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South Africa: A New Impetus for Renewable Energies and Independent Power Producers

bio-and-circular-solutions energy
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Pretoria

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The South African Government has gazetted the amendment to Schedule 2 of the Electricity Regulation Act, which increases the licencing-exemption threshold for electricity generation – embedded generation connected to the grid – from 1MW to 100MW. This may present business opportunities for Finnish technology supply in the areas of Waste-to-Energy (W2E), biomass and energy storage. Energy-intensive consumers such as mines and smelters, as well as medium-sized businesses, are looking to diversify their energy supply sources due to expensive and unreliable energy supply by power utility Eskom. South African municipalities are also beginning to rollout their own programs to buy energy from Independent Power Producers and be less dependent on Eskom. South Africa has also launched bid window 5 of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) in May 2021, which is expected to bring a significant amount of foreign direct investment into the country.

Country Outlook

The South African Government has gazetted the amendment to Schedule 2 of the Electricity Regulation Act on 19 August, which increases the licencing-exemption threshold for electricity generation – embedded generation connected to the grid – from 1MW to 100MW. The 100MW licensing-exemption now gazetted by the Minister of Mineral Resources and Energy has the potential to allow as much as 15GW of new power-generation capacity to be built over the next 10 years or less. This would mostly cater for energy-intensive consumers such as mines and smelters, but could also include medium-sized businesses. It allows for the sale of electricity to “one or more customers”.

The embedded generation projects will still be required to register with the National Energy Regulator (NERSA), a process that should be concluded within 60 days, according to the government, once NERSA implements its online registration system.

As we noted in our Country Outlook on Circular Economy published in April, the business opportunities in Waste-to-Energy (W2E) arising from the ban on disposal of brine, hazardous e-waste and all batteries in landfills that will come into effect in 2021 in SA, as well as further bans on other materials up to 2024 such as organic materials up to 2027, could potentially provide opportunities to explore the areas of W2E. South Africa generates about 122-million tonnes of waste a year.

W2E solutions could alternatively contribute to greener energy power generation into the grid. While W2E solutions may not be competitive for power generation when compared to solar or wind solutions, the scarcity of available land to build solar and wind plants around the major urban areas, as well as the municipalities needing to manage waste and sludge from their water treatment facilities, may provide opportunities for W2E solutions. W2E development needs to consider the waste value chain more holistically (gate fees, recycling and re-use of waste, refuse-derived fuels, Combined Heat and Power, fertilizer production, etc.). The National Waste Management Strategy of 2020 anticipates the development of a strategy and policies to promote waste-to-energy projects, particularly involving organic waste.

Municipalities and IPPs

South Africa's biggest cities are preparing to source their own power from Independent Power Producers (IPPs) through Power Purchase Agreements (PPAs). Johannesburg and Cape Town plan to diversify away from the electricity produced mainly from coal by Eskom to more sustainable sources such as solar and power generated from landfill gas. The City of eThekwini (Durban) has issued a Request for Information (RFI) to procure 400MW from Independent Power Producers.

The City of Cape Town is looking at procuring 300MW of renewable energy in the next three to five years. In January 2021, the Stellenbosch Municipality announced that it would explore various sources of energy production, including rooftop solar panels, methane mining, allowing the public to generate electricity and sell it to the municipality, purchasing electricity directly from Independent Power Producers (IPPs) and possibly selling electricity to willing buyers from outside the municipal area. The goal is to become completely independent from Eskom in terms of electricity generation. More recently, the Western Cape Provincial Government announced that other than Cape Town and Stellenbosch, other five cities in the province would be primed to procure their own electricity from IPPs: Drakenstein, Mossel Bay, Overstrand, Saldanha Bay and Swartland.

Eskom's plans in transitioning to renewables

State-owned power utility Eskom also has plans to move away from coal-fired power plants. Aside from the decommissioning and repurposing of its four coal plants – Grootvlei, Komati, Hendrina and Camden – Eskom is working on a proposal for a multi-lender loan facility from development finance institutions for 1,566MW of solar power, 600MW of wind power, 4,000MW of gas-fired power, 61MW of battery storage, 1,400MW from micro-grids, and 390MW from pumped storage. For the Komati plant, which will be the first to be decommissioned and repurposed in 2022, Eskom has plans for a 1,000MW gas project and a 244MW/h battery energy storage project.

In order to transition to renewables, Eskom also needs to restructure the national grid to adjust to the areas of the country where wind – Western and Eastern Cape – and solar – Northern Cape, North West, Limpopo – energies are generated versus the coal generation area of Mpumalanga. That requires about 8,000km of grid to be built at an estimated cost of R100-billion. Eskom can tap into green financing from international finance institutions for funding. The restructuring of the national grid also opens opportunities for smart grid management technologies.

Seeking information and partnerships

Team Finland SA and the Western Cape Provincial Government's GreenCape, a non-profit organisation to drive the widespread adoption of economically viable green economy solutions and transform the Western Cape Province into a “green province in Africa," can assist. The GreenCape's Market Intelligence Reports provide valuable insights into renewable energy, waste and sustainable agriculture, among others. They also provide matchmaking and networking services with a view to potential partnerships. This would be a valuable service for companies wishing to enter the SA market. Another good source of information is the Bioenergy Atlas of South Africa.

