Lack of transformation in South Africa’s renewable energy sector

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Thuletho Zwane 

Local and international investors, unions and black energy bodies all agree that renewable energy is critical for South Africa’s future power needs and that proper implementation of Renewable Energy programmes will lead to economic growth, jobs and empowerment. However, the major point of contention is how the transition from non-renewable energy to renewable energy should take form and who should be the primary beneficiaries of the transition.

In 2010, the Department of Energy (DoE), the National Treasury and the Development Bank of Southern Africa (DBSA) collaborated to set up the Independent Power Producer (IPP) office and designed the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP). At the heart of the programme was the provision that Eskom, South Africa’s public  power utility, enter into Power Purchase Agreements (PPAs), ensuring that investors could forecast accurately their profits and bankability. Investors’ payment risk would be mitigated by government guarantee.

As a result of this structuring, the implementation of REIPPPP  has been successful. The programme has been lauded throughout the world as a unique model for delivering on a triple bottom line of economic, developmental and environmental benefits for the country.  REIPPPP attracted private sector commitments of R193-billion, including R53.2-billion in foreign investment in only four years after the first request for proposals (RFP) went to the market.

There were four rounds of bidding between August 2011 and April 2015 during which the Department of Energy (DoE) received 305 bids for 17.5 gigawatts (GW) of renewable energy.

The department selected 92 Independent Power Producers (IPPs) to produce 6.328 GW of renewable energy.

A DoE report titled The State of Renewable Energy in South Africa shows that the country’s most favourable renewable energy resource endowments are located in the most remote and poor areas where investment and employment are desperately needed. Most projects are located in the rural areas of the Northern, Eastern and Western Cape. These areas attracted investment commitments of R174bn of the country’s total. The report estimates that projects in the three areas will create an estimated 93 600 employment opportunities of a national total 107 347 of estimated job opportunities.  

The report also states these IPPs will also generate socio economic development (SED) contributions to local communities of R88.9-billion.

There has been no shortage of interest from investors in participating in the REIPP procurement programme. This can be seen from the oversubscribed, transparent and well-run process carried out by the IPP office. South Africa’s competitive tender process was designed to facilitate private sector investment into grid-connected renewable energy generation. As a result of this programme, South Africa has achieved more investment from IPPs in four years than in the rest of Sub-Saharan Africa over the past two decades.

In his study, The South African Renewable Energy IPP procurement Programme: Review, Lessons Learned & Proposals to Reduce Transaction Costs, UCT Professor Anton Eberhard writes that since 2011, prices have fallen sharply and the projects of selected bidders (or “preferred bidders”) are now amongst the lowest priced gridconnected renewable energy projects in the world with the average cost of supply being far below Eskom’s cost of its new coal power stations.

It is against this backdrop that in June, Energy Minister Jeff Radebe announced a new R56-bn round of renewable energy projects to be implemented by the private sector. He told a conference in Midrand that the new IPPs will be part of the country’s energy strategy to move to cleaner electricity generation. The new bid round of the Renewable Energy IPP programme was launched in November 2018, and it is estimated to be 1800MW, he said. He added that his department secured R56-Billion of investment into 27 new projects.

“These 27 projects are making a significant contribution to government’s commitments to meaningful black ownership participation and economic transformation,” said Radebe.

However, there has been some criticism of the current REIPP procurement programme most of which is centered around the lack of black participation and the full cost of transitioning from fossil fuels to renewables.

Black Energy Professional Association (BEPA), an NGO that is highly critical of the current REIPP procurement programme, was created to establish a unified voice to represent black interests; provide perspectives on transformation and empowerment; and develop skilled black professionals that can meaningfully participate in the energy sector.

In an interview with African Leader Magazine, BEPA Chairperson Meta Mhlarhi said REIPPP continued to exclude black professionals from full participation in the energy sector.

Mhlarhi said they were unhappy that the minister and the IPP office decided to open the new bid window in November because most of the issues raised by black actors in this industry have not yet been resolved.

“There are some structural barriers that must be dealt with. One of the key structural inequalities that still exists is access to capital and access to land. Because of these barriers, we find no black people or group that have led any development in the last ten years. And this is where the money is, in EPC [Engineering, Procurement, Construction].

“We want to participate in the entire value chain. The current REIPP procurement programme fosters an environment where black people can only participate as empowerment partners,” she said.

Mhlarhi also spoke of unfair competition and the volatile and depreciating exchange rate which has negatively affected local companies in the space.

“We are expected to compete with internationally backed IPPs such as Biotherm, Scatec Solar, Globeleq and Building Energy. Enel, the Italian utility, has been particularly prominent with equity holdings in 11 awarded projects since BW 3 [bid window 3]. How am I, as a black South African woman, expected to compete with an international Eskom equivalent,” said Mhlarhi.

