The Government of South Africa has intervened in the energy market to achieve a range of objectives: to ensure affordable access to energy, encourage decarbonization of the energy system, improve energy security, and boost economic development. Intervention usually involves a combination of regulation and fiscal policies, such as government spending, subsidies, and revenue collection.
This recent report titled “South Africa’s Energy Fiscal Policies: An inventory of subsidies, taxes, and policies impacting the energy transition” published by International Institute for Sustainable Development explores the extent to which South Africa’s current energy fiscal policies are aligned with goals relating to the development of a robust domestic energy system that can provide low-carbon energy to all at a fair cost. REGlobal presents an extract from this report that focuses specifically on renewable energy policies in South Africa…
The Government of South Africa has ambitious plans to accelerate the adoption of renewable energy. But are current policy settings sufficient to achieve these objectives?
The renewable energy sector currently contributes only a small share of total electricity generation in South Africa: in 2019 wind and solar accounted for 3% and 1% of total generation, respectively. Installed capacity increased tenfold in as many years, from 0.9 gigawatts (GW) in 2011 to 9.6 GW in 2020.
Targets
South Africa’s Integrated Resource Plan (IRP) aims to guide future energy infrastructure investments and determine the country’s generation mix. The 2010 IRP set a target of 17.8 GW of renewable energy by 2030. After a delay of 8.5 years between updates, the 2019 IPR substantially increased the renewable energy target to 31.2 GW installed capacity (39.7% of the energy mix) by 2030, comprising:
- 17.7 GW of wind
- 8.3 GW of solar PV
- 4.6 GW of hydropower
- 0.6 GW of concentrating solar power
South Africa has also stated its intention of achieving a net-zero economy by 2050 through its Low Emission Development Strategy, released in February 2020.
Support Policies
Six support policies were identified for renewable energy in South Africa. The only two that could be quantified were funding for institutions to support research and development (R&D).
The key driver in bringing in private investment to deploy renewable energy projects in South Africa has been REIPPPP, launched in 2011. The REIPPPP is a competitive tender process that awards long-term contracts to private investors for grid-connected renewable energy projects.
The South African Renewables Initiative was launched in 2011 to develop and implement financing arrangements needed to help kickstart renewable energy in South Africa. The South African Renewables Initiative, no longer in operation, was a government project funded through the Department of Public Enterprises, the Employment Creation Fund, and the European Climate Foundation Fund. The initiative sought to secure low- cost loans, financial risk mitigation instruments, international grants, along with a “modest domestic contribution”.
Several tax exemptions have also been made available to renewable energy project developers, including accelerated depreciation on plants and equipment along with deductions for expenditure on supporting infrastructure such as roads and fences.
Other strategies that aim to accelerate South Africa’s adoption of renewable energy and the energy transition more broadly include the carbon tax, the Green Transport Strategy, and the enhanced energy-efficiency program. The South African presidency also recently announced an amendment to the Electricity Regulation Act around the licensing threshold, increasing it from 1 MW to 100 MW, in order to promote the rapid deployment of distributed generation projects. This measure aligns well with the IRP 2019 targets.
Impact of Policies on Investment
While the REIPPPP was instrumental in the deployment of renewable energy, investments in new projects came to a halt in 2016 and 2017, reflecting a reluctance by Eskom to sign new PPAs under the REIPPPP.
In 2018, under new political leadership, Eskom eventually signed new PPAs and investments in renewable energy rebounded rapidly. This spike in investments could not be sustained in 2019, as the fifth round of auctions was delayed until 2021.
Eskom’s financial situation, its reluctance to sign PPAs, and the delay of the REIPPPP are primarily attributed to political reasons. The coal lobby has been active in the African National Congress and pushed back against the development of a renewable energy sector in South Africa.
The recently held fifth round of IPP auctions attracted 102 bids from diverse project developers and saw record low tariffs. Solar PV tariffs averaged 0.429 ZAR/ kWh (0.032 USD/kWh), a 45% drop from 2015 tariffs. New wind tariffs averaged 0.495 ZAR/ kWh (0.037 USD/kWh), a 36% reduction on 2015 tariffs. The latest outcome of the fifth round of auctions indicates that the REIPPPP continues to have an impact in attracting investment in renewables in South Africa.
Renewable energy developers interviewed by the authors for this report indicated that the tax exemptions that are available to them were not influential in helping them to mobilize investment for renewables.
Barriers and Risks for Renewable Energy in South Africa
Despite the success of the REIPPPP, there remain barriers and risks to the mobilization of finance for renewable energy project deployment in South Africa. The key barriers are highlighted below:
Eskom
Eskom’s monopoly in the electricity sector means that if Eskom lacks the ability, willingness, or political support to procure renewable energy, this creates a major barrier to renewable energy investment. Eskom’s financial situation and previous reluctance to sign PPAs have been clear factors in the rate of renewable energy investment. Two possible approaches have been proposed that could reduce this risk.
- A process of unbundling and legal separation of Eskom to improve the governance and financial position of some parts of the restructured entity, enabling renewable energy procurement and reducing institutional incentives that favour existing coal-based generation over new renewable energy. Various risk-reducing mechanisms have also been proposed in parallel to the unbundling to address the financial issues and reduce the credit status risks that Eskom exposes the power sector to
- A program of transformation, enabling a rejuvenated Eskom to participate in renewable energy investment and eventually reduce its reliance on high-carbon energy
Measures designed to achieve both goals are being taken. The legal separation of Eskom’s transmission division is expected to be completed by soon, and the separation of the generation and distribution divisions will be completed by December 2022. Eskom is seeking finance for a major clean energy investment program.
Inconsistent Subsidies and Policies for Low-Carbon Transition
The DMRE continues to propose policies relating to new coal investment, including clean coal technologies, underground coal gasification, and carbon capture and storage, demonstrating a continuing commitment to coal as a source of primary energy.
A current push for gas, indicated through government plans and announcements, is also inconsistent with a low-carbon transition. The IRP gives a significant future role to gas, and South Africa is investing in gas fields in Mozambique and Namibia, as well as exploring two significant recent gas condensate discoveries off its coast. The Risk Mitigation IPP request for proposals is a 2 GW tender to deal with the issue of load shedding in the coming years. The tender aims at diversification of the energy supply: any distributed generation power plant can participate except for diesel and coal. However, it is widely thought that the tender has been designed to favour gas projects and will result in renewable technologies needing to make more expensive bids in these auctions.
Transmission and Distribution Infrastructure
Generation potential and transmission capacity are significantly mismatched in South Africa. More transmission infrastructure needs to be built—especially in Northern Cape and in areas where the highest wind speeds and best solar resources are located. Some of these are far from existing coal fields and the associated electricity transmission infrastructure. To enable renewables deployment in the long term, this transmission infrastructure also needs to allow for greater movement of energy across the country to smooth local and national peaks and troughs in demand and supply and allow for increasing levels of intermittent renewables and storage.
The complete report can be accessed here
