Power policy

South Africa has finally revived policy support for renewable energy projects to deploy capacity quickly and alleviate severe supply shortfalls, which are resulting in frequent load shedding, or rotating blackouts. The government’s Integrated Resource Plan (IRP) was updated in 2019 and has set capacity allocations for at least 20 gigawatts of new wind and solar by 2030, alongside additional thermal generating capacity and storage.

The government also plans to procure 1.5 gigawatts of new coal between 2023 and 2027, and 3 gigawatts of new gas between 2024 and 2027. After a six-year hiatus, with no auction rounds under its Renewable Energy Independent Power Producer Program (REIPPP), the government in October 2021 awarded contracts to 2.6 gigawatts of utility-scale wind and solar projects in its fifth renewable energy auction, to begin implementation of the 2019 IRP.

This follows an emergency auction for firm capacity held earlier in 2020 (known as the Risk Mitigation IPP Procurement Programme, or RMIPPPP), which awarded 20-year offtake contracts to a range of co-located projects – totaling 2.7 gigawatts of solar photovoltaic (PV), wind, battery storage and diesel generators, plus 1.6 gigawatts of gas including power ships.

Auctions are the primary route to market for utility-scale renewable energy projects in South Africa’s regulated energy sector. The sector suffered setbacks due to policy instability in the late 2010s. The government awarded power purchase agreements (PPAs) to more than 6.4 gigawatts of renewables capacity across 102 projects in the first to fourth REIPPP rounds from 2011-15. However, political fallout resulted in three years of delays to the government signing PPAs from rounds 3.5 to 4. The situation went unresolved until 2018, when PPAs were finally signed.

Power prices and costs

As is common in the region, South Africa has no wholesale electricity market and the National Energy Regulator of South Africa (Nersa) determines final retail prices. Municipalities are responsible for retail of electricity in some areas, although the customer still has no choice of supplier. State-owned utility Eskom Holdings SOC Ltd. has repeatedly argued for substantial tariff increases to pay back its debts. Tariffs increased by an average of 13.7% a year between 2004 and 2018.

Costs for renewables have also fallen. The levelized cost of electricity (LCOE) for onshore wind in South Africa – at $70-110 per megawatt-hour – falls in the middle of BloombergNEF’s benchmark estimates in 2022, as its relatively low capital expenditure is counteracted by higher financing costs. It is a similar story for PV (without tracking), which has an LCOE of $51-62 per megawatt-hour.

Importantly, renewable energy LCOEs are rising in South Africa, likely due to the higher prices globally. The winning tariffs dropped significantly in each renewables auction round: wind and PV fell 27% and 30% between rounds 3 and 4, after adjusting the tariffs for factors such as inflation and merchant tail. In round 5, tariffs dropped even further. Bid prices converged at their lowest and tightest spread of any auction in South Africa, with projects securing a capacity-weighted average price of $29.55 per megawatt-hour for PV and $33.70 per megawatt-hour for onshore wind. When levelized, these bid prices come in 11% lower than round 4 for PV and 31% less for onshore wind.

Power market

Eskom dominates South Africa’s power sector, although independent generators have started to capture some of the market, particularly in the renewable energy sector. The country regularly exports electricity to its neighbors through the Southern African Power Pool.

However, meeting peak demand is a major challenge as the supply crisis worsens. South Africa has seen regular short-term load shedding (scheduled power cuts) return from 2019 to 2022 at rates worse than the previous height of load shedding in 2014 and 2015.

Coal dominates the country’s electricity mix, accounting for 73% of capacity in 2018. Coal’s share in generation is likely to be broadly maintained despite growth in renewables, as the Medupi and Kusile coal plants (at 4.8 gigawatts each) are fully commissioned under the government’s IPP program.

Doing business and barriers

Investors remain wary of future policy stalemates, and Eskom is in a weak financial position. Its financial challenges are continuing amid weak power demand, non-payment by municipalities and governance issues. A roadmap for unbundling the utility published in 2019 aims to resolve these challenges. Electricity consumption in South Africa has stagnated in recent years, declining on average 0.5% per year since 2006. The reduction has been mostly caused by heavy power users, due to factors such as an economic slowdown, volatility in commodity markets and rising electricity costs. This trend has been reflected in peak demand, which fell for a fourth consecutive year in 2021.

Regulatory approval for off-grid renewable energy projects of any size has become easier following revisions to regulator Nersa’s exemption policies, which bodes well for solar projects to supply industries. The main opportunity for off- or mini-grid projects in South Africa is in rural areas where electrification was at 66% in 2018, compared with 93% in urban areas. The Integrated National Electrification Plan includes initiatives to boost electricity access in rural areas – aiming to fund an estimated 723,000 grid and 49,650 non-grid connections to households by 2020. It is not clear if this target has been achieved, owing to the Covid-19 pandemic.

EV market

The government has yet to implement any substantive policy support in this sector and the electric vehicle market remains at an early stage. There are no national subsidy programs such as capital expenditure grants for EV purchases or tax incentives. South Africa’s NDC anticipates that the country will transition its transport sector as late as the 2030s.

There are also significant barriers to EV adoption in South Africa. These include a lack of charging infrastructure and high upfront costs that are elevated by higher import taxes on EVs to compensate for the lack of petrol tax revenue. Many consumers may also not wish to rely on the grid to power their vehicles due to the high risk of load shedding, meaning that they might not be able to charge their car when needed.

EV policy

The government has yet to implement any substantive policy support in this sector.

Buildings market

The government in 2016 implemented a National Energy Efficiency strategy targeting a 50% reduction in specific energy consumption (measured as gigajoules of annual energy consumption per square meter of occupied floor area) by 2030 relative to a 2015 baseline. South Africa has some measures to support energy efficiency, including issuing energy performance certificates (EPCs).

There are an array of loans and grant options available to South African consumers to implement energy efficiency measures in buildings, but these mostly target commercial and industrial consumers. Funding is available via loans from many banks, via energy services companies (ESCOs), as cash grants and tax deductions.

Buildings policy

The government has yet to implement any substantive policy support in this sector.