Eberhard makes an interesting observation around the emergence of preferred local-foreign equity partnerships. Some of these partnerships include Pele partnering with Enel on four of the seven projects in which it has an equity holding; Aveng repeatedly partnering with Acciona Energy, a Spanish company, under the entity Blue Falcon Trading; and Intikon Energy partnering with SolarReserve, a US developer.

Mhlarhi said that these internationally backed companies have limited their ability to compete. She said what made this worse is the IPP office’s stringent RFP [request for proposal] and lender requirements that end up ‘forcing’ local developers to on-sell projects or partner with the multinationals, losing a lot of money in the process.

Herein lies the disconnect between announcements made by the energy minister and what is happening on the ground. Mhlarhi said the current packaging of REIPPPP removes the entrepreneurial spirit and makes it impossible for young people to participate.

She made a few recommendations that the government should consider so as to remove these structural barriers. Her recommendations include having an exclusive black bid round. Mhlarhi also suggested that the Industrial Development Corporation of South Africa (IDC), DBSA and the Public Investment Corporation (PIC) come up with a fund, backed by the National Treasury, for black industrialists and black business in the energy space. She added that the government can, through the department of rural development and land reform, tender out government-owned land where these projects can be developed.

Other criticism of REIPPPP comes from the unions.

We spoke to the National Union of Metalworkers of South Africa (Numsa) General Secretary, Irvin Jim,  who said Numsa has been calling for a just transition from fossil fuels to renewable energy.

Numsa has come under fire for supposedly being opposed to renewable energy and defending fossil fuels. Earlier this year, environmental activist organisation Greenpeace condemned Numsa for a court interdict preventing 27 contracts with renewable energy IPPs from being signed. At the time, Greenpeace said Numsa’s intention was to sabotage renewable energy in favour of coal.

However, Jim said Numsa is not against the move from coal to renewable energies. What they want is for this sector to represent the demographics of South Africa. The union wants this sector should be “a socially-owned renewable energy sector,” he said.

One of the main problems with the REIPP procurement programme is that there was not enough engagement with affected stakeholders, said Jim. Key stakeholders were excluded from this process and they want workers to believe them when they tell them it is for their benefit.

“They did not consult the unions who would be affected by the closure of power stations. They also did not consult the coal transporters who represent some of the business people whose existence is based on the work they provide to Eskom. And they did not consult the community of Mpumalanga about the closure of power stations; and about the benefits of IPP’s as well to detail the plans the state has in place to respond to the closure of power stations and its impact on the local economy,” said Jim.

Resistance of REIPPPP also came from Eskom. In April, Eskom begrudgingly signed the much-delayed 20- year guaranteed power purchase agreements  (PPAs) with the 27 IPPs.

Former Acting Eskom Group Chief Executive Masthela Koko asked if the cost of Eskom signing the PPAs for the 27 IPPs could be justified.  Koko said the impact on the average electricity price due to purchases from IPPs was not fully appreciated.

Eskom purchases a unit of electricity from the IPP’s at a cost of R2,22 cents and sells it for 85 cents, when it can produce it at around 42 cents, said Koko.

If consumers were to buy directly from IPPs today, the price they would pay would not be a blended price of 85 cents, but the expensive R2,22 cents today and R2,26 cents in 2023, compared to Eskom customers who pay between 42 cents and 85 cents for electricity.

Economic risk consultant and former MD at Econometrix Rob Jeffrey said IPP agreements should not have been signed given South Africa’s surplus supply of electricity and  the current low economic growth rate.

Jeffrey said the country did not need additional power from the IPPs and he called the decision to introduce REIPPP “economically and financially costly” and “damaging”.

“It is the weary consumer, the poor and the economy that will be the major losers,” said Jeffrey.

He added that the IPPs would not create thousands of jobs as per government projections but the jobs would be created only during the construction phase.

“Large-scale high penetration use of renewables would lead to a significant decline in the mining sector generally and the coal sector in particular. The coal sector could shrink by 46% given the direct, indirect and induced impact reduce the Gross Domestic Product (GDP) of South Africa by over 2.5%. This will result in a loss of at least 29000 jobs in the coal mining industry, and almost 162000 jobs in the economy. This will detrimentally affect more than 600000 dependents,” he said.

The move would also cut the country’s balance of payment. “Coal is the country’s largest export earning commodity, earning approximately R55- billion per annum. This would decline significantly as the sector becomes less efficient and South Africa becomes a less favoured mining destination,” said Jeffery.

 

 

 

 

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