Africa Energy Futures: South Africa

Over the last five years, how has the energy mix changed, and what have been the key drivers?

The energy supply mix in South Africa is currently about 84% coal, 11% renewable energy, 3% natural gas and 2% nuclear energy with the balance being shared between other sources (such as diesel, hydro and pumped storage plants).

While South Africa remains very reliant on fossil fuels (mainly because coal is in abundant supply in-country and is the cheapest energy source), there has been an increased supply and use of renewable energy, particularly wind and solar. This is mainly a direct result of the 2019 Integrated Resource Plan in 2019 (IRP) which sets out the South African government's diversification targets for the energy supply mix by 2030. Also, in certain regions, the country receives large amounts of sunlight and wind consistently throughout the year and benefits from a notable reduction in costs related to solar and wind power generation.

In addition, the South African government has adopted the Low Emissions Development Strategy (LEDS), which aims to reduce the country's greenhouse gas emissions to net zero emissions by 2050.

The country has also pledged to meet the goals contained in the Paris Agreement through the Nationally Determined Contribution under the Paris Agreement (NDC). In September 2021, South Africa submitted its updated NDC. South Africa’s updated mitigation targets represent a significant progression from the first NDC. The country commits to a fixed target for greenhouse gas emissions levels of 398-510 MtCO2e by 2025, and 350-420 MtCO2e by 2030, compared to 398 and 614 Mt CO2e between 2025 and 2030 as communicated in the first NDC. In its updated NDC, South Africa has also set the goal to reach net zero emissions by 2050 in its LEDS. As one of the world's largest carbon emitters, mainly due to its reliance on coal, the shift towards renewable energy may enable South Africa to meet the goals set out in the strategies it has adopted.

What is the outlook for the energy and natural resources sector in the next five years? In particular:

Key policy decisions

The outlook is promising and remains as set out in the IRP, the LEDS and the NDC.

Through multiple regulatory reforms, the South African government is actively seeking to address capacity shortages. The Renewable Energy Independent Power Producers Procurement (REIPPP) program and the Risk Mitigation IPP program continue to expand renewables penetration in the country. The latest in this regard is the launching of Bid Window six of the REIPPP in April 2022 with a goal to deploy a further 2,600 MW into the energy mix, while the National Energy Regulator of South Africa (NERSA) has approved over 15 projects for IPPs in May and June 2022, alone.

On September 2, 2022, the Minister of Mineral Resources and Energy published draft amendments to schedule 2 of the Electricity Regulation, Act 4 of 2006 (ERA). The main change proposed is to remove the current 100 MW licensing threshold by exempting generation facilities, with or without energy storage, of unrestricted capacity, with a point of connection on the transmission or distribution power system, from the need to obtain a license. The proposed amendment to remove the licensing threshold comes soon after the licensing threshold was increased from 1 MW to 100 MW on August 12, 2021. This indicates the South African government’s attempt to encourage further growth and investment in the energy sector and promote further generation and reliable electricity supply. The removal of the licensing threshold will hopefully help to alleviate South Africa’s energy crisis and bring much-needed relief to the country’s economy after many years of load shedding.

In terms of the IRP, the government contemplates restricting solar installations to 1,000 MW and wind to 1,600 MW per annum. It is also anticipated that government will remove this cap.

Main policy challenges

To ensure that market confidence is maintained, the amendments to schedule 2 of the ERA must be finalized and published without delay.

While embedded generation projects will become exempt from being required to be licensed, they will be required to be registered with NERSA. NERSA should make this as quick and easy a process as possible.

In addition, the generation facility will need to comply with the grid code(s) and, if the energy is to be wheeled, it will be required to obtain connection approvals. Both may present challenges from a capacity perspective – to be able to determine grid code compliance or consider connection applications efficiently.

The proposed greenhouse gas emissions targets have been criticized as not being ambitious enough. Yet other than there being delays in implementing regulatory and appropriate process framework and policies, it is not anticipated that there will be any other challenges in implementing the policies set out above.

The anticipated role that renewables and/or new technologies will play

Renewables and/or new technologies will play an important role in South Africa, including by:

• acting as a means by which the country attracts and secures infrastructure and foreign direct investment, which could lead to job creation;
• contributing to economic recovery and growth as businesses obtain energy certainty and security; and
• continuing to lessen the demand burden on Eskom which has the potential to substantially reduce loadshedding.

What are the key investment opportunities in the energy and natural resources sectors over the next five to ten years?

• One of the current obstacles to greater uptake of renewable energy relates to the challenges around storing and transferring energy to the national grid. Possible investments in battery and storage technologies could be a potential solution.
• A greater focus on the use of natural gas. Natural gas is readily available in Southern Africa, cleaner than coal and currently cheaper than renewable energy (it also features prominently in the IRP).
• Based on the number of renewable energy sources available in South Africa, the growing number of renewable energy generation facilities in the country as well as recent policy reform, green hydrogen is expected to emerge as a viable investment opportunity.
• Renewable energy projects have attracted significant investment from the private sector and it is anticipated that they will continue to be a worthwhile investment.
• Renewable energy projects potentially being financed or refinanced through the issuance of green bonds or other green, sustainability or social-linked instruments are also an opportunity to consider.

South Africa’s current energy crisis will require investment, both from the private and public sector, of an estimated ZAR1.2 trillion until 2030. South Africa has submitted an investment plan to donors who have pledged USD8.5 billion to help the country’s transition to renewable energy. The funds have been promised by France, Germany, the EU, the UK and the US during the last climate talks in Glasgow, to kick-start South Africa’s move from coal to renewable energy, mostly offered in the form of concessional loans. To get the needed USD8.5 billion from donors, South Africa must show its plan will reduce its carbon emission by more than it was planning to do under already existing climate commitments. However, the shift of South Africa’s economy into renewable energy is estimated to cost at least USD250 billion over the next three decades.

With particular focus on sustainability, and on reducing carbon emissions, how will the energy and natural resources landscape change over the next five to ten years?

A gradual reduction in the use of coal is expected, which should enable the following:

• a significant increase in the use of renewable sources and natural gas, as opposed to other sources of energy;
• green hydrogen becoming a viable investment opportunity and energy source both for domestic and export markets;
• an increase in financing and refinancing transactions through the issuance of green bonds or other green instruments; and
• renewable energy projects and financing transactions that prioritize sustainability, the environment, social benefits and good governance.

Considering the abundance of coal in South Africa, and its cost effectiveness, it is uncertain as to how realistic a significant reduction in the use of coal can be in the next five to ten years. Any reduction will probably have to be gradual. However, it is believed that the country wants to give effect to the commitments in the IRP, LEDS and NDC. Based on the optimistic developments in the energy and natural resources landscape over the last five years, the points set out above are realistic and achievable.

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