South Africa commits to diversified energy mix

Out-Law Analysis | 14 Nov 2019 | 4:11 pm | 4 min. read

The recently-published South Africa Integrated Resource Plan (IRP) is the clearest demonstration yet of the government's intention to achieve energy security of supply.

The emphasis of the IRP (100-page / 2.5MB PDF) is on a diversified energy mix at the lowest possible cost, with renewable energy accounting for a large portion of the anticipated generation.

After a number of false starts, and against a backdrop of severe constraints on national electricity supply and added pressure to add new generation capacity onto the national grid, publication of the IRP is a positive development for consumers and for investors in energy and infrastructure. We hope that this will create momentum which will culminate in the procurement of new generation capacity.

What does the IRP envisage?

The importance of an energy plan such as the IRP cannot be overstated.

We hope that this will create momentum which will culminate in the procurement of new generation capacity.

South Africa's first IRP, which was published in 2011 (IRP2010-2030), led to the successful design and implementation of the now world-renowned Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). This scheme delivered:

  • 92 projects awarded to independent power producers across a number of renewable energy technologies. These projects accounted for almost 6,422MW of new generation capacity, of which 3,876MW has reached commercial operation;
  • direct investment of close to $20 billion into the South African economy;
  • a significant drop in the average price of wind and solar photovoltaic (PV) tariffs, ultimately leading to lower prices for consumers;
  • greater community involvement and participation throughout the life cycle of each energy project; and
  • job creation and the development of local manufacturing capability, including component factories for solar PV panels and wind turbine technologies.

The South African government Department of Mineral Resources and Energy (DMRE) sees the 2019 IRP as an opportunity to introduce a different energy mix. With a number of coal-fired power stations due to reach their end of design life over the next five years it hopes the plan will reduce reliance on coal.

The IRP envisages procurement of generation capacity until the year 2030 as follows:

  • 1,500MW of coal;
  • 2,500MW of hydro;
  • 6,000MW of solar PV;
  • 14,400MW of wind;
  • 1,860MW of nuclear;
  • 2,088MW worth of storage;
  • 3,000MW of gas/diesel; and
  • 4,000MW from other distributed generation, co-generation, biomass and landfill technologies.

The IRP will replace some of South Africa's reliance on coal with renewable energy. Coal accounts for 85% of South Africa's electricity generation but under the IRP this will reduce to 59% with solar contributing 18% and wind 6%.

While coal will undoubtedly continue to play a significant role, the IRP signals a significant shift from fossil fuels and significant commitments to renewable energy technologies. Solar PV and wind represent almost 60% of the new generation proposed by the IRP. Adding biomass, landfill and hydro brings that figure to 75%.

The IRP reiterates the South African government's intention to 'unbundle' the three business functions of state-owned electricity utility Eskom into separate generation, transmission and distribution companies. It calls for the development of a strategy as part of that unbundling to enable Eskom to participate in the development of new generation capacity in line with the IRP. The role of Eskom, as well as the impact of the resulting regulatory framework post-unbundling on the rest of the energy sector, will largely determine the degree to which the IRP's ambitious objectives will be met.

To ensure a credible 10-year plan, the IRP also recommends:

  • a power purchase programme to assist with the acquisition of the capacity needed to supplement Eskom's declining plant performance in the short term;
  • undertaking the necessary technical and regulatory work to extend the design life of the 1,800MW Koeberg nuclear power plan by another 20 years;
  • compliance by Eskom with minimum emission standards, taking into account the energy security imperative and the risk of adverse economic impact;
  • consolidating the various initiatives needed for a just transition to a more diverse energy mix into a single delivery team;
  • retaining the current annual build limits on new wind and solar PV pending the finalisation of a just transition plan;
  • basing new coal power projects on high efficiency, low emission technologies and other cleaner coal technologies;
  • converting existing diesel-fired power plants to gas;
  • commencing preparations for a 1,500MW nuclear build programme at a pace and scale that the country can afford;
  • national participation in strategic power projects that enable the development of the cross-border infrastructure needed for regional energy trading.

What are the implications of the IRP for the energy industry?

The IRP is a positive development for both potential and existing renewable energy investors, as it provides confidence that renewables will play a significant role in bolstering South Africa's generation capacity over the next 10 years.

One area of concern, however, is the gap between 2024 and 2027 during which no solar procurement is envisaged. This means there would not be a continuous pipeline for investment.

To be successful, the IRP will need to be able to deliver sufficient new generation capacity to ensure energy security under both the current low-growth economic environment and a potential level of 4% annual growth.

Annual build limits have also been imposed on renewable technologies in order to achieve a 'just transition'; mitigating the adverse impact of the transition to a more diverse energy mix on employees and local economies. Although necessary, these build limits can also impact on investors that want to achieve economies of scale in their pipeline of projects given the lower expected returns as a result of plummeting wind and solar PV tariffs.

Contractors are likely to have similar concerns as they would want to see a steady flow of projects, particularly if they wish to establish local manufacturing or assembly facilities. Any future procurement programme should therefore be uninterrupted over the 10 years of the IRP, and beyond.

Similarly, the banks will have welcomed the IRP although we imagine they would have preferred a larger allocation of capacity to renewables in the light of issues around financing coal. Given the current competitive price bidding pressures under the REIPPPP, banks will have to consider other competitive forms of financing solar PV and wind projects and potentially will have to compete with other players that will bring innovative ways of financing renewable energy projects to the market.

The market now keenly awaits the ministerial determination which will give legal effect to the provisions of the IRP. To be successful, the IRP will need to be able to deliver sufficient new generation capacity to ensure energy security under both the current low-growth economic environment and a potential level of 4% annual growth. It must also deliver the desire, and crucially also the ability, of independent power producers to finance and deliver new projects on a sustained basis.

Gari Matarirano and Jurg van Dyk are energy experts at Pinsent Masons, the law firm behind Out-Law.