‘Perfect storm’ threatens SA’s move away from coal
In its scramble to find a solution to the energy crisis, SA must contend with a pandemic, war and ‘crazy’ prices
SA, where daily blackouts are a fact of life, knows better than most that it cannot rely on coal power.
But just when it plans to shift to renewable energy to help drive the economy, rising costs linked to the pandemic and the war in Ukraine threaten further delay.
After a six-year hiatus, the country in 2021 held a bidding round for companies to operate wind and solar projects, attracting aggressive offers from more than 100 companies, eager to make up for the shortfalls of state power generator Eskom.
The winners include EDF, Scatec, Engie and Mainstream Renewable Power. They are among nine companies pledging to supply nearly 4,600MW of power in the next two years that would help bring an end to Eskom’s woes.
Eskom said last week that maintenance and breakdowns had knocked nearly 45% of its 46,000MW capacity offline. The power utility needed up to 6,000MW of additional generating capacity.
Apart from the unreliability of ageing coal power plants, SA is also under pressure to end its reliance on highly-polluting coal, as it is the world’s 12th biggest emitter of climate-warming gases.
At UN climate talks last year, Britain, France, Germany, the EU and US pledged $8.5bn (R146bn) to help SA make a swifter transition from coal.
The problem for the companies that saw an opportunity in SA’s energy needs is they agreed to supply power at tariffs so low that they stand a minimal chance of making a profit.
The average tariff in last year’s round was R0.429 per kilowatt hour (kWh) for a solar plant — a 10th of the tariff a decade ago. Wind was a quarter of its 2011 level at R0.495 per kWh.
Tariffs for last year’s “power-on-demand” round, specifically to provide electricity to meet Eskom’s supply shortfalls, were 34% lower than the previous round in 2015.
After four regular rounds and power-on-demand tenders, the process went dormant in 2015 after former president Jacob Zuma’s administration halted renewables procurement.
“The prices quoted in bid window 5 were absolutely crazy even at the time of bidding,” Manie De Waal, joint CEO of Energy Partners Group, a solar plant construction firm, said of last year’s fifth regular bidding round.
Since then, the invasion of Ukraine by Russia has driven energy costs and inflation to multiyear highs.
In addition, supply-chain disruptions linked to the pandemic have also increased costs, such as shipping, and a weakening rand has made imports of turbines and solar modules more expensive.
Across the globe, the war has heightened the appeal of renewable energy as a source of energy that is domestic and also tackles an increasingly urgent climate crisis.
Soaring costs have left many governments struggling to encourage short-term investment in green energy and the problem is extreme in SA, because of the low tariffs that were agreed.
“The winning financial models didn’t likely have a lot of fat on them,” Kai Howie, chair of the working group for policy and markets at SA Wind Energy Association, said.
We need the [renewable] power. We are doing all we can within the ambit of the law to help [IPPs] reach financial closure.Tshifhiwa Bernard Magoro, head of the Independent Power Producers Office
The SA Photovoltaic Industry Association (SAPVIA) said capital expenditure and component inflation have risen by up to 40% for solar projects since companies locked in tariffs in August last year.
A banker working on several of the energy projects said it was a perfect storm. He asked not to be named as he was not authorised to speak to the press.
He and a renewables company executive said the shift in global economic conditions meant the bulk of those projects would struggle to reach financial close, a fundraising process after which construction could begin.
“Either the government resolves the issues with a solution that suits all, or reaching financial close will be a significant challenge,” the executive, who asked not to be named, said.
Companies selected last year must achieve financial close in the third quarter of this year.
Scatec reached financial close on July 19 for three projects under the on-demand round, but declined to comment on the status for its other projects.
Mainstream Renewable Power said its consortium was working with the government to meet the targeted timelines. Other companies did not comment.
Tshifhiwa Bernard Magoro, head of the Independent Power Producers (IPP) Office, the government body overseeing the projects, told Reuters he was engaging with companies.
“I have to emphasise we need the power,” he said. “We are doing all we can within the ambit of the law to help them reach financial closure.”
The company executive pointed to two options: an adjustment of tariffs — something he deemed unlikely — or flexibility on financial close deadlines in the hope that costs would fall.
“Otherwise, it’s untenable,” he said, adding that he expected global economic and supply-chain issues to ease in the short term.
Other industry experts were less optimistic.
Shashi Barla, director with Denmark-based renewable advisory firm Brinckmann, said top equipment manufacturers have hiked prices of wind turbines by roughly 20% and are still making losses.
“These high prices will prevail for at least 12-18 months,” he said.
Magoro said he was willing to work with companies, but there were no provisions for tariff revisions to offset the macroeconomic factors they faced.
“They understand the RFP (request for proposal). They have studied these documents. So they know the risk allocation,” he said.