Last week another major step was taken on the way to resolving our energy crisis. The opportunity is now coming into focus for major infrastructure investment while also sparking the development of a thriving renewables-based industrial sector that could become an economic champion for South Africa.
Last Friday, the minister of minerals and energy, Gwede Mantashe, gazetted the section 34 determination to procure 11.8 gigawatts of new power from independent power producers. That is a lot – equal to around 25% of our theoretical total current installed base.
The process has been a long one, made more agonising by the energy crisis we’ve had to endure throughout. Gazetting was a formality after the National Energy Regulator of South Africa concurred, after six months, with the determination the minister had made in February this year.
Finally we are at the point when the Independent Power Producers (IPPs) Office can go ahead and begin the procurement process. That will start with a request for proposals leading to bidding rounds in which project developers will pitch to sell electricity to Eskom. Those offering the best prices and socioeconomic benefits will be selected. The request for proposals will open in December or January, with winning bidders announced sometime next year.
The IPP Office has overseen four rounds of bidding in the renewable energy programme with great success. Indeed, amid the travesty that was made of public procurement during the state capture era, the first four Renewable Energy Independent Power Producer Procurement (REIPPP) rounds were conducted without a flaw. Those procured 6.4GW of capacity, attracting R210 billion of investment.
The IPP Office is now entering a phase that will require significant additional capacity. It is also simultaneously running the 2 000MW Risk Mitigation IPP Procurement Programme, the determination for which was gazetted on 7 July, with the procurement programme kicking off on 23 August. The preferred bidders for that round are expected to be announced on 15 December.
The determination includes 6.3GW of renewables, 513MW of storage, 3GW of gas-fired power and 1.5GW of coal-fired power. These are all in line with the Integrated Resources Plan released in August last year.
If we are going to make the most of this procurement to stimulate industrial activity, it is important that we space out procurement so that South Africa’s own supply capacity can grow.
Of course, many components in energy generation must be imported but there is potential for local manufacturing of key components. This was shown during the earlier rounds of REIPPP when manufacturing activities like the construction of wind turbine towers, assembly of photovoltaic units, and coating of parabolic mirrors all began locally. Much of that collapsed when round 4 of the programme was frustratingly delayed for years.
Two lessons should be clear from that experience: a predictable pipeline of demand is necessary, and local content requirements for project developers are important.
The IRP sets out procurement plans for the next 10 years but it is important that we create a visible pipeline longer than that to really galvanise firms to enter into the energy supply chains that will flow from the projects. The early rounds of REIPPP produced several firms that have become globally active in energy projects, showing the potential of how the procurement process could catalyse a major new export sector for South Africa.
It won’t all be easy. The coal targets in the IRP are going to be difficult to reach – it is becoming near impossible to raise finance for fossil fuel projects and legal challenges are likely. Gas will also face some pushback on environmental grounds.
There will also be issues over just what forms of renewable and storage technologies are used. But we are finally at the cusp of a real change in energy security and a potentially vibrant new economic cluster. Stats SA is expected to release second-quarter unemployment figures tomorrow that will reflect the devastation that Covid-19 is causing to jobs. We cannot be so dependent on big business and big government to be a source for jobs. It’s time to put labour law reform on the negotiating table, I wrote in my Business Report column.
The question over the future of South African Airways has so often been pitched as a battle between those in favour of the state ownership and those clamouring for a much smaller government role in the economy. What often gets lost in this age-old ideological debate is that the national airline in its current guise poses a risk to the sovereign. Reducing that risk should be the overall objective. Read my full Business Day column here.
This is a weekly newsletter from BLSA CEO Busi Mavuso.