South Africa's energy market is currently dominated by coal-fired plants that are being run more efficiently in a bid to keep up with demand as private-sector led investments in solar and wind power generation increasingly enter the country's energy mix.

At the current rate of progress, however, South Africa will only meet its current demand levels in 2040 and large companies, including mining firms, are increasingly buying energy privately, according to Standard Bank and financial adviser Cresco.

"Many companies are implementing and procuring power through their own processes as there's so much uncertainty around regulation. Companies are buying from traders and aggregators and it's mainly driven by ambitious targets to become more sustainable," said Rentia van Tonder, head of power at Standard Bank.

South Africa is restructuring its power sector and signed the Electricity Regulation Amendment Act in August to introduce competition and private sector participation. The move is expected to reduce state power utility Eskom's monopoly and lead towards the diversification of the country's coal-reliant energy system.

"At the moment, if you buy power directly from Eskom, you don't have any way to actually pin that to your ESG goals," van Tonder said.

Progress has been slow so far on South Africa's Just Energy Transition Partnership Plan with rich countries, which was announced at the COP26 international climate summit in Glasgow in November 2021. Little funding has been received to date, although negotiations are continuing with the government.

The US$8.5bn deal with the European Union, France, Germany, the UK and the US is supposed to accelerate the decarbonisation of South Africa’s electricity system by providing a mix of grants and concessional loans and guarantees.

"We are all waiting in anticipation for when the first money will flow and exactly what it will be spent on. At the moment all the Development Finance Institutions are currently still in discussions around exactly what the plan, framework and focus areas will be," van Tonder said.

Standard Bank would like the bulk of the funding to focus on transmission as the country needs to expand its transmission network to support the connection of more renewables to the grid, along with a focus on the social side of the just transition to support jobs as coal power is decommissioned.

South Africa's JETP sees solar and wind capacity increasing in the next 20 years and coal capacity decreasing to 18GW by 2040, although this plan is currently under review. As many as 27% of coal-fired power stations are still required to be part of the energy mix in 2040, which will make South Africa's goal of carbon neutrality by 2050 challenging.

In the next two to three years, the bulk of South Africa's energy will be provided by government-procured projects, which started construction a few years ago, along with private sector projects that reached financial close recently. But there is a projected slowdown in new capacity additions between 2030 and 2034, which is related to grid constraints linked to Eskom's Transmission Development Project.

Even with an optimistic delay, South Africa is still facing power shortages as demand will continue to outstrip supply, despite the addition of new wind and solar facilities and both utility-scale and rooftop or diversified renewables systems, according to Standard Bank and Cresco.

South Africa's privately-procured energy market is planning to achieve a 20%–35% decarbonisation target that will last until 2026 following rapid increases in the installment of utility-scale wind and solar generation. From 2025 to 2030, power decarbonisation is projected to increase to more than 50% as more solar and wind power comes online and battery energy storage systems provide cover for solar and wind intermittancy.

Green hydrogen is expected to enter the energy mix after 2030 but is still being tested for financial feasibility for large-scale electricity replacement. As a result, the primary application for green hydrogen in South Africa may not be for electricity generation, but for export or industrial applications and potentially in fuel cells, van Tonder said.

South Africa already has about 6.3GW of operational renewable energy, mainly wind and solar in 93 projects with another 17 in construction that represent a further 1.9GW and an additional 1.1GW will reach financial close in the next two to three months, she added.

Source: IFR