10 Driving forces spearheading the rise in Private Procurement of Renewable Energy in South Africa

The South African renewable energy market exhibited remarkable resilience and steady growth in 2023, defying uncertain policy conditions and technical challenges. Despite the ongoing review of the Integrated Resource Plan (IRP) 2019, the renewable energy sector continues to be guided by the existing framework. However, a draft new IRP, IRP2023, was published for public comment in January 2024, offering the potential to significantly boost the industry through the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) framework. Two new bid windows, BW7 and BW8, which collectively add 10 Gigawatts (GW) of projects to the pipeline were introduced. BW7 was officially launched by the Department of Mineral Resources and Energy (DMRE) in December 2023, leaving an additional 5,000 MW of projects to be procured if BW8 is launched.

Although public programs were the primary catalyst for market growth in the past, the industry is now increasingly driven by private off taker agreements. This shift is reflected in the increasing number of registered private generation facilities, which have become a key driver of market expansion. Additionally, the continued process of unbundling Eskom’s electricity infrastructure monopoly and the mining industry’s shift towards renewable energy have further propelled the sector’s progress.

The shift towards the private sector

The South African renewable energy market is witnessing a significant shift towards the private sector, driven by the potential for higher returns through power purchase agreements (PPAs) with private off takers. Developers are increasingly focusing on on-site installations and wheeling arrangements to capitalize on this trend. The private sector's growing demand for energy security, coupled with environmental considerations and the removal of capacity limitations on generation licensing exemptions in February 2023, have created a compelling opportunity for new generation capacity procurement.

The private sector in South Africa presents a significant short-term opportunity for renewable energy procurement, driven by large energy users seeking to achieve their environmental, social, and governance (ESG) targets, reduce energy costs, or enhance energy security. Direct electricity sales are currently facilitated through wheeling agreements under Eskom's existing regime, but the upcoming virtual wheeling platform is expected to further expand these opportunities, providing a more comprehensive and efficient framework for private procurement.

Market Value

South Africa's private renewable energy market is poised for substantial growth, with projected private procurement market sizes indicating a significant increase in solar PV and wind power capacity by 2030. The estimated growth includes 6 GW of solar PV capacity and 4 GW of wind power capacity, corresponding to investment values of R116 billion and R98 billion, respectively. This totals a substantial R214 billion investment opportunity by 2030, representing an average annual growth rate of R36 billion. These projections highlight the immense potential within South Africa's private renewable energy market, although actual growth will depend on regulatory and infrastructural developments.

Key Drivers

The key drivers are briefly outlined below as the 10 Driving forces behind Private Procurement of Renewable Energy in South Africa.

1. Improved cost competitiveness of renewable energy

Renewable energy has achieved significant cost competitiveness, driven by a combination of factors. Despite recent price increases, large-scale solar PV and onshore wind energy systems remain the most cost-effective utility-scale solutions, as measured by the levelized cost of energy (LCOE). This cost advantage is attributed to the ongoing decline in capital costs, technological advancements, and intensified competition in the industry.

2. Carbon emissions reduction for large power users

Companies are proactively setting internal targets to reduce their carbon footprint, with the utilization of renewable energy playing a crucial role in achieving these goals. These targets are driven by a combination of factors, including growing awareness of the climate crisis, international commitments, trade requirements, and legislation. The Johannesburg Stock Exchange (JSE) has also played a significant role in promoting the adoption of clean energy by listed companies. The JSE's King IV Code on Corporate Governance mandates that listed companies disclose sustainability metrics as part of their environmental, social, and governance (ESG) reports, thereby incentivizing companies to prioritize the sourcing of renewable energy and enhance their overall sustainability performance.

3. Energy security

The persistent electricity blackouts, commonly known as "load shedding," have had a profound impact on large power users and their entire supply chains in South Africa. The frequency and duration of load shedding escalated significantly in 2023, driving a surge in demand for energy security solutions. This demand is expected to continue rising as companies seek to mitigate the adverse effects of unreliable electricity supply on their operations.

While carbon-based sources, such as diesel generators, can provide short-term energy security, their high operating costs make them less attractive for many energy-intensive users. As a more cost-effective and sustainable alternative, these companies are increasingly investing in large-scale battery storage systems, combined with solar PV or onshore wind projects. This hybrid approach offers a reliable and environmentally friendly solution to the ongoing electricity crisis, ensuring that businesses can maintain their operations and reduce their carbon footprint simultaneously.

4. Enabling environment for wheeling

A key enabler of this growth is the ability to wheel electricity through the transmission network, allowing independent power producers (IPPs) to sell directly to customers while paying for the use of the electricity grid through use-of-system charges. This innovative approach, known as wheeling, enables off takers (customers) to enter private procurement contracts for power, thereby reducing their carbon footprint, increasing price certainty, and potentially decreasing costs. By leveraging wheeling, companies can secure a stable and sustainable energy supply, aligning with their environmental and financial goals.

