Ready or not, the private power revolution is here – and it's largely renewable

Ready or not, the private power revolution is here – and it's largely renewable

By Dario Musso

Electricity generation by the private sector has never been more accessible or had lower barriers to entry than now.  Significant technology advancements mean that large, costly and complex fossil fuel generation with long construction lead times no longer offer the only option to generate utility-scale electricity. 

It is a fact that renewable energy from solar PV and wind is now cheaper than any other form of new build generation. In South Africa, the eagerly-expected next round of the renewable energy procurement programme is widely expected to deliver electricity prices south of 50c/kWh.  Importantly, this enough to cover the full cost of these plants, including capital expenditure, financing costs and investor returns (renewables typically don’t have fuel costs).

In its revenue application for 2018/19, Eskom cited its average variable cost of generation as ca.45c/kwh^[1] from already-existing power plants, i.e. including only variable costs like fuel and operating costs. This ignores the cost of building new plants, like capital expenditure, financing costs and investor returns. Therefore, when the all-in cost of a new coal or gas-fired plant is considered, a significantly higher cost of electricity is required to cover build costs, as well as fuel and operating costs, compared to the equivalent all-in cost of a renewable energy plant.  

But the traditional electricity generation lobby (fossil fuel and nuclear enthusiasts) will remind us that while renewables may be cheap, they are unable to provide the reliable, consistent and predictable baseload power that can be delivered through coal or nuclear plants. This is because solar and wind plants only work when the sun shines or the wind blows.  Ironically, Eskom’s struggling coal-fired fleet is quickly proving to be just as unreliable, making rolling blackouts or load-shedding a regular inconvenience. 

Several solutions could help make renewable energy more predictable and less variable, including storage technologies like batteries, pumped storage or others that are under development. However, current storage technologies are not as mature as renewable energy generation. But that is changing fast, as rapid advances are accelerating efficiency and affordability, as occurred (and is still occurring) for renewable generation. Over the past decade, the rapid global uptake of renewable energy generation has led to spectacular advances and cost reductions in these technologies. Since its inception in 2011, the South African renewable energy IPP programme has seen a 67% average decline in electricity prices^[2], over four bidding rounds.

A similar cost reduction trajectory will no doubt apply to storage technologies as the world adopts more renewable energy to stem the very real threat of climate change. So, it is not inconceivable that renewable energy generation with storage will soon become the least cost electricity solution for South Africa, thereby delivering cleaner on-demand baseload power.

Another solution to reducing renewable energy’s variability and unpredictability is to simply roll out more of the stuff. South Africa can certainly capitalise on its excellent solar and wind resources, by spreading out renewable energy generation facilities. Not all parts of South Africa will experience cloud cover or low wind speeds at the same time, which means that, on average, electricity generated from a large number of renewable energy plants spread out across the country becomes more predictable and reliable. This is certainly the case for Europe’s interconnected grid, into which more and more renewable energy plants are being connected.

The increasing adoption of electric vehicles globally means there will be a greater requirement for clean and reliable electricity, as demand for fossil fuels wanes. In early February 2020, Elon Musk’s electric vehicle manufacturer, Tesla, was valued at over 100 billion dollars, more than long-established global giant, Volkswagen. Technological disruption in the automotive sector has arrived. As with many technological advancements, South Africa remains a late adopter, but the proliferation of electric vehicles is to be expected here too. Already, early movers like South African company, GridCars, is rolling out electric vehicle charging stations across the country in anticipation of the electric vehicle boom. In fact, you can now already drive your electric vehicle from Johannesburg to Durban or Cape Town, using the GridCars network of charging stations conveniently located along the way. This year, several manufacturers plan to offer a larger, more affordable range of electric vehicles to the South African market.  Watch this space.

In the recent State of the Nation address, the President reinforced sentiments expressed by the Minister of Mineral Resources and Energy during the Mining Indaba, which point to the liberalisation of the electricity sector, allowing more private participation. This is good news for private or self-generation, which is set to become more mainstream in South Africa.  Moreover, this will help to alleviate the country’s sole reliance on a single constrained utility. The mining sector is certainly heading in this direction, with several mining houses now soliciting proposals for independent power generation.

The case for renewable energy is no longer built solely on addressing climate change. It now has a strong commercial underpin that new traditional thermal generation will struggle to compete with. South Africa has little choice but to pursue private sector renewable energy solutions at greater scale, as local and international financing for fossil fuel generation dries up. Already banks, insurers and equity providers are refusing to support new coal-fired generation due to its emissions.  How long until this sentiment moves to gas-fired generation as well?

Dario Musso is co-head of infrastructure finance at Rand Merchant Bank

[1] Eskom MYPD Application, January 2019

[2] Independent Power Producers Procurement Programme (IPPPP), An Overview, As at 30 June 2019, www.ipp-projects.co.za