route to market to the beleaguered REIPPPP. “You will see a lot of projects prepared for the tenders that are not awarded, going to this,” Berg predicts. That is the thinking, at any rate—but even the Schedule 2 amendment is not free from uncertainty. It is yet to actually come into effect, with no set date yet agreed. Plants up to 100 MW may no longer need a licence, but they still need to be registered with the National Energy Regulator of South Africa—and the details of the registration process have yet to be clarified. IPPs are keen for that information to be published as soon as possible, but it is unlikely they will be holding their breath. “There’s a saying here: Why run when you can walk?” says Ahlfeldt. •
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Jason Deign