Like many countries, South Africa too faced an acute economic crisis due to the global pandemic. Due to the fall in power demand, the economic crisis had impacted the country’s power sector as well which was already facing persistent issues with power cuts. Now, in a bid to recover from the economic turmoil and promote cleaner sources of energy, the country is focusing on a just energy transition. Recently, FTI consulting published a report titled, “Energy Transition in South Africa: The Power Sector in 2020”. In this report, FTI Consulting focusses on the key developments in South Africa’s power sector during 2020. It also focusses on events that have impacted energy transition and decarbonisation of the electricity grid. Key excerpts from the report…
Disruption In 2020
South Africa entered 2020 recovering from power supply shocks in December 2019. Eskom, South Africa’s electricity utility, had implemented record setting rounds of load-shedding. South Africa was already going into recession at the start of this year, with negative GDP growth in Q4 2019 and Q1 2020. Power supply problems constrained the economic growth.
Discussions on energy transition continued and South Africa appeared to be on a path of an incremental and gradualist energy transition. Discussions on the issue of security and monopoly of power supply became common. Many solutions were proposed such as:
- Consumers reducing their reliance on Eskom through the adoption of behind-the-meter solar photovoltaics (PV) and battery storage technologies at a time when solar grid parity economics improve further.
- The emergence of companies with “virtual utility” business models that enable and control the proliferation of distributed generation and participation of prosumers in the energy system, with greater convenience and lower cost for customers.
- A move towards decentralised supply, with smaller, lower carbon installations replacing large fossil fuel power plants.
- More self-supply with Small Scale Embedded Generation (SSEGs) – typically solar systems – for commercial and residential use.
- More banking and wheeling agreements between private sector power producers and municipal grids to distribute energy across cities and provinces to high demand users.
In February 2020, a policy shift was met with cautious optimism when the Minister of Mineral Resources and Energy announced that companies – such as those in the mining industry – could generate their own electricity rather than rely on Eskom. In general, South Africa has started to witness a move towards more self-sufficiency – with companies such as Sasol releasing tenders to purchase renewable power from independent power producers (IPPs) – but unclear registration requirements and protracted licensing processes have remained a hurdle to rapid and large-scale adoption of off-grid power so far.
Impact of Covid-19 on South Africa’s power sector
In March 2020, the country implemented one of the world’s strictest Covid-19 lockdowns. As the pandemic hit and economic activity dropped, the country focused on lockdown levels instead of load-shedding levels, with load-shedding ceasing during the initial phases of lockdown.
The economic impact of lockdown included a GDP drop of over 16 per cent from Q1 2020 to Q2 (Figure 1). This translates into an annualised growth rate of -51 per cent, the steepest on record and graver than the global financial crisis in 2009. The impact has continued into the rest of the year and is still ongoing, despite almost all sectors of the economy now being reopened.
Demand for power dropped by as much 9,000 MW from usual peak daily demand of approximately 30,000 MW to as low as approximately 21,000 MW during the first 5 weeks of the national lockdown, before returning to close-to normal levels by September 2020 as economic activity resumed. Yet despite the Q2 drop in demand, 2020 has already beaten 2019’s record for load-shedding hours, with South Africans experiencing rolling outages in September 2020 as economic activity resumed. Approximately 1,500 GWh of power outages had occurred by the end of September 2020, emphasizing that Eskom’s performance remains a risk to the South African economy and the recovery from Covid-19.
Other disruptions related to the power sector included oil price falls and investment appetite. Due to South Africa’s reliance on domestic coal for power generation, the oil price drop in March-April 2020 did not enable a corresponding drop in South African power prices or operating costs.
The subsequent diesel shortages as the re-opening of the economy coincided with unplanned refinery outages also risked the planned start-up of power plant units coming back online, but overall no major impacts on power supply or pricing were seen as a result of oil supply and price disruptions.
In terms of investment, many projects were halted or delayed as a result of the lockdown, but recent government announcements and the prioritisation of infrastructure projects seem to be re-invigorating investment in the sector.
While these statistics paint a grim picture and illustrate the need for decisive action on economic recovery, the pandemic is also viewed as a reset opportunity by many in the energy sector. While Environmental, Social and Governance (ESG) issues have typically attracted less attention than economic ones, there is greater recognition that these are becoming mainstream. Whether led by an investor-driven ESG perspective or policy maker’s focus on sustainable development, these are now mainstream and strategic issues for both public and private sector organisations.
