More than green dreams06 / 2012, Markets & Trends | By: Habib Ali/Shamsiah Ali-Oettinger
South Africa: As the PV industry feels the negative reverberations in Europe as a result of the cuts to the feed-in tariffs, South Africa has new PV plans in the pipeline and seeks to further the growth of solar generated electricity and aid its manufacturing sector.
The demand for energy in Africa has been on the rise and utilities have been struggling to keep up supply. South Africa is one country where acute power shortages have called for the need to rethink the direction of energy development. The South African Department of Energy’s (DoE) white paper on renewable energy (RE) set a target of 10,000 gigawatt hours (GWh) of energy to be produced by renewable sources by 2013. This figure constitutes approximately five percent of the current electricity generation in South Africa.
Thus, the South African PV market is said to be geared toward exponential growth from 2012 onwards. Christopher James Haw, Cofounder and Chairperson of SAPVIA (the South African PV Industry Association), and Cofounder and Director of Aurora Power Solutions says, “The market will grow strongly but the continued growth will depend on energy prices of PV dropping to come more in line with the country’s electricity wholesale and retail prices. Large scale projects will dominate the market initially providing business opportunities downstream in construction and supply of equipment over the next two to three years. The smaller scale rooftop market will follow but regulation on net metering and other subsidies need to be in place for this market to gain momentum.” The policy situation for PV installations in the country looks particularly positive with the government having drawn up a 20 year master plan, the Integrated Resource Plan (IRP) which is a subset of the Integrated Energy Plan. The IRP is seen as a tool to direct the expansion of electricity supply over the given period. Not only did the IRP see an upward spring in the RE contribution to the energy mix, but PV is seen as the ‘big winner.’ From 11,400 MW in the draft plan in October 2010, the number went up to 17,800 MW, or 42 percent of the targeted new generation after a second round of public participation was conducted at the end of 2010.
The new policy-adjusted IRP report allocated a total of 8,400 megawatts (MW) to solar PV and another 1,000 MW to Concentrated Solar Power (CSP). Frost & Sullivan reported that 300 MW of large-scale PV will be rolled out from this year onwards. The IRP forecasts the peak demand to grow from 38.9 to 67.8 GW by 2030, at about 2.8 percent per annum.
Haw comments on the government’s renewable energy procurement program, “It has provided a commitment from government to purchase all energy produced from a compliant PV facility for a period of 20 years at a tariff that provides reasonable return for investors. This allows money to flow into developing and constructing projects between five and 75 MW in size which mobilizes all parts of the value chain. As this chain develops and becomes more competitive, prices will drop, bringing PV to an affordable level and eventually making it more competitive than most other electricity generating assets.” The IRP is scheduled to be updated this year but thus far no changes are on the horizon. Haw says that the continued procurement of PV will depend on its ability to produce electricity at a lower levelized cost of energy (LCOE). The LCOE in South Africa at the moment is around R2.20 to R2.60/kWh (US$0.27-US$0.32/kWh), which is declining and could be made much cheaper with better financing costs. The early adoption of PV will depend on how quickly the retail and wholesale prices in South Africa and the LCOE of PV converge.
PV in South Africa has generated a sort of gold rush. As a result of the government’s push, investment is now entering the country. The DoE’s mandate is also such that Independent Power Producers (IPPs) contribute to 30 percent of new generation capacity by 2030. SAPVIA’s spokesperson Davin Chown finds the opening of the market to IPPs positive as he said at the webinar ‘Phase I challenges and the future of South African PV’ organized by PV Insider. The rapid urbanization has placed a massive strain on the national infrastructures including that of energy. He states that electricity demand is predicted to grow three percent per annum till 2030 and roughly 40 GW of new electricity is needed to cap this demand. There is still a high dependence on coal and the power plants are located in the northeast with complex networks distributing power throughout the country to every load center. A considerable amount of electrical losses of between 10 and 12 percent occur due to the distance of transporting the electricity.
Eskom, the largest electricity generation utility in South Africa states that a further 89.5 GW of generating capacity is needed by 2030, and a large portion of this should come from renewables. Eskom states, “Ministerial determination will determine the allocation between Eskom and IPPs with the ambition of 30 percent of total generating capacity in 2030 from IPPs.” Eskom hopes to build a good service relationship with these IPPs who have asked for a single point of contact to manage the relationship.
In phase one of bidding for large-scale RE projects, 28 bids totaling 1,416 MW were sieved out. 18 of these were bidders for PV, covering approximately 632 MW of capacity (see ‘Details of successfully won bids in the first round,’ p. 62). The IRP is the backbone of the government’s drive to give RE a much needed pep. Five rounds of IRP bidding are planned.
International PV bidders will either have to move in or team up. The DoE places emphasis on local content to ensure that local communities benefit economically. The local content was pegged at 35 percent for the first phase but the government sees it increasing to an aspirational 65 percent over time (see table Local content requirements, p. 62). With this the government hopes to create 300,000 jobs.
South Africa’s ambitious plans for RE are also tied in with the National Development Plan that wants to create a virtuous cycle of growth and development to eliminate poverty and reduce inequality by 2030. The manufacturing industry has declined over the years and solar PV is seen as the solution to stimulate the ailing sector. “Solar players are asked to contribute to localizing manufacture,” Chown adds. He says that localization is a key component in the IPP process and the new RE flagship program that the government will launch. The aim: to retain the benefits in the country. Economic Development Minister Ebrahim Patel said the commitment by the RE sector to localize was partly to create at least 50,000 jobs directly in the RE sector by 2020.
