South Africa: Investing in Clean Energy

South Africa: Investing in Clean Energy

Since 2009, South Africa has experienced intermittent rolling blackouts due to a lack of maintenance and failure to build in-line with national growth projections. In response to the rapidly diminishing energy surplus, state-owned utility Eskom commissioned the construction of two new coal-fired power plants, Medupi and Kusile. The plants are expected to add 9.6 GW to the national grid, a 22% increase on Eskom’s current installed capacity.¹ Unfortunately, these projects have experienced a cost overrun of more than double their original estimates and delays in excess of five years.² It is therefore unsurprising that the country’s energy policy, the Integrated Resources Plan (IRP) of 2010, aspired to decrease the percentage of coal-based energy from 92.5% in 2010 to 48% in 2030, with 17.8 GW of the replaced energy to be generated by renewable sources.³ After the IRP set this goal, South Africa embarked on a journey towards diversifying its grid, experiencing global acclaim in the process.

Location: South African Renewable Energy Business Incubator (SAREBI), Atlantis

Employees from iSOLAR learning practical skills in the green economy at SAREBI. iSOLAR is one company receiving incubation support as part of SAREBI’s work providing non-financial assistance to entrepreneurs in the renewable energy industry.

Location: Northern Cape

Abengoa’s Khi Solar One concentrating solar power (CSP) plant

Location: Takealot.com Building, Foreshore in the Cape Town CBD

Rooftop solar PV panels being installed on the takealot.com building by SolaFuture. The system will generate 780,000 kWh per annum, which is enough energy to power 100 medium-sized houses.

Location: Atlantis, Western Cape

Gestamp Renewable Industries (GRI) wind tower factory

Driving the energy mix through a tender-based platform

South Africa has short to medium-term problems that can be addressed through renewable sources. Unlike the timelines and sheer magnitude of current coal-fired projects, renewable energy-based projects can be erected in a relatively short period of time, while providing cleaner long-term investments.³ Building on the IRP, the Renewable Energy Independent Power Producer Purchasing Programme (REIPPPP) was introduced in 2011. Via a multi-stage tendering system, the programme encourages independent power producers to submit renewable energy project proposals, from which the state agrees to purchase power, at a pre-determined rate over a fixed number of years.

In addition, the programme aims to stimulate the local renewable energy industry through the mandated procurement of locally manufactured products.⁴ According to Bloomberg’s New Energy Finance group (BNEF), the REIPPPP has already secured around USD 12.5 billion since inception and is expected to raise a further USD 35 billion by 2020.⁵ This projection, however, was made before 20th July 2016, when Eskom stated that further discussions are required before they sign new REIPPPP projects (after meeting the commitments of the current bid window).⁶ Until this point, Eskom has not had a central role in the programme and has requested further involvement before committing to additional bidding windows. While this lends an element of uncertainty regarding the future of the REIPPPP, at the time of writing, the state policy regarding the key role of renewables by 2030 remains intact.

Creating a business environment conducive for green investment

The Industrial Policy Action Plan (IPAP) provides a pragmatic framework to meet South Africa’s economic developmental policy by outlining the nation’s industrial priorities. The 6th edition of the IPAP (2014/15 – 2016/17) highlighted achievements in green industries, underscoring national commitment in this specific arena.⁷ Among other milestones, energy-related progress includes an update to the REIPPPP and approved funding worth USD 265 million allocated to 43 green industry projects by the Industrial Development Corporation (IDC).⁷ The Department of Trade and Industry (DTI) supports the goals of IPAP via investment promotion (both greenfield and expansion), numerous funding facilities and SMME (small, micro and medium enterprise) assistance.

South Africa’s competitive advantage in renewable energy, particularly in solar PV potential, is on the radar of investment promotion agencies (IPAs) at all regional levels. The South African National Investment Promotion Agency (IPA), InvestSA, the Western Cape Government’s IPA, Wesgro and sector development agency GreenCape have collaborated closely over the past 6 years to position the Western Cape as the definitive green economy hub of South Africa.⁴ In order to accomplish this, each body has leveraged their networks and core skills in the following ways:

• InvestSA coordinated between multiple relevant national entities including the Department of Trade and Industry, the Department of Energy, the South African Revenue Services (SARS), the International Trade Administration Commission and the Department of Economic Development.
• Wesgro coordinated on the provincial level with the Red Tape Reduction Unit, negotiating with the City of Cape Town on land availability and promoting the Western Cape as a green economy hub.
• GreenCape served as the thought-leader on green economy issues while providing administrative assistance on the ground. In addition, GreenCape forms part of the International Clean Tech Cluster Network, serving as a link to global thinking.

