Encouraging signs of progress on renewable energy programme

SA’s electricity sector is at last seeing movement in policy development, after numerous delays over the past decade.

The opening of the sixth bid window of the government’s renewable energy programme last month is the latest move in this direction. It builds on other encouraging signs of progress in recent months.

Global focus on climate change offers a unique opportunity to decarbonise SA’s electricity transition. SA set itself ambitious targets in the run-up to the COP26 conference in Glasgow in November last year.

It has developed plans for a just transition that addresses the need to transition away from dependence on coal-fired power as well as the broader socioeconomic impact on communities.

The just energy transition agreement that SA negotiated with international partners at the Glasgow conference was a significant advance, one made possible because SA was well prepared. 

Details of the $8.5bn (R132.5bn) just energy transition deal will take time to figure out, and it is unavoidable that much of the funding will go towards helping Eskom to transition away from coal-fired power. However, crucially, it is a deal that recognises the whole electricity supply value chain needs to change and seeks to enable that.

The rollout is not nearly fast enough to take the pressure off Eskom’s ailing power stations

That is important to support the rollout of new renewable energy generation already under way. But the rollout is not nearly fast enough to take the pressure off Eskom’s ailing power stations and provide SA with the stable electricity supply it urgently needs.

Over the past decade, since the first round of the government’s renewable energy procurement opened in 2011, just 5.2GW of new renewable energy has been added to the national grid.

If SA is to meet its energy transition commitments it will have to multiply that by 10 over the next 12 years, building a further 50GW of solar, wind and other forms of cleaner energy generation, as well as the storage needed to maintain a reliable supply.

There will have to be a step change in the way the electricity supply industry is structured and governed.

Importantly, the government has restarted the renewable energy independent power producer (REIPP) programme, which had been stalled since 2015.

The fifth bid window of the REIPP programme was opened in April 2021 for 2,583MW of wind and solar photovoltaic power, and 25 preferred bidders were announced in October, with the aim to reach financial closure within six months.

The weighted average price for all preferred projects in bid window 5 was notably lower than the average for the previous bidding round six years ago. However, the 47c/kWh low is very unlikely to be repeated.

The cost of components is up because of the rise of global commodity prices, which would drive prices in the current bid window 6 and the bid window 7 due to be launched later this year. Each window aims to procure 2,600MW of solar and wind energy. 

One of the most dramatic advances over the past year has been the government’s decision to open the market to embedded generation, or self-generation, of up to 100MW. This was a development that the private sector had long advocated.

The government made the change in August 2021 by updating the licencing requirements of the Electricity Regulation Act to raise the level below which companies do not have to apply for a generation licence. 

This prompted a flood of announcements from companies, particularly in the mining industry, to procure generation capacity for own use, and for sale to third parties. Some larger municipalities have also shown interest in self-generation.

The regulatory processes remain unnecessarily cumbersome, however, and new facilities may not come online as rapidly as had been hoped. 

The restart of the government’s procurement programme of utility scale renewable energy generation could see a total of 7.8GW procured by the end of 2022, more than had been procured in the past decade.

Embedded generation projects by the private sector could add further capacity. Combined with battery storage, these projects should help to alleviate the supply shortfall, and put SA on track to make progress with decarbonisation.

We have finally seen a shift in the government’s resolve to address SA’s electricity supply challenge

However, given the lead time for finalising contracts and the duration of construction, the benefit of these projects may take 2-3 years to be realised.

One of the critical issues is the transmission grid, which is imposing binding constraints on the ability to build new projects in SA’s high-yield solar and wind areas. This is an issue that emerged in the REIPP’s fifth bid window and will become more binding in the sixth and seventh, and for potential private power producers.

SA simply does not have the transmission infrastructure to put any more renewable energy projects on to the grid in the Northern Cape, and this is becoming an issue too in the Western and Eastern Cape.

Eskom’s recently announced tender for 1,000MW of private generation facilities to be built on leased Eskom land in Mpumalanga takes advantage of the existing transmission grid.  

The increasing reliance on renewables will require simultaneous investment in storage, transmission and grid infrastructure to cope with decentralised, distributed generation.

Transmission lines take about seven years to construct and SA needs large-scale and urgent investment in these. A failure to ensure such investment is potentially the biggest risk to SA’s transition process.

The policy movement of the past year has opened the way for a more decentralised, decarbonised electricity supply industry and one in which Eskom’s role will progressively diminish over time.

The government has recently published a game-changing draft document that provides for a wholesale revamp of the electricity supply industry. It not only factors in an independent transmission entity, unbundled from Eskom, but also opens the way for an electricity market in which traders, private power generation arrangements and government-procured projects can all operate. 

The draft drops some of the cumbersome requirements now in place, but also introduces new ones, such as a ban on starting early construction work before registration. It also allows the minister to determine a tariff, a maximum tariff or a guideline tariff per generation technology in advance of opening IPP  bid windows.    

While the draft rules still leave too much power in the hands of the minister, they begin a process that could ultimately create a very different electricity industry, one more able to support a growing economy. 

We have finally seen a shift in the government’s resolve to address SA’s electricity supply challenge and put policies in place that will enable it to overcome the constraint on growth imposed by the power shortage. But there are many more steps still to take.

• Ilkova is markets strategist at Rand Merchant Bank