South Africa’s Changing Energy Landscape

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South Africa’s changing energy landscape

South Africa’s energy sector is changing so quickly, this publication may well be out of date before the year is out. In four years, the country’s utility-scale renewable energy program has nearly 100 plants at various stages of development. The cost of solar and wind energy has dropped so significantly they are now cheaper than coal power. The country’s two new coal power stations, which should have been completed in 2011, are still not ready to go online. And in the past four months, the political ground has turned to quicksand under plans to build six to eight nuclear power stations.

If anything, this shows how quickly this country’s transition away from mega-infrastructure carbon-intensive energy investment could be.

New-build coal: big, expensive, and behind schedule

In 2007, when construction began on the first of two new coal-fired power stations - Kusile and Medupi in Mpumalanga and Limpopo provinces - the two were designed to add 9.6 GW of electricity to the grid, and were due to come online in 2011. They were expected to cost R69.1 billion (US$ 4.5 billion at current exchange rates) and R80.6 billion (US$ 5.3 billion), respectively.

By early 2016, the plants were still not completed. Their anticipated cost has ballooned to double the original price, now figured at R154.2 billion (US$ 10 billion), and R172.2 billion (US$ 11 billion). And their procurement has been dogged with accusations of corruption, which have been widely reported in local media.

SA’s renewables: small, fast, and cheap

In the four years that these two coal stations have overshot their delivery date, the arrival of renewable energy has, quite literally, changed the face of SA’s energy future: almost 2.5 GW of renewables have been added to the grid; R190 billion (US$13 billion) has come in from private investments; and the cost of solar and wind energy has gone from being uncompetitive with coal to being significantly cheaper.

The Department of Energy kicked off the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) in 2011. The aim was to bring 3.75 GW of power to the grid through a series of concentrated solar power, photovoltaic (PV), biomass, landfill, wind, or small hydro plants at various locations around the country. But the program had already exceeded that target about two-thirds of the way through the procurement process.

REIPPPP has proved so successful, it has been hailed as a global success. While the construction of Kusile and Medupi runs behind schedule, REIPPP is finalizing the fourth of its anticipated five bidding rounds, and has over 100 projects at various stages of either bidding, contracting, raising finance, being signed off, or under construction. According to the Energy Blog, one of the most comprehensive databases of the REIPPPP projects, by mid-April 2016, some 47 of these plants were fully operational, and their combined energy production added up to nearly 2.5 GW to the grid.

Professor Anton Eberhard, expert in infrastructure and associated policy development at the University of Cape Town’s Graduate School of Business, said that REIPPPP has contributed to more competitive pricing, transparency in the procurement process, and greater efficiency in project rollout.

On the pricing matter, Eberhard wrote in a May 2014 report that in just two-and-a-half years since the start of REIPPPP, the price of solar PV and wind power dropped dramatically. In normative terms, he said, by 68 percent and 42 percent, respectively.

Nuclear: political quicksand

South Africa is the only country on the continent with a nuclear power station, and its ambitions to build another six to eight were put on hold in March 2016, after the High Court in Cape Town heard that the state had sidestepped its statutory and constitutional obligations around transparency and public participation, as it wrapped up a deal with the Russian government to deliver the reactors.

The controversial 9.6 GW fleet was expected to cost between R700 billion (nearly US$ 50 billion, at the exchange rate of late April 2016) to R1.4 trillion (approximately US$ 93 billion). This is the immediate cost of building, and excludes the additional cost of decommissioning the plants, handling waste, and interest on loans attached to what would amount to the biggest infrastructure project ever undertaken by this country. The R1.4 trillion, in 2015, was the equivalent to about a third of the current national budget.

Following the court action, initiated by civil society organizations Earthlife Africa and the Southern African Faith Communities’ Environment Institute (SAFCEI), the state announced it had put its nuclear plans on hold.

Price volatility and prospects for renewables

Recent events have weakened the local currency and raised uncertainty for renewables. In November 2015, finance minister Nhlanhla Nene was fired unexpectedly, and replaced temporarily by an inexperienced and unknown parliamentarian (it was soon confirmed that the president fired Nene because he opposed the nuclear fleet procurement). 

The decision sent the local currency into a spiral, from which it has yet to recover. This currency crash, along with rising interest rates in South Africa, are likely to impact the cost of the next wave of plants planned for the REIPPP process, according to local WWF energy analyst Saliem Fakir. 

Fakir explains that “the fourth REIPPP bidding round hasn’t closed, and we haven’t done the calculations yet, so we don’t know for certain what the impacts will be. But it could influence renewable energy prices for the projects built as a result of this bidding round. It won’t stop the renewable rollout, but it could push up the price.”

If so, this could offset some of the gains in terms of cost reduction which were made in the first three bidding rounds, as discussed above.

Several macro-economic trends are adding to the sudden challenges for renewable prices at the moment: the over-supply of PV panels globally has made this a buyers’ market; the SA government’s level of indebtedness impacts whether the state can stand as surety for private sector finance, as is the case at present (a form of indirect state subsidy but these guarantees are not limited to renewables only, says Fakir); and the strength of the local currency, relative to the Dollar and Euro.

“If foreign firms are buying locally produced services and technology for these plants,” explains Fakir, “then their buying power will improve if the Rand weakens. If local firms are buying, then the reverse applies.”

In conclusion, South Africa’s clean energy transition is moving at rapid speeds driven in large part by highly effective government policy and dramatically falling prices for both wind and solar power. Renewable energies are becoming competitive with fossil fuels; the energy transition in South Africa is thus no longer about ideology but about economic forces. After all, it’s the economy, stupid!

 

This article is part of the Heinrich-Boell-Stiftung series on "Energy Transition Around the World".

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