Abu Dhabi, UAEMonday 21 October 2019

South Africa's renewables sector growth may be driven by coal's collapse

With 80 per cent of the country's emissions from the energy sector, the nation's president Cyril Ramaphosa is looking for change

Slow-moving vehicles line the streets as traffic lights stand without power during a load-shedding power outage period in Pretoria, South Africa. Coal stocks are running out in the country with and blackouts likely. Waldo Swiegers/Bloomberg
Slow-moving vehicles line the streets as traffic lights stand without power during a load-shedding power outage period in Pretoria, South Africa. Coal stocks are running out in the country with and blackouts likely. Waldo Swiegers/Bloomberg

South Africa may have to embrace green energy sooner than later as its coal-based energy utility continues to implode.

This month, the official opposition in parliament, the Democratic Alliance, published an alert warning that coal stocks were running out and blackouts were inevitable. State-owned utility Eskom derives more than 90 per cent of its generating capacity from coal, and previous shortages have plunged the country into rolling power cuts countrywide.

“We must ease the licencing requirements for small scale renewable generation and allow municipalities to procure energy directly from IPPs,” says Kevin Mileham, the Democratic Alliance shadow minister of mineral resources and energy. “Only in this way will South Africa’s economy stand any chance of recovery."

New energy technology is replacing coal-fired power faster than most predicted.

Simon Nicholas, energy finance analyst

Eskom is now scrambling to secure coal contracts to keep its power stations running. Although the country has plenty of coal, inept management and corruption at the utility resulted in many contracts lapsing. Now a new board is trying to reverse the deterioration of coal stocks.

“There is still a severe shortage of coal at Eskom,” says Ted Blom, a Johannesburg based energy analyst. “They put out a tender about two weeks ago for another 400 odd million tonnes of coal and in total, they need more than 900 million tonnes of coal.”

South Africa has vast reserves of the carbon-based material, enough to supply Eskom for 200 years, according to the company’s website.

The country does have renewables with about 112 wind, photovoltaic solar and concentrated thermal solar plants. Small scale hydro and biogas stations are also part of the renewable mix. The first of these was opened in 2011 when the government held a series of open auctions to private energy companies to build, manage and own these plants.

At the time, Eskom had begun work on two mega coal plants, but the principal funder the World Bank insisted that renewables be introduced to the South African grid to lessen coal dependency. However, Eskom has struggled to complete the construction of the two coal plants and building costs have soared. So has Eskom’s debt, to almost US$30 billion (Dh110.2bn).

Electricity prices have increased more than 400 per cent, threatening the country’s mining and industrial sector. Mining and energy minister Gwede Mantashe admitted in parliament recently that energy-dependent heavy industry was in trouble because of electricity prices.

“The reality of the matter is that we have to reduce the price of electricity,” Mr Mantashe said. “It is killing manufacturing, it is killing mining, and it is killing furnaces.”

However, Mr Mantashe also wants to renegotiate the original agreements with renewable providers. Many of these were signed more than a decade ago, when wind and solar were a lot costlier. Eskom claims it is paying independent power producers (IPP) around 14 US cents per kilowatt hour (kWh). The tariff charged to Eskom’s end users is only around 6 cents kWh.

According to Eskom’s latest financial results, IPPs now account for 25 per cent of Eskom’s operating costs, while producing only five per cent of the country’s electricity. Eskom has therefore resisted adding new renewable generation to the power grid.

Energy experts have largely rejected Eksom laying the blame on renewables, and want it to licence even more projects, pointing to its expanding use in other African countries.

“If Ethiopia can attract solar PV bids at US 2.5 cents per kWh, so should South Africa,” says Anton Eberhard, an energy analyst and professor Emeritus at the University of Cape Town. “That's one third Eskom's average price.”

Mr Eberhard says there is no excuse in delaying further rounds of renewable auctions. “South Africa urgently needs to contract more power to keep the lights on and, at these prices, Eskom will actually save money.”

Eskom itself may have no choice but to embrace change. Banks in South Africa and abroad have stopped funding coal mines. Even the state-owned Development Bank of South Africa, which provides loans for large capital projects is urging greater reliance on renewables. “Any business leader who says there isn’t a business case for renewables simply doesn’t understand economics,” says Mark Swilling the chairman of the Development Bank of South Africa, speaking at the Financing the Future conference in Cape Town this month.

Mining companies are also adapting by selling up existing operations. In September Bloomberg reported that Sasol, the coal-to-liquid fuel specialist was selling its $1.4bn coal mining business.

Meanwhile the world’s biggest producers of coal including BHP and Rio Tinto of Australia, and London listed Anglo American among others are winding down coal operations. South32, one of the largest coal producers in South Africa, has offered to sell its coal business for a token one dollar.

Internationally, South African exports of around 73 million tonnes of coal a year was also in decline as its major markets such as India reduce consumption in favour of renewables.

“The global seaborne coal trade is set to go into permanent decline," says Simon Nicholas, an energy finance analyst for the Institute for Energy Economics and Financial Analysis based in the US. "South Africa will see increased competition in markets around the world from other major thermal-coal exporters such as Indonesia, Australia and Russia.”

Mr Nicholas says research at the institute shows that renewables are contributing to the decline in coal sales faster than expected.

"New energy technology is replacing coal-fired power faster than most predicted," Mr Nicholas says.

Pressure is also mounting on South Africa from environmental groups. Greenpeace for instance, said a study using satellite gathered over just two months, between June and August last year, showed that the coal producing Mpumalanga province suffered some of the worst nitrogen dioxide pollution on Earth.

“This confirms that South Africa has the most polluting cluster of coal-fired power stations in the world, which is both disturbing and very scary,” said Melita Steele, senior climate and energy campaign manager for Greenpeace Africa.

Wind turbines turn in a canola field in Western Cape Province, South Africa. The country does have renewables with about 112 wind, photovoltaic solar and concentrated thermal solar plants. AFP
Wind turbines turn in a canola field in Western Cape Province, South Africa. The country does have renewables with about 112 wind, photovoltaic solar and concentrated thermal solar plants. AFP

The president of South Africa Cyril Ramaphosa has acknowledged the country cannot ignore international concerns relating to burning coal and climate change. Mr Ramaphosa recently attended the climate change summit in New York, where child activist Greta Thunberg’s emotional presentations dominated the gathering.

“The mitigation challenge posed to South Africa is considerable,” Mr Ramaphosa said in his official address at the summit. “About 80 per cent of our emissions are from our energy sector.”

The country was now finalising a blueprint for the energy sector that included a “considerable increase” in renewables. Older coal plants would also be decommissioned, Mr Ramaphosa noted.

“The rapid fall in prices of renewable energy technologies, coupled with our immense renewable energy resources, has created a massive opportunity for us to make this shift.”

He also touched on a plan to create a private sector fund of around $11bn that would provide soft loans to Eskom, in return for reducing its coal fleet. Earlier this month Bloomberg reported that a Cape Town finance firm, Meridian, is putting together what it claims will be the world’s largest green energy fund. The loan facility is backed by development finance institutions and private funders.

“The $11bn would consist of a blended finance facility and would be the largest climate finance transaction to date, having a significant emissions impact,” Mr Ramaphosa added. “The plan we will develop will focus on the next decade.”

Updated: September 29, 2019 10:18 AM

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