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