Due to these collaborations, over 60% of renewable energy project developers and almost 70% of required manufacturing capacity are located in the Western Cape.⁴

The flagship example of various IPAs working to bring clean energy-related investment to South Africa involves the development of the proposed Special Economic Zone in Atlantis, Western Cape, which has been earmarked as a cleantech manufacturing zone. Spanish wind tower manufacturer Gestamp Renewable Industries (GRI) has invested USD 20.3 million, with a further USD 11.8 million allocated for planned expansion. GRI is already responsible for creating 220 green jobs between 2014 and 2015. Resolux Africa, a Danish manufacturer, became the only supplier of tower internals in South Africa when it launched in Atlantis in March 2016. Their investment of USD 1.7 million forms part of their ambition to provide locally sourced materials in the wind energy value chain and has the potential to create 80 jobs.⁴

In terms of early business support, the South African Renewable Energy Business Incubator (SAREBI) is funded by the Small Enterprise Development Agency Technology Programme (STP) and focuses on providing non-financial assistance to entrepreneurs across the renewable energy value chain. SAREBI predominantly focuses on entrepreneurs within manufacturing and service provision in the fields of energy efficiency, embedded generation or REIPPPP suppliers. The South African Renewable Energy Technology Centre (SARETEC) is the national technology centre which provides industry-related and accredited training for the renewable energy industry, as well as short courses and workshops. The first learning institution of its kind in South Africa, SARETEC was created in response to industrial needs and is an initiative funded by the Department of Higher Education and Training (DHET) and implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), GreenCape and the South African National Energy Development Institute (SANEDI).⁴

Policy and business support is bolstered by a multitude of funding sources available both within and outside of South Africa. Developmental finance institutions (DFIs) such as the Development Bank of South Africa (DBSA), the African Development Bank (ADB), the European Investment Bank (EIB) and the German Bank for Reconstruction and Development (KfV) provide funding specifically geared towards green investments.⁸ A prime example of DFIs working through established credit providers is the French Development Agency, Agence Française de Développement (AFD), funding of the Green Credit Line facility available to ABSA, Nedbank and the Industrial Development Corporation (IDC). Focusing on energy efficiency and clean energy, the planned amount available will be in the region of EUR 120 million, with the AFD providing technical assistance by running workshops for the aforementioned credit providers.⁹

Early signs of success

BNEF released their Climatescope report in November last year. South Africa ranked fourth out of 55 emerging market nations in the rapid rollout of clean energy over the last five years, surpassed only by China, Brazil and Chile.¹⁰ The chief driver of the continued growth in capacity and investment was largely attributed to the REIPPPP, with South Africa’s specific investment strengths relating to low carbon business and clean value chains, including financial institutions in clean energy and clean energy service providers.¹⁰ A combination of South Africa’s natural sun and wind resources along with an auction-style tendering process have resulted in significant investment from the IDC, the Government Employee Pension Fund and private investors, largely due to the mitigation of uncertainty in these capital intensive projects. By streamlining concerns around the supply chain and project financing, and with state-guaranteed contracts to purchase power over the medium to long term, annual returns as high as 20% have been projected – an unparalleled opportunity for investors.⁵

Aside from the bankability of projects, the aforementioned work rendered by various IPAs in making the Western Cape a green economic hub won the United Nations Conference on Trade and Development (UNCTAD) award in July 2016 for success in achieving sustainable investment.¹¹

Despite the energy challenges in South Africa, the nation has rallied and begun to tackle an overwhelming problem by instituting a coordinated approach that ensures bankability through a privately driven, yet publically enabled process. To complement this, investment promotion bodies have done an immense amount of work to expedite projects through effective leveraging of networks and creation of innovative working relationships. South Africa has positioned itself as a global standard in creating a welcome environment for companies across the renewable energy value chain. Assuming the continued rollout of the REIPPPP with its associated governmental support and financial accessibility, investment should continue to realize the goals set for 2030.