South Africa could unleash a decentralised energy boom

Creating an enabling environment for decentralised energy projects, in particular, solar and other renewables, would be the fastest way to address the country’s ongoing electricity challenges. Image credit: WhyAfrica

By Stephen Barnes and Rentia van Tonder

04 June 2021 – Alongside the move to raise the licensing threshold for captive power projects, the South African regulator will need to tackle a host of other bureaucratic hurdles to unleash a decentralised energy boom and quickly plug South Africa’s electricity supply gap.

Creating an enabling environment for decentralised energy projects,  in particular, solar, and other renewables, would be the fastest way to address the country’s ongoing electricity challenges.

Given the country’s jobs crisis, and the impact of Covid-19, this should be a burning priority as it would remove a major constraint on the growth of businesses and the economy.

Vietnam has shown what is possible in a short space of time. In 2020, the southeast Asian country offered incentives to households and businesses to install rooftop solar.

This scheme includes an arrangement whereby households and businesses can sell surplus electricity into the national grid, using existing transmission lines. In a matter of months, 9.3GW of additional power had been added in the country, according to reports.

In South Africa, the government estimates that there will be an electricity supply shortfall of between 4GW and 6GW over the next five years as old coal-fired power stations reach their end of life.

To address this issue, President Cyril Ramaphosa said in February this year that easing the licensing requirements for embedded generation projects – or those not tied to the grid – could unlock up to 5GW of additional capacity and largely plug the gap.

This is in line with Standard Bank’s own estimates. In the mining sector alone, there are projects amounting to at least 2.3GW in the pipeline, including a 40MW project at Gold Fields’ South Deep mine, which has now been approved by NERSA and the miner’s board.

The government is looking to amend Schedule 2 of the Electricity Regulation Act to increase the licensing threshold for embedded generation to 10MW.

Key stakeholders will be consulted and written comments to be submitted, alongside the finalisation of the necessary enabling frameworks, according to government. There are calls to lift the threshold to 50MW and beyond.

In our view a more significant increase in the threshold is required and will promote further investment in the private sector, which has held back on capital expenditure programmes partly due to the uncertainty of future electricity supply and costs. Eskom’s looming 15% tariff hike is a further blow to business confidence.

More needs to be done

Standard Bank’s consultations with clients and other key stakeholders show that although progress has been made, there remain numerous barriers to self-generation projects. For instance, securing a grid-tie connection with Eskom can be a cumbersome and drawn-out process.

Grid-tie and wheeling arrangements, which are common in other markets, allow energy to be distributed through Eskom’s transmission network. This is important because such arrangements promote larger projects, which supports longer term sustainable supply and economic viability.

There is also a need for more certainty on self-generation regulations overall, and a need to streamline other processes, including environmental impact assessments and water licence applications.

Encouragingly, President Ramaphosa recently announced that government is working to ensure that water licence applications are finalised within the revised timeframe of 90 days.

At the same time, an element of education and skills development is needed given that most corporates are not currently geared towards power generation.

To address funding challenges, financiers are adapting their offerings to better align with off-grid power projects. Standard Bank is working on decentralised energy solutions with clients in industries such as agriculture, mining, manufacturing, and real estate.

To support its drive towards project execution, the bank has developed a digital platform, PowerPulse, for producers and consumers of decentralised energy.

Technology improvements

On the back of substantial cost declines in recent years, solar remains the most sought-after technology for decentralised projects.

In addition, interest in battery storage solutions is gaining momentum thanks to cost reductions and technology advancements.

Standard Bank has been monitoring the storage market from a risk perspective for some time, and is now more comfortable with the value proposition.

This is important since renewable energy units have historically only been able to provide an intermittent supply of electricity, but they will become increasingly reliable when combined with storage technologies, set to be a cost-effective baseload solution.

Hydro, wind, and hydrogen technologies are also coming to the fore, particularly as investors and corporates look to improve their environmental, social and governance (ESG) performance.

We believe that if the constraints to such investments are adequately addressed, a decentralised energy boom will materialise, and this will improve business confidence by ensuring cost certainty and the reliability of electricity supply. It will also significantly take the pressure off the national grid.

To fully unlock the potential of renewables and decentralised energy, funders, corporates, and the government will need to work closely together.

Stephen Barnes is Head of Power and Infrastructure at the Standard Bank Group and Rentia van Tonder is Head of Power at the Standard Bank Group.

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