This is the first of a three-part blog series modified from the Renewable Energy Law Review’s Chapter on South Africa, written by Covington’s Lido Fontana and Sharon Wing. The full article as published in the Law Review is available here.
The fundamental driver for renewable energy projects in South Africa remains the Renewable Energy Independent Power Production Procurement Programme (REIPPPP) of the Department of Energy (DoE). Prior to the formal launch of REIPPPP in August 2011, the local renewable energy market was fairly inconsequential. A lot has changed since then, with REIPPPP being heralded globally as a shining example of how to successfully implement renewable energy auction programmes.
The success achieved by REIPPPP has, however, not been without its challenges. Eskom Holdings SOC Limited (Eskom), the state-owned national utility and sole off taker of electricity from projects under REIPPPP, has refused to sign any further power purchase agreements (PPAs) with independent power producers. Eskom’s position has not been unexpected, with its historical monopoly on generation in South Africa now being gradually challenged by independent power producers that are able to deliver generating assets largely on time and on budget – key features that have been somewhat lacking in Eskom’s skill set for some time, leading to above-inflation increased costs of electricity to the end users (while the tariff prices under REIPPPP continue to drop dramatically in each procurement round).
Eskom’s open hostility to REIPPPP had a dramatically negative effect on the renewable energy market in South Africa, forcing the programme to an unwelcome halt for more than two years. Positive winds of change appeared to be blowing during 2017, however, with promises from government and Eskom that the much delayed Round 4 (as well as the final remaining Round 3.5 concentrated solar power (CSP) project) would be signed. In the end, the government and Eskom did not deliver on these promises during 2017.
While this was a disappointment to the industry, a rather important political event did take place in December 2017, with a new African National Congress leader emerging in the form of Cyril Ramaphosa. Many believe Ramaphosa will play a key role in helping to unblock the issues with Eskom and the DoE’s energy procurement programmes (including REIPPPP) to ensure that the country’s burgeoning renewables market continues. So far, the signs are positive, with all the outstanding Round 4 REIPPPP projects having now been signed with Eskom and the DoE. The much anticipated draft Integrated Resource Plan (IRP) was published for public comment by the DoE. Renewables and gas feature prominently as part of the proposed future energy mix. The widely criticized push by Government for additional nuclear generation appears to have disappeared, at least until 2030.
There is a small but growing rooftop solar market in South Africa. The regulatory regime in South Africa does not currently allow for excess energy to be sold back into the grid, as is the case in certain parts of the United States. A change in the regulatory regime allowing for this would most likely stimulate the rooftop solar market and allow it to grow far more quickly than is currently the case. In addition, there are currently no significant tax incentives or other government-led programmes that mirror those in the United States or the EU that have fostered the growth of renewables to such an extent in those markets. Large-scale retailers are now installing large rooftop solar facilities to reduce their reliance on Eskom as a supplier and what is perceived as ever increasing above-inflation tariff costs. Furthermore, reflecting international market trends, a number of international corporate entities are looking at renewable off-grid solutions. We expect this off-grid market to continue to grow, which presents a challenge for Eskom as its customer base continues to shrink.
The year 2017 brought with it significant uncertainty in respect of transformation in the South African energy sector in relation to renewable energy. In February 2017, then President Jacob Zuma announced in his state-of-the nation address that Eskom would sign all outstanding power purchase agreements from Rounds 3.5 and 4 within the coming months. However, as a result of Eskom’s delaying tactics, 27 contracts, totaling US$4.7 billion and covering 2.3GW of renewable energy projects, were only signed in the first quarter of 2018 because of an interdict brought by the National Union of Metalworkers of South Africa together with Transform SA (a non-profit lobby organization).
There has been further uncertainty regarding the 20 small-scale projects (with capacity of between 1MW and 5MW and an aggregate capacity of 100MW) awarded through the bidding process under the Small Projects Independent Power Producers Procurement Programme. It is uncertain when these projects would be able to begin operations, as only 10 of the 20 have licences, while the remaining 10 are under evaluation. It is to be noted that the South African government has decided that independent power producers (IPPs) owning generators that do not exceed 1MW are to be exempt from the obligation to apply for and hold a licence.
Although coal-fired generation still dominates the energy sector (with a net output of 35.6GW, representing 85 per cent of the South Africa’s total capacity), by the end of 2017, a total of 3.2GW of renewable energy projects had been constructed and connected to the grid. This has brought total investments in renewable energy under REIPPPP to approximately 195 billion rand. Further, South Africa was ranked 10th among G20 countries for renewable energy investment conditions by Allianz Climate and Energy Monitor.
The future looks positive for renewable energy on account of the expectation that South Africa’s new president will be promoting renewable energy to restore investors’ confidence.