This is a best prospect industry sector for this country. Includes a market overview and trade data.
In South Africa, approximately 85% or 42,000 MW, of the nation’s electricity is generated via coal-fired power stations. While conventional thermal power will be the dominant source of electricity generation for the foreseeable future, by the end of December 2018 almost 4,000 MW of renewable energy was in operation, accounting for approximately 5% of generated electricity. Further generation comes from nuclear (approximately 5% of installed capacity), as well as hydro and pumped storage (approximately 5% of capacity).
Eskom, the vertically integrated, state-owned power company, generates approximately 85% of the electricity used in South Africa, as well as a substantial share of the electricity generated on the African continent, with the company selling electricity to neighbouring countries, including Botswana, Lesotho, Mozambique, Namibia, Swaziland, and Zimbabwe. South Africa has an electrification rate that is amongst the highest on the continent, with rural electrification around 66%, while electrification in urban areas is approximately 93%.
In February 2019, the South African government announced plans to unbundle Eskom into three separate entities responsible for generation, transmission and distribution. This move was prompted by an urgent need to address the utility's significant debt levels, which was reported in February to have reached levels of ZAR420bn ($29.8bn). The government announced in its budget speech in February that it will not be taking over Eskom’s debt. Instead, it will allocate ZAR23bn ($1.65bn) yearly for the next three years to help the company pay its interest on its debts. The unbundling, which in principle would yield two viable assets, transmission and distribution, and one fiscally-constrained one, generation, aims to allow the successor companies to deal with debt levels by more easily raising financing and rationalizing costs.
Despite Eskom’s debit challenges, South Africa operates a highly successful, Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) for utility-scale transactions. Further, South Africa’s rooftop solar photovoltaic (PV) market has seen significant growth over the past several years with an installed capacity potentially as high as 250 MW.
South Africa Integrated Resource Plan (IRP)
The South African Government’s National Development Plan (NDP) is the blueprint for infrastructure development to 2030. The NDP lays out a framework for future power generation in South Africa, while energy policies in South Africa are driven primarily by the South Africa Department of Energy’s (SADOE) Integrated Resource Plan (IRP). The IRP is SADOE’s estimate of electricity demand growth and what energy generation types should be procured to meet that demand, along with the generation capacity, timing, and cost. The IRP is an electricity infrastructure development plan based on least-cost electricity supply and demand balance, taking into account security of supply and the environment (minimize negative emissions and water usage).
After a number of delays, the Integrated Resource Plan (IRP) was finally signed by the Minister of Mineral Resources and Energy on October 17, 2019. The IRP was intended to be updated every two years following the publication of the first plan in 2010. However, it has proved highly politicized and has been delayed by manoeuvring around the generation mix, especially the balance between baseload –- such as nuclear power and coal and renewables.
Coal has traditionally dominated the energy supply sector in South Africa, from as early as 1880 when coal from the Vereeniging area was supplied to the Kimberly diamond fields. Presently, about 77% of South Africa's primary energy needs are provided by coal. Over the course of the past decade, Eskom has been developing two new coal-fired power plants -– the Medupi and Kusile power stations -– both supplying approximately 4,800 MW for a combined capacity of more than 9 GW. In April 2019 Eskom reported that Medupi is almost 94% complete and Kusile is sitting at about 89%.
In May 2020, Eskom released a media statement indicating that Medupi’s Unit 3 has reached the full generation capacity of 793 MW following a 75-day outage to repair major design defects. Thereafter, the unit underwent optimisation and performance testing prior to conducting the boiler performance verification tests, which require inspections and equipment tests to be conducted after 2,500 hours of operation in order to verify the success of the modifications.
While these plants have been mired in delays and cost overruns, both plants are set to be fully operational by 2022, and Kusile is the first power plant in Africa to implement clean-fuel technology such as flue-gas desulfurization. Once completed, Kusile’s six units will produce a total of 4 800 MW.
For this reason, the South Africa Independent Power Producer (IPP) Office, which is mandated to implement South Africa’s Independent Power Producers Procurement Program (IPPPP) and operates at arms-length from the government, has introduced the Coal IPP program. To date, the Coal IPP program has announced its intent to procure 863 MW from two coal-fired power plants (the 557 MW Thabametsi project and the 306 MW Khanyisa project) under the program’s first bid window, although these projects have yet to finalize their Power Purchase Agreements (PPAs) with Eskom. A second Coal IPP bid window is expected, after conclusion of Round 1 and release of the updated IRP, and cleaner coal technology is expected to be considered under this bid window. However, South African banks Nedbank, Standard Bank and First Rand Bank withdrew their financing of these projects citing reasons of commitments to “green” funding, responsible lending, and supporting sustainability initiatives.
To diversify its energy mix and attract more IPPs to the sector, South Africa has developed a renewable energy independent power producer program over the past five years, namely the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), which has proven very successful in bringing renewable energy projects to commercial operation. To date, REIPPPP has successfully procured 6.4 GW from 112 IPPs across seven bid windows. By December 2017, 3.8 GW from 62 projects were operational.