In line with this, the renewable energy opportunity is being viewed as an enabler for investment and infrastructure development. Renewables are now being seen as a catalyst for kick-starting a greener economy which creates jobs at the same time as supporting climate change targets.
To support economic recovery, the South African President has announced an infrastructure-led strategy, including investments in the energy sector which focus on energy security, local industrialization and green economy interventions. This includes prioritizing and accelerating the procurement and installation of new electricity generation capacity from IPPs across multiple technologies, supporting Eskom’s generation capacity and creating competition in the sector. The longer-term economic impacts of Covid-19 are still emerging. However, it is clear that the energy sector can play a vital role in enabling an economic recovery that also supports South Africa’s just energy transition. This can be done by investing in power generation projects that increase energy security, lower the country’s emissions and provide jobs in areas impacted by decommissioned coal plants.
So far this year, a number of announcements have been made which have started to move South Africa along this pathway. The implementation of these projects and enabling policy actions is the next step to make real progress in the sector.
Policy developments in 2020
There have been a number of government announcements regarding the development of power sector. This accelerated in the second half of 2020 as focus turned from the immediate healthcare crisis to economic recovery. In a letter from President Cyril Ramaphosa at the end of September 2020 stated that the government’s vision is: “…to lead South Africa though a just transition which ensures that as many people as possible benefit from the investment, growth and job-creation that we can achieve through expanding our electricity generation capacity.”
This encompasses power sector developments covering capacity additions, climate change goals and sector employment. Significant developments so far in 2020 include:
- Releasing an RFP for 2,000 MW of emergency dispatchable power through the Risk Mitigation Procurement Programme to rapidly meet the current generation shortfall, to be connected to the grid by June 2022.
- Government gazette of ministerial determinations to enable the development of 11,813 MW of additional power generation (over half of which is wind and solar), with competitive and transparent procurement processes to follow shortly.
- Prioritising the opening of bid window 5 of the Renewable Energy Independent Power Producer Programme by January 2021 (first RFPs planned to be issued in December 2020).
- The Department of Mineral Resources and Energy issuing an RFI to assess nuclear technologies for a national programme to build 2,500 MW of new nuclear capacity, the first step of a nuclear new build programme.
- Removing the licensing requirement for self-generation projects under 1 MW. So far, 156 self-generation facilities under 1 MW have been registered, with a total installed capacity of 72 MW.
- Improving the National Energy Regulator of South Africa licensing processes and turnaround time for facilities that can generate above 1 MW, including being able to process license applications for facilities of above 1 MW even if they are not in compliance with the IRP (Integrated Resource Plan) 2019, removing the need for Ministerial approval for deviation for such facilities.
- Government gazette of a new directive which provides a framework around electricity generation for municipalities, giving effect to President Ramaphosa’s commitment that municipalities in good standing will be able to procure their own power from independent power producers, increasing competition in the generation sector.
This demonstrates the importance that government is placing on the energy sector’s contribution to South Africa’s infrastructure-led economic recovery, and its transition to a lower carbon energy mix.
Implications for South Africa’s energy mix
Recent policy announcements have accelerated progress towards achieving 2030 targets, but action on procurement and implementation must now be seen before any real judgments can be made. The need to gazette an additional 16,076 MW of wind and solar power shows that a sustained programme of renewable power infrastructure development is needed to fulfill the 2030 power generation mix set out in the IRP 2019. This provides a long term opportunity for South Africa to benefit from renewable power developments in terms of attracting international investment, industrializing local economies and creating jobs. The assigning of Renewable Energy Development Zones (REDZs) in areas where coal and gold mining are in decline will also help the potential redeployment of workers in these areas, supporting a just transition. However, many of the most promising wind and solar sites are not located by existing power plants, so the spatial distribution of South Africa’s generation capacity will shift during the energy transition. There is also significant opportunity to build a manufacturing hub for renewable energy equipment and infrastructure manufacturing in the country, creating jobs across the value chain and driving future economic growth.
In conclusion, while there have been a number of announcements made in 2020 which will enable South Africa’s energy transition, action must now be taken to implement these changes and accelerate generation capacity developments to support economic recovery and the achievement of climate change commitment.
The full report can be accessed by clicking here