Financing South Africa’s new-build renewables: a game-changer

South Africa’s utility-scale renewable energy programme has opened up the local energy sector to international markets. The success of this funding and procurement model is now tweaking interest in other areas in the local energy sector, and shaping how neighbouring countries might tackle big green-energy projects, writes Leonie Joubert.

Behind something that looks like a cornfield there's the coal power plant Kusile.

The Kusile Power Station – together with the Medupi Power station they will produce 9600 megawatts of electricity. (Photo by Leo Za1/© Rute Martins of Leoa’s Photography, modified, CC BY-SA 3.0)


South Africa has two significant ‘new build’ energy projects rolling out side by side. The first, one could argue, is a doff of the hat to the old empire: the Kusile and Medupi coal fired power stations in Mpumalanga and Limpopo provinces. Together, they’re expected to add 9 600 megawatts (MW) of electricity to the grid when they finally come online.

The second project – the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) – is a series of over 100 utility-scale renewable energy plants that will be dotted about the country. Each plant will be small, compared with their coal-fired counterparts, but together they should deliver 3 725 MW to the grid, although it looks as though they will exceed that initial target.

But it’s the funding and ownership of the two projects that’s interesting in terms of how state mega-projects get handled.

The building of Kusile and Medupi was commissioned by the state, and will be owned and operated by the state through its parastatal utility, Eskom. Private business is involved only in so far as they bid for contracts with the state, through its procurement processes, so that they supply components such as boilers or control panels, or to project manage the construction. This leaves little incentive to keep costs down, according to Kevin Nassiep, CEO of the state-sanctioned South African National Energy Development Institute (SANEDI). As the costs go up, says Nassiep, so Eskom has to recover the money from consumers.

The REIPPP plants, on the other hand, involve private firms bidding for contracts with the state on the basis of being able to prove that they can produce the cheapest form of energy through a series of renewable plants, either concentrated solar power, PV, biomass, landfill, wind, or small hydro. If successful, they must raise the capital themselves. They then build the plants themselves and keep ownership. The private company takes on the capital risk, but the guarantee is that the state will buy the power it generates for the next two or three decades.

The result? In terms of funding, procurement, and actual construction, the REIPPP process has resulted in more competitive pricing, transparency in the procurement process, and greater efficiency in the rollout of the projects, according to Prof Anton Eberhard, expert in infrastructure and associated policy development, based at the University of Cape Town’s Graduate School of Business.

Procurement started in 2011, and, to date, there are about 100 separate projects at various stages of either bidding, contracting, raising capital, being signed off, and construction. The first projects to be commissioned are already supplying energy into the grid. (See a list of all current REIPPP projects here.)

Kusile and Medupi have had their own share of bad press lately. There are massive cost overruns on both plants. In 2007, they were expected to cost US$ 4.5 billion [R69.1 billion at March 2016 exchange rates] and US$ 5.2 billion [R80.6 billion] respectively. Last year the Mail & Guardian (M&G) newspaper reported that these figures had ballooned to about double that: US$ 10 billion [R154.2 billion], and US$ 11 billion [R172.2 billion].

Construction delays already have them four years behind schedule, as they were meant to come online in 2011, according to the M&G. And there are hints of vested interests and state profiteering.

Hard times for coal

Nassiep, whose Ministry of Energy-appointed unit is tasked with developing technologies and strategies to drive the county towards a low carbon economy, points out that coal and solar have reached price parity in South Africa. Unit for unit of energy, they cost the same. Wind and PV-derived solar power are now cheaper than coal.

And while coal is becoming politically unpopular, the economics are likely to get even more unfavourable as plants now have to be cleaner, with higher compliance standards to trap emissions, which pushes up the price of coal generated energy. Economies of scale and improved technology, on the other hand, are making renewables more and more affordable.

As the REIPPP project has gained momentum, the prices have dropped dramatically. In the first three of the five bidding phases, average solar photovoltaic (PV) tariffs decreasing by 68 percent and wind dropping by 42 percent, in nominal terms. Most impressively, these achievements all occurred over a two-and-a-half year period,’ writes Eberhard in a May 2014 report on the process.

Once subsidies for the fossil fuel industry begin to fall away, the economics will swing even more in favour of renewables.

