Private power lessons from SA for the rest of the continent

19 JUNE 2023

Unlocking private power in Africa

By Keith Webb and Daniel Zinman

Private power has rapidly become a lifeline for South Africa’s escalating energy crisis, and to a large extent, the country has been successful in creating a burgeoning segment of the power industry through liberalising the market. However, aside from increase in energy supply, private power offers a number of other advantages that will undoubtedly prove to be highly beneficial not only in South Africa but throughout the continent. Private power benefits include increased access to electricity, improved quality and security of supply, enhanced efficiency, innovation, price path certainty and much-needed investment into infrastructure. Taking some lessons from this growing space in South Africa, we explore how to unlock private power for Africa.

Power at scale

From a utility-scale perspective, South Africa has seen some significant advancements in recent years. The government’s power procurement programme set things in motion, and changes to the regulatory regime governing private power generation in the last few years have resulted in substantial growth in the sector. This growth has been driven by energy-intensive users – typically resources companies, which make up around 40% of South Africa’s energy demand – procuring their own renewable energy. In fact, over 70% of these users have initiated private power transactions.

The initial driver behind this was to meet decarbonisation goals by procuring green power, but this was rapidly eclipsed by the need to ensure security of supply as load curtailment or ‘load shedding’ then escalated. Price is also a critical factor, with private power offering certainty of price path that the incumbent is unable to meet. With the national utility having been granted increases at well above inflation for the last several years, a trend which looks likely to continue for the medium term, the lower tariffs that renewable energy can offer means that solar photovoltaic (PV) plants and wind farms selling to private offtakers have mushroomed. Much of this power is delivered at utility scale and ‘wheeled’ across Eskom’s network, but there is also a segment of ‘behind the fence’ power generation, with plants in place next to the users’ sites.

In terms of funding this shift, the banking sector has come to the party by providing long tenor, competitively priced debt on the back of equally long contracted Power Purchase Agreements (PPAs), supported by the various private power buyers. These long debt tenors combined with competitive bidding process have resulted in very attractive electricity tariffs that compete with base-load power pricing.  

Some challenges

While this model has proven successful, Eskom’s ability to provide grid connections for wheeling power and their ability to invest in additional grid capacity have become constraints. In addition, while wheeling over Eskom’s national transmission network has been implemented successfully, wheeling over the distribution networks owned and run by municipalities has yet to be unlocked – although plans are afoot to achieve this.  

A further challenge in terms of sustainability and decarbonisation is that most of these energy intensive users require continuous use of power, which means renewable sources can, at most, cover their power during a portion of the 24-hour work day and cannot alleviate load shedding. Going forward, they will require on-site storage and backup. We see the take-up of battery energy storage systems as a trend that is nascent, driven by the reducing costs of batteries, elevated diesel prices and the ongoing drive for green energy.

Addressing the smaller market

While the energy intensive users make up a significant segment, the solutions discussed above still leave the balance of the power user base under-served. While a segment of these ‘smaller’ buyers are still substantial users of power (in the range of 1MW to 20MW), those consumption levels seldom justify the development of a plant to supply only that user: for one, at those smaller plant sizes, the economies of scale that the larger users enjoy cannot be achieved; secondly, raising limited recourse project finance to fund the projects is inefficient and often too time-consuming and expensive relative to the cost of the project. It makes more sense to aggregate this power demand with multiple offtakers using standardised long/medium term PPAs to get sufficient scale to justify the investment in generation. Consequently, we have seen the emergence of power aggregators in South Africa – a further progression in the liberalisation of the sector.

However, some users may not be able to commit to long-term power purchase, so the next step in the power sector evolution is the emergence of traders to intermediate between independent power producers (IPPs) that need long-term funding, and smaller, shorter-term users. They are taking on the role of facilitating economies of scale to offtakers, and/or buying power under long-term PPAs and selling to customers under shorter term contracts of five years or more. These contract tenors may reduce as the market develops.

Once again, while this offers benefits, it still will not cover 100% of power needs due to the intermittency of renewable sources, nor will it solve load shedding issues directly, as the power is still subject to curtailment schedules. In addition, many of these smaller users will be connected within a municipality, so the need to solve for wheeling across municipal distribution networks becomes imperative. Additionally, providing long-term, cost effective funding to develop generation capacity on the back of a PPA signed with a trader requires some thought on the trader’s credit-worthiness and ability to provide liquidity. RMB is currently developing innovative mechanisms to solve these issues.

Going even smaller

When it comes to addressing even smaller users, South Africans have not been sitting still. Solar irradiation across most of the country is excellent, which makes small-scale embedded generation and rooftop solar an ideal solution to fill in where utility scale supply falls short. For residential consumers with the ability to extend their home loan facilities, and for properties with large rooftop space such as malls and industrial parks, this is ideal. This mitigates the effect of load shedding – at least during the day. To obviate the effect of load shedding, battery storage has become popular with both residential and smaller corporate users to offer more stable supply while saving on fuel costs if diesel generators are used as backup.

Solar rooftop generation with battery storage on-site can reduce the effects of grid constraints, but won’t solve for all users and use cases, and there may be instances where some power needs to be wheeled in, meaning it is subject to the same municipal network constraints as aggregated and traded power. This is also a highly competitive and fragmented space with huge potential in South Africa, where everyone is scrambling to find a solution to continuous load shedding.

While individual projects are small (200kW – 5MW), certain players in this segment of the market have built up significant portfolios (of 100MW+), which gives funders an opportunity to provide more efficient portfolio-level financing once scale has been reached. In this area of the market, there has been a recent trend away from outright sale models (where the consumer simply buys the equipment from a contractor who installs it) toward an IPP/PPA or rental model, allowing customers to purchase the power generated under longer-term contracts without owning the equipment.

Finding a way forward

While private power is seeing significant growth in the South African context, there remain a number of challenges to be overcome. As renewable and alternative energy solutions become imperative to stave off the worst of the ongoing energy crisis and to meet global decarbonisation and sustainability goals, the entire model of power procurement must fundamentally shift. The regulatory landscape is having to evolve in tandem, and issues with grid connections and transmission (a problem facing both developed and developing countries alike) must be resolved. In addition, access to affordable and long term funding is a critical element in the successful shift toward a private power market. Addressing these challenges will require a collaborative effort from all parties involved, and countries across Africa would do well to take note of these issues to streamline their own energy transition challenges and solve their energy supply deficiencies.

Webb is Head: Private Power and Zinman Head: Power at RMB