The South African energy system is undergoing the most significant changes in its history. Decades of political reluctance to reform the electricity sector has led to chronic underinvestment and left it reliant on aging coal-fired generation plants and dominated by a state-owned monopoly utility. But, following a false start with the poorly designed Renewable Energy Feed In-Tariff (REFIT) in 2009, the government introduced the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) in late 2010. This policy is in the process of revolutionizing the power system by encouraging investment in new generation capacity while simultaneously stimulating much needed competition.
The idea of independent power producers (IPPs) playing a larger role in the South African power market has been popular since the government published an energy policy White Paper on the subject in 1998. The legal conditions for independent, renewable generation were not however laid until the Electricity Regulation Act of 2006 and the Energy Act of 2008 made provision for IPPs and renewable energy sources respectively.
In line with the countrys integrated resource plan (IRP), the initial goal of the REIPPPP was to achieve more than 3.7 GW of installed renewables by 2020. This target was later revised upwards to almost 7 GW. More than 2.5 GW of this planned capacity has been earmarked as solar PV.
The interest in building PV capacity in South Africa has been very strong. With two of five possible tender rounds completed, 18 projects have secured contracts to supply the national utility, Eskom, with more than 1 GW of PV capacity. International solar players have been heavily involved, with firms including SunEdison (see achieved non-recourse project finance on combined 58 MW PV installation in Table above), juwi, Mainstream Renewable Power, and even the internet giant Google, active in supplying parts, developing or investing in projects. The third round, currently open to submissions, also promises to be well subscribed.
|Wiktop (30 MW) and Soutpan (28 MW) solar parks|
|Investment||US$314 million (long-term debt and equity)|
|Estimated year of operation||January 2014 (Soutpan) and April 2014 (Wiktop)|
|Developer||SunEdison in partnership with Chint Solar and the Kurisani Youth Development Trust|
|Debt providers||Standard Bank and Futuregrowth Asset Management|
The scale of the opportunity has attracted a multitude of suppliers, including Chinese panel manufacturers who, facing accusations of dumping in Europe are looking to Africa as a continent of opportunity with projects in Kenya possibly a precursor to deeper involvement. It is unlikely that any Chinese charge into African PV will overlook the red-hot market in South Africa and firms like Jinko Solar and GCL Poly are already actively involved.
In spite of the unarguable success of the REIPPPP to secure and promote PV and other renewable capacity at low cost to the consumer challenges remain.
The South African tender model differs from other renewable capacity allocation systems in that it explicitly seeks to address some of the countrys unique social and economic development challenges as well as delivering renewable power capacity. While local content requirements are widely used around the world to try and capture the economic benefits of renewables development, South Africa goes much further.
Following a preliminary qualification phase, tenders are subjected to a detailed evaluation, 30% of the scoring of which is calculated by assessing each projects contribution to broad social and economic development targets. Criteria include project ownership and specific project lifetime job creation.
Many developers have complained about the complexity of the process with anecdotal reports that up to a quarter of all submitted bids have been rejected at the qualification phase due to incomplete paperwork or simple errors. But, on the whole, there is a consensus that the approach is effective in ensuring that only viable projects move towards contract award something that has notoriously eluded competitive allocation of power generation contracts elsewhere.
A commonly observed hurdle to PV development in rapidly growing or new solar markets is the availability of non-recourse project finance. And, in South Africa, despite a well-established local debt market and good understanding of the requirements for project finance, it seems that debt does not grow on trees here, either.
The majority of finance to date has been sourced from within South Africa since international lenders are reluctant to take on the currency risk that rand denominated power contracts would expose them to.
The future ability of domestic lenders may also be constrained by a lack of liquidity in the market making it difficult for them to securitize loans made in REIPPPP rounds 1 and 2. The nature of the debt available could also be a challenge as lenders have yet to become entirely comfortable with the technology and therefore offer finance over shorter terms than elsewhere and to only larger projects. While current interest rates range from 12 to 14%, equity investors usually require levels of returns in the high teens. There is a clear opportunity for higher risk capital provided by other players, like manufacturers or infrastructure funds to bridge the gap during construction and fund the higher risk early stages of project development.
The perceived risk of financing some PV projects could be increased by inconsistent and unreliable solar resource measurements. Solar maps have been produced by a variety of international organizations but on-site measurements are few and far between.
Concerns have been voiced about the availability of the skills needed to support the industry. However, the wider policy context of the Broad-Based Black Economic Empowerment (B-BBEE) initiative and the qualification requirements of the REIPPPP mean that project promoters are obliged to ensure that adequate skills are developed, going some way towards allaying the fears. This has led to international players forming partnerships with local companies in order to ensure the requirements from the REIPPPP.
Although there is no sign that the REIPPPP will be discontinued, there is also little evidence of firm, long-term political commitment to the role of renewables in the power sector. If the price of renewables does not continue to fall and more stringent local content rules mean it probably wont political support for the program in the face of a growing nuclear lobby could become difficult.
Finally, as the owner of the South African power transmission system, Eskoms ability to meet all the grid connection requirements of a rapidly growing and disperse fleet of renewable generation stations has been called into question. If grid connection is to avoid becoming a serious bottleneck, substantial investment in the transmission system is required. The unique position of Eskom as power supplier, transmission owner and generation owner also raises questions about the potential for conflicts of interest.
South Africa has one of the highest irradiation levels in the world, making it a great place for solar, but the public and private sectors both face challenges. The government must maintain the momentum to deliver the jobs and PV capacity that will complete a clean energy revolution. Private sector firms must play the tender rules and be creative in finding innovative new ways to finance.
The REIPPPP process is cumbersome and would benefit from streamlining. But, along with hybrid self-generation projects for the industrial and mining sectors, it has undoubtedly created one of the African continents most exciting opportunities for solar PV development.