Haw says, “South Africa will always encourage local manufacturing. Currently a study is underway between SAPVIA and the Department of Trade and Industry (dti) as to which components of the value chain are likely to bring the most value to the country, from a value add and job creation perspective. The wind and solar industries have committed to creating 50,000 jobs by 2020 in the green economy accord. We would hope to increase this number but this will depend on whether the market shifts (or begins to include) smaller scale roof-mounted systems.”
Red tape is something the project developers of phase one have to reckon with. The power structure in South Africa is centralized and controlled by the government and therefore, the process will not be a breeze.
Momentous Energy is closing a deal on the 6.8 MW RustMo1 solar farm in the north west. Managing Director Gareth Warner is quoted as saying that the tender and its requirements are extensive. Since it is the first round, the documentation among the banks, the DoE and Eskom is zealously comprehensive. Developers have to get their paperwork together by the end of June.
Key programs creating opportunities for renewable energy
17 GW by 2030 (will be revised)
RE Independent Power Producer Program
3,725 MW (1,450 MW of PV)
Flagship RE Program
1,000 MW+ per annum (still being agreed)
5 GW of solar (PV, CPV and CSP)
Solar rooftop program
Linda Thompson, Head of Solar Development from Mainstream Renewable Power also highlighted some challenges: “In South Africa, the Department of Agriculture does not want any development on agricultural land or land that was previously cultivated. This is quite inhibiting.” Getting the right sites and permits for PV can thus be challenging. The Northern Cape area where most projects are allocated is arid. Water is needed for construction and maintenance works. Hence, water issues can also inhibit developers.
Thompson also raised the issue of Environmental Impact Assessments (EIAs), regarding when they should be completed, by who and how. These questions of assessment and time are still unclear.
She also sees the grid access application process as potentially complicated. The White Paper recognized this challenge with the grid as well and aims to learn from phase one. It stipulates: “As with wind, grid upgrades might become necessary for the second round of solar PV installations from 2016 to 2019, depending on their location. To trigger the associated tasks in a timely manner, a firm commitment to these capacities is necessary in the next round of the IRP at the latest. By then, the assumed cost decreases for solar PV will be confirmed.” The date set to iron out such issues is the next round of IRP at the latest.
Thompson says that it was an enormous challenge lobbying the government to increase the allocation of PV in the IRP. She asserts that the biggest challenge now is that government departments are new to the technology and its implications. “It is a steep learning curve,” she says. This had led to policies being reviewed. This reviewing means more time and money. She adds that there is competition in the market. This is pushing land prices upwards and competition for the grid is intense. The local Engineering, Procurement, Construction (EPC) companies need to catch up with the technology and build their capacities.
The White Paper highlights that the RE feed-in tariff (REFIT) needs to consider the impact of learning rates and adjust accordingly, otherwise the price impact will be more extreme than assumed on the policy front. The energy cost for the earlier solar PV capacity from this year and 2013 is not included in the multi-year price determination for Eskom. The REFIT delay means that the funding can be reallocated in this regard, but additional funding may be required depending on the final REFIT for solar PV. The REFITs were introduced by the National Energy Regulator in 2008, but they did not cause any major movement in the RE development scene.
Foreign PV players are eyeing this new market as it opens up quickly and rather massively. India’s largest private power utility Tata Power developed the joint venture Cennergi, with South African mining group Exxaro. Cennergi looks to produce 16 GW of RE projects by 2025 as it announced in April. The company had submitted solar and wind bids for the second bidding round. The submission date was set for March 5. The DoE made an announcement mid-May that in total, 79 bids were received and the evaluation process had been concluded. It also noted that there had been a notable improvement in the quality of bids.
Local content requirements
First bid submission date
Second bid submission date
Third bid submission date
Chown points out that the mining industry creates one million jobs in the country. From solar’s point of view, the energy-intensive industry is now starting to look towards RE to decarbonize. Exxaro head Sipho Exxaro sees Cennergi partnering with Eskom. “We felt that as coal producers in South Africa, we should start immersing ourselves in REs, because we need to continue to be responsible corporate citizens in South Africa,” the top man says. Exxaro is one of South Africa’s leading coal producers and one of Eskom’s top suppliers.
Spain’s Abengoa Solar is also moving into South Africa via the KaXu Solar One Consortium, of which Abengoa owns 51 percent. A 100 MW CSP plant is being developed by the company. Mainstream is also a preferred bidder and it has used its South African arm to bid for the De Aar and Kimberley PV projects in Northern Cape. Another preferred bidder is Erika Energy, who seek to develop a 28 MW solar park. The company’s shareholders sit in Korea at Astronergy, a subsidiary of Chinese company Chint.
Haw says that the development time is approximately 18 months from start to finish. “The international investor must come to terms with certain regulations and laws that apply locally and uniquely to South Africa, e.g. Black Economic Empowerment (BEE). This regulation has been made clear in the RFP documents, however some further clarity on certain issues – such as the exact definition of local content – is required. The RFP communication system is run very efficiently by the department of energy and queries can be answered in fairly short time frames. South Africa’s legal and banking systems are robust and reliable.”
The next big thing?
An independent study on solar PV made and listed in the White Paper suggests that before 2015, the levelized cost of PV installation, excluding storage would be the same, if not cheaper, than residential electricity prices. Hence, distributed generation should be taken into consideration for future IRP iterations with additional research into this aspect. The development of smarter grids and storage solutions to boost renewable technologies is also in the to do list.
South Africa fundamentally seeks to use RE as a tool to revive its ailing manufacturing sector, its unemployment issues and its power shortage debacles. RE is not just seen as a way for the country to show the world that they are now ready to ride the green power wave sweeping the globe, but it is a key that can revive the economy and contribute positively to the people of South Africa. In a sense, it looks like a holistic approach the government is taking to tackle many problems via one main solution: renewables. If they succeed in their grand plans, then South Africa can be the role model to follow for many other developing countries seeking a new energy and economic awakening.