This article originally appeared on Investec’s Focus.

Many are pessimistic about SA’s energy situation. They see a future with rising costs and constant blackouts wrecking businesses and negatively affecting homes. The role of an affordable, reliable and accessible power supply in the growth of the economy cannot be underestimated.

South Africans were alerted to a crisis in the power supply with the return of depressingly familiar load-shedding in early December and again, in February.

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The return of load-shedding, just as the country celebrated 2% growth in the economy – moving it out of a potential recession – led to some economists revising their forecasts for 2019. It is clear that another model for the provision of electricity is needed.  

Cleaner fuel by 2030?

At the moment, there seems to be limited comfort in the draft Integrated Resource Plan (IRP), which outlines the extent to which the country’s programmes lag behind other economies in exploiting sun, wind and gas as alternative energy resources. 

France and the UK have set stringent deadlines of 2020 and 2025, respectively, to end carbon-based energy reliance, but SA’s proposed IRP still factors in the country's reliance on coal as being close to half of its total energy mix by 2030. 

Investec's Andre Wepener, however, believes that the final IRP, expected by mid-2019, envisages a different scenario, with reduced reliance on carbon-based energy and the easing of limitations on embedded generation or self-generators. 

“We are expecting a significant shift away from coal, as envisaged in the draft report,” he says. “It will show a significant decrease in reliance on carbon-based energy. By 2030, we will see a 32-gigawatt (GW) shift towards cleaner fuel, which includes 24GW of energy from renewal sources. 

“8.1 gigawatt-hours (GWh) of gas-fired power generation is also envisaged in the draft IRP. Natural gas burns cleaner than coal and, in combination with renewables – solar and wind – can compensate for the base-load generation that will be removed from the energy mix as Eskom's existing coal-fired power stations reach the end of their useful lives."

"We are expecting a significant shift away from coal as envisaged in the draft [IRP] report. It will show a significant decrease in reliance on carbon-based energy." – Andre Wepener
"We are expecting a significant shift away from coal as envisaged in the draft [IRP] report. It will show a significant decrease in reliance on carbon-based energy." – Andre Wepener

A tricky transition

The transition, however, is not a simple one. Coal provides the base-load power to industry, and there are limitations to both wind and solar as alternative energies when it comes to battery storage and consistency, he says. Even in sunny SA, the sun doesn't always shine and the wind does not always blow.

Nevertheless, battery storage innovation is continually improving, and the solution lies in an energy mix.

"There is a significant difference between us and European countries like the UK and France. They transitioned away from coal decades ago and moved towards gas, which is in abundant supply in the region," he says.

A better comparison is between SA and Australia, which has a significant reliance on carbon-based energy, because both countries have rich coal resources. Alternative energies provide solutions to both households and industry, says Wepener.

At the lowest level, it could be a combination of solar panels on a roof and battery storage that supplies a household or small business with its energy requirements.

Will renewables cost more?

Wepener cites a study done by Jörg Peters of the University of Passau in Germany. It looked at the effects of electrification on households in Rwanda, as well as on firms, health centres and schools in that country's rural areas. It found that, contrary to expectations, electrification reduced expenditure on energy. 

“The average amount that connected Rwandan households that spent on grid electricity was 1,500 RWF (about $2) a month after they had replaced traditional energy sources like kerosene and batteries. And they no longer needed to spend money on charging their mobile phones outside their homes. In total, they reduced expenditure on energy by about $2.50, which is the equivalent of about 4% of their total monthly expenditure,” the study found. 

This is apart from yielding other benefits to households that had done away with torches and wick or hurricane lamps. The study found that thanks to electrification, after-dark study time increased for children; it benefited micro-enterprises such as hairdressing shops, small kiosks, bars and restaurants; and, significantly, it gave the community access to information. 

The study concluded that because of the relatively low levels of energy consumption in rural areas – a mere 2kWh per month, per person – off-grid solutions like solar would make more sense.

A 'virtuous cycle' of price reduction

There has been much debate about whether renewables will cost South Africans more. "There is a lot of political noise about this, but the cost of renewables is coming down," Wepener says. 

At the 2018 SingularityU Summit in SA, futurist Ramez Naam talked about how alternative energies were disrupting traditional coal-based energy sources. He said moving towards renewables made sense both economically and morally, as there were significant health risks associated with carbon-based energy. 

According to Naam, the more renewable energy is used, the less it costs. Bring innovation into the equation and the benefits are clear-cut. He calls this a "virtuous circle", with prices of alternative energies coming down and, in the end, having the ability to produce electricity in some countries for as little as 5 to 6 US cents per kilowatt-hour (about 67c in South African currency). 

Wepener says the cost has dropped even more in recent rounds of the Renewable Energy Independent Power Producer Programme (REIPPP), where tariffs were bid as low as 60c–65c per kilowatt-hour. Consumers in some regions in SA are paying as much as R2.20 per kilowatt-hour.

Promising use cases

Already there are good news stories to be told regarding renewables in SA. The Karoo town of De Aar in the Northern Cape supplies Eskom with 85,458 megawatt-hours of energy a year, enough to supply more than 19,000 average households. The town effectively supplies its own power and sends some to the grid. This will soon no longer be an isolated good news story, says Wepener. 

Business is looking to supply its own power, too, and sell excess back into the grid. To this end, it is lobbying the government to remove regulatory controls that limit the amount of power generated for own use. This has become a priority for Business Unity South Africa. 

In addition, the recent signing of a R1bn joint commitment between Investec and UK Climate Investments to form Revego – a majority black-owned and managed fund manager, which will manage investments in renewable energy – will boost the sector. Revego plans to list on the JSE later this year. 

Greenfield projects (which don't come with constraints imposed by prior work) are funded by the bank too, says Wepener. So, there is a package of investment opportunities for businesses within the renewable energy space.

Looking towards the future, Wepener says the next 20 years should bring an open and transparent power market. "We see a future where Eskom maintains the grid, and power producers and power consumers can trade power in accordance with their requirements, creating a win-win situation.

"Independent power producers (IPPs) will be substantial, private households that produce excess power and can push this back into the grid. The online trading of power, with the combination of IPPs, households and businesses, will mean the cost of electricity will be lower. Consumers and businesses will both benefit. Let the free market drive the process – that's what we hope to see." 

Visit the Investec website for more information on power and infrastructure finance.

This article originally appeared on Investec’s Focus.

About the author: Andre Wepener is the head of power and infrastructure finance at Investec.

The information contained in this communication does not constitute an offer, advertisement or solicitation for investment, financial or banking services. It is for informative purposes and is not intended to constitute advice in any form, including but not limited to investment, accounting, tax, legal or regulatory advice. 

This article was paid for by Investec.

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