- A lack of progress on the State of the Nation Address 2020 goals and the seemingly contradicting actions by the government will erode investor sentiment for the South African power sector.
- With delays in the approval of regulations allowing municipalities to purchase power from independent power producers (IPPs) and firms to self-generate, power security will remain an issue as Eskom’s already-strained capacity remains the primary source of electricity.
- The role of IPPs in the country will remain limited as the planned fifth round of the Renewable Energy Independent Power Producer Procurement Programme has not yet taken place, while Eskom’s plan to renegotiate prices on existing power purchase agreements will make new investors wary.
In February we stated that there would be three key factors in 2020 determining the trajectory of the South African power sector going forward, one of which is the level of political interference and energy policy uncertainty. The government’s State of the Nation Address (SoNA) 2020 – which took place in February – indicated a strong upside risk to growth in the sector, particularly for non-hydropower renewables. However, we expect that a lack of progress on these stated measures and, in some cases, even conflicting decisions and statements will cause further uncertainty and decrease investor sentiment in the country.
In SONA 2020, the government announced a number of measures aimed at boosting power security, some of which include:
- Implementing the Integrated Resource Plan (IRP) 2019, which entails the development of additional power capacity from virtually all technologies, prioritising the procurement of electricity from projects that could supply electricity within three to 12 months of being approved.
- Private companies would be allowed to generate their own electricity, no longer being limited to a 1MW cap.
- A new bidding window for independent power producers (IPPs) under the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
- Allowing municipalities to purchase their own electricity supply from IPPs.
As of the time of writing, however, there has been almost no progress on these stated measures. Along with continued breakdowns of state-owned utility Eskom‘s power capacity, the chart below highlights our expectation that growth in new electricity generation will be hampered as a result.
Uncertainty Over Private Generation for Municipalities And Firms
While the government has stated that it will allow municipalities to purchase electricity from IPPs (provided that the municipality could prove that it had a stable financial footing), there has been very little progress on this since issuing draft amendments to the regulations in May. In fact, the city of Cape Town is currently in a legal battle with the Minister of Energy, Gwede Mantashe, in its efforts to procure electricity from IPPs, and argues that the minister has used litigation to block the city from doing so. At the same time, plans to lift the 1MW cap for self-generation has still not materialised. The amended draft in March indicated that only licencing requirements for projects below 1MW of capacity would be lifted.
“…the delays and seeming contradictions in policy implementation will delay progress in this regard, and may deter risk-averse investors from participating in the market.”
If these measures were to pass, it would bolster the country’s overall power security and improve local business operations by reducing or eliminating disruptions brought on by periodic loadshedding. However, the delays and seeming contradictions in policy implementation will delay progress in this regard, and may deter risk-averse investors from participating in the market. As a result, the country has remained reliant on Eskom’s already-strained capacity. At the start of September, while Eskom was undertaking maintenance on 4,558MW of its capacity, a further 11,665MW suffered breakdowns during a cold snap in the weather resulting in higher electricity consumption. This meant the utility, which supplies more than 90% of South Africa’s electricity, was operating with more than 35% of its total power capacity offline.
Role of IPPs In Overall Power Sector Remains Inhibited
In addition to the above-mentioned points, we expect that the ongoing policy uncertainty will make IPPs wary of entering the market. While a fifth round of the REIPPPP was announced in the SoNA 2020 address, there has been no further progress in this regard either. Eskom even stated in May that it will look to renegotiate contracts with existing IPPs for lower prices, which will further dampen investor sentiment given that these projects were already subject to a competitive bidding process. As highlighted in the chart above, renewable IPPs have been able to supply Eskom with much more electricity (10,792GWh vs 552GWh) at less than half the cost (USD0.14/KWh vs USD0.33/KWh) than the diesel-fired power IPPs on which Eskom currently relies as a stop-gap measure.
Furthermore, with a lack of progress in the aforementioned regulations allowing municipalities to procure electricity directly from IPPs, Eskom’s efforts to reduce its debt load of over ZAR480bn (USD28.9bn) will be strained as the utility remains obligated to buy electricity from any IPPs with power purchase agreements already in place.
Note: This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.
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