The procurement and funding approaches show how fleet of foot the REIPPP processes is, compared with the coal stations. In the four years that the two coal stations are running behind schedule, about 100 smaller renewable projects are in the pipeline, at various stages of being commissioned, built, funded or brought into operation.

Behind the money: SA’s energy matters.

Critics of the energy sector in South Africa have long bemoaned the unhealthily close relationship between private interests in the energy sector, and state energy provision which is governed by the Department of Energy and delivered by its national utility Eskom.

Case in point: the M&G newspaper recently broke a story which showed how the ruling African National Congress (ANC) government benefited financially from a massive state-commissioned coal fired power station project. In September 2015, the M&G exposed that the ANC’s private investment wing, Chancellor House, owned 25% shares in a company that had a contract relating to the construction of the new Medupi and Kusile power stations that was worth ‘more than R40 billion’.

Second case in point: SA’s deputy president, Cyril Ramaphosa, had interests in the Shanduka Group, a cluster of companies with significant interest in coal mining. While Ramaphosa gave up his shares in the group upon taking office, that doesn’t guarantee his close ties with former fellow shareholders, and the senior executives, merely end there.

Simply put, critics argue, when decision makers within the Department of Energy or the state utility Eskom are personal friends or dinner party guests with senior executives of coal mining companies, the alliances become unholy.

This is one of the reasons why the SA government’s other big energy project, the REIPPPP is being called a game changer. Private firms have been invited to bid on building any number of more than 100 small renewable plants, either concentrated solar power, PV, biomass, landfill, wind, or small hydro. The firms showing they can produce the cheapest energy per plant, win the bids. They must then finance the construction themselves, and will build and run the plants themselves, too. The state’s other big power generation – from coal mostly – are all through plants that are state owned and run.

The procurement process has opened up SA’s energy sector to international markets. The result: a network of small, decentralised plants that are competitive in cost, where there is greater transparency, and more efficiency in implementation, according to infrastructure expert Eberhard.

This is a far cry from the cost overruns on the coal project (the two stations are now expected to cost double earlier estimates, ballooning to US$ 10 billion [R154.2 billion], and US$ 11 billion [R172.2 billion]), construction delays (the plants were meant to come online in 2011 but have yet to reach completion), and hints of vested interests coming from the coal fired new-build project.

Together, all the REIPPPP plants will add 3 725 megawatts (MW) to the grid – small, compared with the 9 600 MW which the two coal stations will bring online. But the investment is significant, and begins to break the hold which the coal industry, and the beneficiaries of the industry, have over SA’s energy sector. The first four out of five rounds of bidding have attracted US$ 12 billion (R190 billion at March 2016 exchange rates) in private investment so far.

Benefits of decentralisation

Decentralising the funding of these infrastructure projects breaks up the hegemony. Decentralising the grid itself can lead to greater efficiency and fewer losses across the grid, according to Kevin Nassiep, CEO of the South African National Energy Development Institute (SANEDI).

Most of South Africa’s electricity is generated by coal stations in northern provinces, such as Mpumalanga. Traditionally, there’s a loss of load on the high voltage transmission, particularly when the electricity is generated in Mpumalanga and then delivered to a city on the other side of the country, such as Cape Town.

‘Having utility scale plants closer to Cape Town means shorter delivery lines, and less loss of electricity across the grid,’ explains Nassiep. This has cost saving implications which Eskom can pass on to the consumer.

Opening to the world

Fears that opening the SA energy sector to the international market will result in profits leaving the country are unwarranted, argues Eberhard. Most of the REIPPPP projects have involved raising capital locally, either through debt or equity, meaning that the loans, and the interest, are serviced here and the benefits to the economy remain onshore.

Rather, argues Eberhard, the ‘big story’ here is that the procurement and funding of these projects has been so successful in terms of their competitiveness and transparency, that it might be the way to go for future large energy projects such as co-generation, or gas.

Meanwhile Nassiep says that the REIPPPP model has worked so well that some SA’s neighbouring countries are also considering this as a way to pursue their own renewable ambitions.

by

Leonie Joubert

Leonie Joubert is a science writer and journalist based in Cape Town, South Africa. Her work focuses on climate change, energy policy, urban food security, and giving communications support to various academic and civil society organisations.

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