5. Removal of generation license requirements in 2023

Recent amendments to the Electricity Regulations Act of 2006 (ERA) have significantly streamlined the process for large-scale electricity generation projects in South Africa. The cabinet-approved changes to the ERA have eliminated the need for an electricity generation license for such projects, replacing it with a registration requirement with the regulator. This regulatory shift simplifies the process for developers, allowing them to focus on project implementation without the burden of obtaining a license. The new registration process ensures that the regulator remains informed about the facilities and can effectively monitor and regulate the industry.

6. Registering of energy traders

The introduction of electricity traders and virtual wheeling in South Africa is poised to revolutionize the energy market by enabling large-scale projects to tap into multiple small private off takers or low-energy users. This innovative approach allows for diversification away from single off taker agreements with large energy users, providing a more robust and resilient revenue stream for project developers. By leveraging electricity traders and virtual wheeling, large-scale projects can now access a broader range of customers, thereby reducing dependence on a single off taker and enhancing their overall financial stability.

7. Creation of the National Transmission Company of South Africa

The unbundling of Eskom into separate transmission, distribution, and generation entities is a crucial step in resolving South Africa's energy crisis. Significant progress has been made in the unbundling process, with the National Energy Regulator of South Africa (NERSA) issuing key licenses to the National Transmission Company of South Africa (NTCSA). The NTCSA will operate as a single-buyer entity, purchasing power from both Eskom and independent power producers (IPPs). This development enables IPPs to directly compete with Eskom, ensuring transparent and non-discriminatory access to the grid. This competitive landscape will drive innovation, increase efficiency, and ultimately improve the overall reliability and affordability of South Africa's energy supply.

8. Eskom’s Transmission Development Plan (TDP)

Eskom's Transmission Development Plan (TDP) outlines a significant need for new generation capacity, with approximately 53 GW required by 2032, primarily from renewable energy sources. To support this expansion, the transmission infrastructure must be upgraded. According to the plan, at least 14,200 km of extra-high-voltage transmission lines and 170 transformers are necessary by 2032. To address this requirement, Eskom has allocated R72.2 billion for critical projects, focusing on the Northern and Western Cape regions. By financial year 2027, these projects aim to complete approximately 2,890 km of extra-high-voltage lines and 60 transformers. This investment will ensure the reliable and efficient transmission of electricity, supporting the growth of renewable energy and the overall stability of the energy grid.

9. Decommissioning of Eskom coal power fleet

Eskom's ambitious plan to decommission approximately 10 GW of coal generation capacity by 2030 is a crucial step towards a cleaner and more sustainable energy future. The phased decommissioning of power stations such as Hendrina, Grootvlei, Arnot, Camden, and Kriel will significantly reduce South Africa's reliance on coal, which currently accounts for over 80% of the country's electricity generation. Additionally, the decommissioning of Duvha, Tutuka, and Matla power stations from 2030 onwards will further accelerate the transition towards cleaner energy sources.

10. 2023 Draft Taxation Laws Amendment Bill

The Draft Taxation Laws Amendment Bill, 2023, has introduced significant tax benefits to enhance the competitiveness of the renewable energy sector. The new section 12BA of the Bill, published by the National Treasury on July 31, 2023, aims to stimulate private business investment in renewable energy for electricity production. The Amendment Bill has removed electricity generation limits, allowing any-sized generation capacity to claim a 125% upfront deduction of eligible asset costs. This tax incentive is applicable to energy plants brought into operation between March 1, 2023, and March 1, 2026.

This tax incentive is expected to significantly improve the competitiveness of renewable energy projects, enabling private off takers to achieve lower energy costs. By providing a more favorable tax environment, the government is encouraging private investment in renewable energy, which will help reduce the country's reliance on fossil fuels and mitigate the impact of climate change.

References

1. JSE 2023. The JSE Sustainability Disclosure Guidance – Narrative Disclosures and Metrics. Sandton, Johannesburg Stock Exchange.

2. Green Cape (2024) Large-scale Renewable Energy: Market Intelligence Report

3. Lazard 2023. Lazard’s Levelized Cost of Energy Analysis (16) [Presentation] [PDF]. April 2023. Bermuda and New York City, Lazard.

4. Mavuso, Busisiwe 2023. BLSA CEO slams DMRE for Electricity Regulation Act Amendment Bill delay. Green Building Africa, 21 August 2023.

5. National Development Plan (NDP) 2023. Energy Action Plan: One year progress report. August 2023. Pretoria, South African Government.

6. National Treasury 2023a. Draft Explanatory Memorandum on the Draft Taxation Laws Amendment Bill [Draft Explanatory Memorandum]. 31 July 2023. Pretoria, South African Government