After numerous rounds under REIPPPP, the program has seen a significant decline in costs by approximately 55% for wind (ZAR 1.51 to ZAR 0.62 per kWh) and 76% (ZAR 3.65 to ZAR 0.62 per kWh) for solar PV, which make the technologies cost-competitive with new-build coal. Furthermore, renewable power sources account for just under 3% of South Africa’s national electricity supply, from a baseline of zero in 2010.
The program has leveraged approximately $135.6 billion in investment across South Africa, and projects include wind, solar (both PV and concentrating solar power), small hydro, landfill gas, and biogas as sources of energy. Of this, 25.8% is from foreign financiers and investors across the globe. To date, the United States is the largest source of foreign direct investment (FDI) in the renewables space, and several U.S. companies have shown strong interest in this program and have participated in tenders issued by the South African Department of Energy. In 2019, then-Energy Minister Jeff Radebe announced that South Africa would launch a fifth REIPPPP bid with the aim of procuring a further 1 800 MW of renewable energy from IPPs.
The New Development Bank (NDB) has signed a $180 million loan agreement with ESKOM Holdings for Renewable Energy Integration and Transmission Augmentation Project in South Africa. The NDB loan will carry a sovereign guarantee. The Project Finance Facility will support the development of grid connection infrastructure for renewable energy projects. It will also back renewable energy development and reduce dependence on fossil fuels. The project is envisaged to integrate 670MW of renewable energy into the Eskom grid. Latest grid connection infrastructure will be used for renewable energy schemes and augmentation of the Eskom transmission network to the identified areas. The project will boost electricity supply to the targeted areas.
According to a research house BMI, non-hydropower renewables will be the fastest growing source of electricity generation in South Africa between 2019 and 2028. Struggling thermal capacity at Eskom and the government's commitment to REIPPPP contracts suggest good growth opportunities. Wind power will be the primary source, accounting for 60% of renewables output by 2028. The large presence of the coal power sector means renewables' contribution to total electricity output will remain below 10% during this time.
While a large portion of the planned generation is based in the renewables space, a key issue has been the move towards natural gas as a fuel source. Currently, efforts are being made to develop west-coast offshore gas and explore shale gas reserves. The aim is to have liquefied natural gas (LNG) infrastructure in place to power combined-cycle turbines by 2021. Looking further out to 2030, a mix of shale gas and imported LNG will be a growing part of the power generation mix.
The South African Department of Energy is tasked with the procurement of 3,126 MW of power from gas in the period 2019–2025. This is to be baseload and mid-merit energy generation capacity needed from gas-fired power generation to contribute toward energy security. The Department’s “Gas IPP Program” has been initiated through the IPP Office. At present, the IPP Office is concentrating on the LNG-to-Power IPP Program. The program commenced in May 2015 with the launch of an RFI (request for information). This closed in July 2015 and more than 170 responses were received. The next step is the RFQ (request for quotation), which was scheduled to be due before the end of 2018 but delayed because that must be done after the IRP is made public. This will establish a short list of bidders.
The South African Government’s commitment to the future of nuclear energy is strong, with plans to generate an additional 9.6 GW from as many as eight reactors, estimated to cost between $37-$100 billion. An initial RFI from Eskom was released in December 2016 for vendor capabilities to provide South Africa with a vertically integrated nuclear new build power program based on pressurized water reactors. However, in April 2017, the South African Constitutional Court set aside nuclear agreements signed by government and vendor countries, declaring them unlawful and unconstitutional.
According to GreenCape’s Energy Services 2018 Market Intelligence Report, “energy services” (ES) describes several key energy market segments in the South African energy space: (1) small-scale embedded generation (SSEG), which includes rooftop solar photovoltaic (PV) systems and energy storage; and (2) energy efficiency. According to Business Insider of May 17, 2019 the then-Minister of Energy Jeff Radebe gave the National Energy Regulator of South Africa (NERSA) leave to license 500 Mega Watts (MW) for SSEG projects, sized between 1MW and 10MW, without him needing to sign it off. While a 1MW PV solar project can power almost 140 medium-income homes over a year, this is not enough for a large shopping mall or business. With the size limit being brought up to 10MW, it gives many businesses and retailers room to go off the grid during the day - and have a surplus.
There are several factors driving growth in the SSEG and energy efficiency markets. Above-inflation electricity price rises, decreasing technology costs, and supportive policies and regulations have motivated many individuals, businesses, industry, and government to adopt alternative energy service options. These drivers are creating several notable opportunities:
The national embedded generation market for installations and operation and maintenance of rooftop solar PV has grown in the past 12 months. Local solar PV data suggests an installed capacity increase by as much as ~110 MW throughout South Africa (possibly as high as 250 MW). It is expected that the total annual available market could continue to grow at this rate to a saturation point of ~500 MW installed per year on an ongoing basis. This market could reach a total of 7.5 GW of installed capacity by 2035. The commercial and industrial (C&I) sector has been leading investments in this sector, with ~70% of new rooftop solar PV installations nationally in this sector.
