Renewable Deal Finally Signed in South Africa

On 4 April, Minister of Energy Jeff Radebe signed the long-delayed power purchase agreements with 27 successful bidders from Rounds 3.5 and 4 of the Renewable Energy Independent Power Producers Program (REIPPP). The contract signing was a significant development, particularly for IOCs interested in the gas-to-power independent power producer (IPP) program, as it signaled the intention of President Cyril Ramaphosa’s government to restore stability and confidence in the energy sector. Radebe’s speech at the signing ceremony highlighted the role that the private sector can play in power generation. It also reinforced the government’s other priorities, which IOCs should look to align themselves with, such as job creation and increasing black participation in the energy sector.

The 4 April signing had originally been set for 13 March, but a late-night attempt by the National Union of Metalworkers of South Africa (Numsa) and lobby group TransformSA to interdict the signing resulted in a delay. The North Gauteng High Court ruled on 30 March that Numsa and TransformSA’s court action was not urgent, paving the way for the 4 April date. The delays signal potential issues facing private investment in the power sector. Unions and other interest groups are opposed to IPPs, not just renewable energy ones, as they pose a risk to jobs at Eskom and coalmines linked to the state-owned utility. Job creation is an important message for IOCs to build on in their engagement with the government.

However, as underlined by further attempts made to derail the signing, the challenges to IPPs extend beyond the unions. While Radebe, Eskom and Deputy Finance Minister Mondli Gungubele signed the agreements with the 27 IPPs in a public ceremony, when it came to signing the actual documents later in the day, Eskom executives tried to argue that they did not have the required authority. Only after the intervention of senior government officials, possibly even President Ramaphosa himself, did Eskom agree to sign. This situation reflects the need for further reforms at the state-owned utility, which continues to oppose threats to its virtual monopoly position across generation, transmission and distribution. Eskom’s dominance has given it considerable influence in the energy sector, and vested interests are threatened by IPP investment.

Nonetheless, despite this hiccup, the signing will boost confidence that a more rational approach toward the energy sector will be seen under Radebe. The latter’s speech at the signing ceremony was widely praised. In addition to reflecting on the benefits of the REIPPP program, which will result in 56bn rand ($4.65bn) of investment and 2,300 MW of new generation from the latest 27 projects, Radebe welcomed the REIPPPs’ support for socio-economic transformation and job creation. These areas will remain priorities for future IPP programs, including gas-to-power. Radebe also spoke of the need for further transformation through access to affordable funding; he called on banks and development finance institutions to support this endeavor. To address the various structural issues facing the sector, Radebe called for an Energy Transformation Charter to be developed. This will likely be an important area of focus ahead of the 2019 national elections.

While Radebe acknowledged the potential role of gas in the generation mix, he did not provide much more detail, given that the focus of the event was on renewable energy. However, he did indicate that the updated Integrated Resource Plan (IRP) for Electricity would provide further certainty over future energy requirements. This message was repeated by Department of Energy (DOE) Director General Thabane Zulu at the Africa Power Roundtable on 10 April. Zulu indicated that Ramaphosa’s cabinet had made various recommendations on a new draft IRP and that further consultations with “strategic institutions” are now underway. The DOE is expected to report on these developments to parliament’s Portfolio Committee on Energy on 18 April. Zulu also suggested that a more streamlined procurement process for IPPs is being considered, but he did not provide any timeframes or details.

In our assessment, the final updated IRP will be even more important than the IPP contracts in terms of setting the future agenda for the energy sector. The prioritization of nuclear power seen under former President Jacob Zuma will likely be scaled back. The inclusion of natural gas will also be important to watch, as will the extent to which additional coal-fired power is included. There is strong, growing opposition to new coal-fired power from environmental groups, and legal challenges are likely if coal continues to be a major part of the energy matrix. This would hamper Radebe’s efforts to bring certainty to the energy sector, but the gas sector should ultimately benefit as South Africa tries to transition away from its reliance on coal-fired power.