Photovoltaics

South Africa is growing its deployment of renewable energy faster than any country in the world, making a $4.3bn investment in solar in 2012. What is behind this extraordinary policy shift in a coal-dependent nation and what does it take to develop PV projects there?

Starting from a 93 per cent coal-based economy, South African policymakers have succeeded in completely remaking the nation’s energy policy from fossil-friendly to carbon conscious. Not only does it have a goal to have an energy mix comprising 43 per cent renewable energy by 2030, but a sensible plan for getting there, with arguably the most meticulous bidding policy in the world.

Stringent requirements ensure that its bidding process results in only the most professional energy developers winning the right to become independent power producers.

Unique tender structure

The tender structure is different than almost any other market in the world, and one that protects both the developer, and the buyer, which is the giant electric utility Eskom, which has a guarantee from the South African government. South Africa has learnt from the stumbles of others.

“Initially the country was going to move towards a feed in tariff scheme,” says Davin Chown, who has been involved in South Africa’s renewable sector since the late 1990s and is a Director at Genesis Eco-Energy and Mainstream Renewable Power South Africa. “It changed direction and set up a competitive bidding programme instead.”

One company that has experienced the process is California-based SolarReserve, which, together with local partners, has received the coveted "preferred bidder" status. It is developing three PV projects totalling nearly 250 MW; Letsatsi and Lesedi, at 75 MW each, awarded in the 1st round, and the 96 MW Jasper project in the second round of bids.

“The South African bidding process is more difficult, and we think it makes a lot of sense,” says Stephen Mullennix, SVP of Asset Management at SolarReserve.

“Here’s why. To bid, you have to have a fully developed project; you have to have all your permits complete and in hand. All of your land rights, your water rights, transmission access. You have to have letters of commitment on debt and on equity. You really need a completely developed project in order to bid.”

One requirement is that would-be bidders must collect a year of meteorological station data on any proposed site. “So it’s a whole year of data before you can even bid,” Mullennix explains.

“That affects us, because when you’re doing greenfield development, you have to find the site, you have to get rights to the site, then you have to actually put the met station there, and then start collecting the data, and have a year of onsite data. And that also dictates that people have real sites."

“What that means is you have to be committed and you have to do it right, and you have to spend a fair amount of money to put all that together, which basically means that the projects that actually get through those bids are realistic viable projects.”

Importantly, this means that the competition is also pricing its proposals commercially, in a way that makes sense, so everyone is competing against truly viable projects “and that contrasts to a lot of markets where anyone with a laptop can put in a bid.”

Average bids from PV developers fell to 1 Rand 65 in the second round (about 16.5 cents US) from 2 Rands 75 in the initial round. While not as low as in countries with a more developed solar infrastructure over a longer timeframe, the remarkable drop is significant.

From coal to solar

The well designed renewable process is all the more remarkable, coming as it does from a nation dominated by coal power, with 93 per cent of its electricity coming from coal. Such a well-designed transition to clean energy is as improbable as though the coal-powered South in the US were to suddenly embrace clean energy policies. So how stable is this new clean energy policy, and how likely is it that this decision will not be overturned or meet other obstruction?

“The government has shifted - very clearly - its policy towards a low carbon society,” says Chown. “We have massive carbon emissions targets that we have to meet.”

South Africa’s Integrated Resource Plan or the IRP 2010 requires the addition of 17 GW of renewable energy to the South African grid, with 8.4 GW set aside for solar PV.

Chown is comfortable that the push is unlikely to be overturned because it has the support of the entire cabinet - and it was carefully developed over time with input from all stakeholders, government, industry, labour, in a very long consultative process, resulting in a clearly cemented government policy direction.

But what about Eskom, South Africa’s coal-fired electricity giant, which is widely seen to have been against South Africa developing renewable energy?

“In the past it’s been very confused because Eskom would decide which direction policy would go because it had the money to do that,” one industry source tells PV Insider. “But that’s changed over the last five years; government now plays a much stronger hand.”

“For a big organisation like that to make such a transition, it’s not easy,” he adds, comparing Eskom to similar coal-fired utilities worldwide. “Eskom is a huge beast. It’s 26,000 people, with a history of operating a very static fashion, so for them to operate in this new world of flexible, more modular, more variable power loads - it’s very difficult for them to adapt, but they are coming round to it. It’s adapt or die.”

Price of coal, unserved power create stable PV future

Another driver, which perhaps hammered the final nail in the coal power coffin, has been the blackouts that hit the economy hard in 2008. Power shortages are a risk in a country with very little reserve, no voluntary conservation programmes, and no independent system operator.

“What does it cost the economy for every kilowatt hour we don’t have, and the loss of jobs, loss of revenues, loss of exports, loss of manufacturing?” Chown asks, and answers by citing a study by Pretoria University that has estimated the cost of this unserved power in South Africa as 75 Rand per kWh.

Although a lack of new build - claiming unexpected economic growth - played a small part, as did delayed work on transmission, the blackouts were also driven by a coal shortage, because, although South Africa has access to plentiful coal, it is more profitable to sell coal supplies overseas.

"At international commodity prices it’s much more lucrative to sell that coal on the international market,” Chown calculates, “than it is to go and burn high grade coal in extremely inefficient coal fired power stations.”

Because emerging economies will continue to drive coal power demand, the heated market for coal overseas should help cement the transition to renewable energy.

And then there is the rising cost of new coal fired power in relation to the fast-dropping PV price. Local estimates put the price of electricity from a new coal power station at nearly 1 Rand (not even considering the externalities, which would more than double this figure) and escalating approximately 10 per cent annually, while the government has put a cap on solar at 1 Rand 40, and PV prices are headed below that.

“If you look at their ability to add new large coal and new large nuclear, then I think we’re very competitive on a price basis,” Mullennix says. “I think these renewable projects are more viable. You can get them equity, you can get the projects done.”

For these reasons, even given its coal-fired past, PV offers more long term stability, and South Africa’s sensible bidding process guarantees competent development.