The rapid uptake of solar PV over the past three years has caught national regulators by surprise and has highlighted the need for new national policies and regulations to guide and regulate the solar PV market. At a local level, there will also be a need for policy and regulation to govern the safe uptake of solar PV. Municipalities will need the support of the national energy regulator and national and provincial government to do this. Progress has already been made at a municipal level, with 35 municipalities across South Africa having introduced rules and regulations to allow SSEG to connect to and feedback on the municipal electrical grid. Of these, 21 municipalities in the Western Cape are allowing SSEG, of which, 15 have National Energy Regulator of South Africa (NERSA)-approved tariffs in place.
With increasing demand in embedded generation, the South African energy storage market is expected to grow to ZAR14.5 billion by 2035, becoming a keystone of the future energy services market. This will create opportunities for investors, manufacturers, suppliers and energy end-users in the energy storage value chain.
Energy efficiency also presents a significant opportunity to investors and businesses in all sectors. The estimated annual total available market currently stands at ZAR3 billion, reaching an estimated ZAR21 billion by 2035.
Business Insider South Africa: https://www.businessinsider.co.za/nersa-licence-change-jeff-radebe-eskom-sseg-renewable-energy-projects-flood-2019-5
The issue of aging network infrastructure remains a concern for the distribution network as it compounds the supply and limits South Africa’s ability to expand electricity access. The South African Department of Energy has completed a study to estimate the backlog, and work is currently under way to determine the most effective way to fund the rehabilitation of these networks and assets going forward.
Eskom and South Africa's 187 municipal governments are responsible for electricity distribution in South Africa. Many of the municipalities are experiencing financial problems. The maintenance backlog in the sector is valued at approximately R38.6 billion and is growing at a rate of about ZAR3.377 billion a year.
Bankability of Utility
Poor governance and a compromised executive team at Eskom saw the utility run into serious liquidity challenges at the start of 2018. In addition, there has been discussion among industry stakeholders on how to deal with the utility’s “death spiral.”
Public Enterprises Minister Pravin Gordhan has confirmed that Eskom’s business model is up for discussion as government seeks to reduce the fiscal risk currently posed by the utility and to reposition the state-owned enterprise (SOE) for future sustainability.
Discussions could look to enhance Eskom revenue in the short-term through both higher sales and, controversially, tariff increases. Yet further tariff increases (which have increased by over 300% in the past eight years for some consumers) could spur more consumers to find ways of using less electricity, possibly even through full or partial defection from the grid.
The National Energy Regulator of South Africa (Nersa) has also warned of a “utility death spiral,” whereby price elasticity of industrial demand is emerging as a primary driver of the lack of demand. This has served to exacerbate a “vicious cycle” in which increasing electricity prices drive declining sales, thereby resulting in the utility having to recover the same cost base from a shrinking customer base.
Power Africa. Launched in 2013, Power Africa is a market-driven, U.S. Government-led public-private partnership to double access to electricity in Sub-Saharan Africa. It also serves as a one-stop shop for private sector entities seeking tools and resources to facilitate doing business in Africa’s power sector. In 2016, the Electrify Africa Act unanimously passed both houses of Congress and was signed into law, institutionalizing Power Africa and establishing two goals: to add 20,000 MW of generation capacity and expand electricity access to 50 million people in Sub-Saharan Africa by 2020. In bringing together more than 140 of the world’s top companies, development institutions, and financial entities, Power Africa employs a transaction-centered approach to directly address key constraints to project development and investment in the power sector. These interventions aim to mitigate investment risk and accelerate financial close by facilitating project bankability, providing technical and transaction support to engaging with host-government counterparts: https://www.usaid.gov/powerafrica/toolbox.
Power Africa in South Africa. In South Africa, the Power Africa interagency team is working to support the country’s effort to introduce large-scale renewable energy and natural gas (for power and other uses) into the economy, while assisting the government in their effort to strengthen and expand the regulatory framework. Additionally, Power Africa plans to provide transaction advisory support to municipalities, developers, and finance partners.
Sub-Sector Best Prospects
Products and services with immediate need or potential in South Africa include:
- Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
- Energy Services
- Energy Efficiency and Demand-Side Management (DSM) Technologies.
- Oil/Gas, LNG Provision, Exploration Equipment, Extraction, Pipeline, and Fuel Conversion.
- Transmission and Distribution Equipment.
- New Plant Equipment and Related Systems.
- Process Automation and Systems Control Equipment.
- Off-Grid Solutions, e.g., Fuel-Cell Technology.
Eskom Media Statements
Central Energy Fund SOC Ltd (CEF)
Department of Mineral Resources and Energy (DMRE)
Eskom Holdings Limited
South African National Energy Association (SANEA)
For More Information:
Contact in Johannesburg, South Africa:
Phone: +27-11- 290-3103
Fax: +27-11- 884-0253
Or visit our Website: http://export.gov/southafrica/index.asp
Or visit our Website: https://www.usaid.gov/powerafrica.