The niche market for Finnish companies could potentially be in scalable solutions for waste-to-energy, biomass, biogas, LNG-to-Power, energy storage and smart grids solutions, since the South African renewable energy market is oversaturated with other European and international suppliers. While the forecasts for gas generation present good opportunities, distributed generation will most likely present the best and short to medium-term opportunities given the rising electricity tariffs and generation capacity constraints on the part of Eskom.

Biomass and bioenergy from waste generation have been identified as renewable energy sources in seven of the nine provinces of the country: Limpopo, Gauteng (bioenergy from waste), Eastern Cape, Northern Cape, North West, KwaZulu-Natal (most notably from sugarcane fibre), and Mpumalanga (from agriculture and forestry waste).

Bioenergy is still an untapped resource in the country. The Southern African Biogas Industry Association estimates that biogas can contribute 2.5GW generation capacity. To date, only two Independent Power Producers (IPP) bids have been received under the four Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) bid windows, but the programme identifies 1,800MW for procurement. There is, nevertheless, the first commercial scale biogas plant in South Africa in Bronkhorstspruit that is generating 36GW/h per annum. The plant entered into an offtake agreement with BMW's Rosslyn plant. Ford South Africa and Volkswagen South Africa are following BMW's example.

Bid window 5 of the REIPPPP was announced in May 2021. For more information, please click here.

The provision of embedded generation could potentially contemplate bioenergy generation capacity. The Development Bank of Southern Africa intends to launch a $200 million distributed power generation fund for projects outside the Independent Power Producer Procurement (IPP) office's renewable power programme. The Industrial Development Corporation (IDC) is also looking at projects where Finnish companies may enter as technological partners in batteries, gas and pumped storage, as well as embedded generation projects with energy intensive consumers.

The Digital Global Biogas Cooperation (DiBiCoo), a programme funded through the EU's Horizon 2020 research and innovation programme that will run until June 2022, will include a Digital Matchmaking Platform that will be launched later this year. The programme aims to develop cooperation between biogas technology exporting and importing countries, with the overall objective to prepare markets in developing and emerging countries for the uptake of sustainable biogas/biomethane technologies from Europe. When launched, the Biogas Matchmaking Platform could be an excellent tool to connect Finnish companies with South African counterparts to explore future business opportunities.

The constraints

For Finnish companies looking at opportunities in the South African market, it should be noted that Broad-Based Black Economic Empowerment (B-BBEE) and public procurement rules hinder doing business with SA's public sector, including State-owned Enterprises. Additionally, although the minimum threshold of local content requirements for solar PV (45%) and wind (40%) has been retained, bid window 5 of the REIPPPP introduces designated local content, which over and above the threshold requires bidders to procure certain specified components locally if they are available. Companies should seek to identify potential local partners. New private sector actors, such as the recently established independent power utility Earth - Fire – wholly owned subsidiary of Dimsum Energy – could potentially be an option. The power utility has been established in South Africa to sell electricity directly to private and municipal customers and it may require technology providers.

Background

The South African Government published the Update of the Integrated Resource Plan (IRP) 2010-2030 in October 2019. In terms of embedded generation, the IRP introduced the possibility to allocate unspecified embedded generation capacity “to the extent of the short-term capacity and energy gap" from 2019 to 2022, and included 500 MW capacity each year after that until 2030.

With the relaunch of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) bid window 5 in May, the government's plans are to procure 4,800 MW of wind, 2,000 MW of solar PV, 1,500 MW of new coal (unlikely for IPPs to find funding) 3,000 MW of gas, and 513 MW of battery energy storage capacity over the next three years. The IRP 2019 envisages the procurement of more than 31,300 MW of new generation and storage capacity until 2030, during which roughly 11,000 MW of coal is scheduled for decommissioning.

As for timetables, the government has announced a target date of 28 September for the launch of REIPPPP's bid window 6, along with an indicative bid-submission date of 1 February 2022, and target dates of 5 May and 19 September 2022 for the naming of preferred bidders and financial close respectively. Bid window 7 has been pencilled in for 15 February 2022, with a target bid-submission date of 21 June 2022, followed by the announcement of preferred bidders on 30 September and financial close on 16 February 2023. Bid window 7 will however be preceded by a Request for Proposals for energy storage on 22 November this year, which has a target bid-submission date of 25 February 2022, with the dates for the preferred bidder announcement and financial close indicated as being 4 May and 5 September 2022, respectively. A target date of 28 February 2022 has been set for the launch of a gas-to-power Request for Proposals, with 2 September and 2 December 2022 highlighted as the dates for bid submission and the naming of preferred bidders, followed by financial close on 7 July 2023.

After the publication of the amendments to the Electricity Regulations on New Generation Capacity in October 2020, municipalities now have the opportunity to generate income from waste streams, although the Public Finance Management Act requires them to obtain a ministerial determination to allow Power Purchase Agreements with IPPs. The IRP anticipates “distributed generation through biomass, biogas and municipal waste are areas holding great potential for improving municipal revenues. All municipalities have sites for processing waste; they also have sewer outfall sites. Technologies are available for these resources to be added to the generation mix at sub-utility scale." Additionally, the IRP makes reference to the need to balance the intermittent power generators through smart technologies. The Gauteng Infrastructure Financing Agency (GIFA) has a R17-billion waste-to-energy Public Private Partnership project for the three Metros in the province (Johannesburg, Ekurhuleni and Tshwane).​​

Written by Rui Nozes, Commercial Advisor, Embassy of Finland, Pretoria