In this focused discussion on renewable energy, Paul Semple of Futuregrowth explains why his company has lent more than R4bn to 19 South African projects – and explains why renewable energy will deliver cheaper electricity into the national grid than Eskom’s new coal-fired power stations. But he frets that this is the trough for renewable energy prices, despite the country’s excellent natural assets and technological progress. – AH
ALEC HOGG: On the line from Cape Town is Paul Semple from Futuregrowth. We’re talking about renewable energy today. Paul, what’s driving this renewable energy boom, in South Africa?
PAUL SEMPLE: Alec, in a nutshell, it’s really an energy capacity deficit in this country and it all relates to the inadequate supply by Eskom, into the national grid to meet the demands on power in this country.
ALEC HOGG: But one doesn’t necessarily have to do renewables to meet the supply. I mean, they could put up more dirty power coal stations. Is it not something to do with climate change, as well?
PAUL SEMPLE: Absolutely. The green option is becoming more and more relevant in this country. Currently, Eskom is supplying over 90 percent of the power in this country and most of it is from coal-fired plants. It’s becoming more and more of an issue, not only in this country, but internationally.
ALEC HOGG: So what’s been holding renewable energy back? You would have thought… If you look back 100 years, we had the sun. We had the wind. Someone should have wanted to convert that into energy a long time ago. Why not?
PAUL SEMPLE: Alec, it goes back probably 40 years, and it really started in the early 70’s when the Government (or Eskom) overestimated their capacity requirements. They made massive investments in coal-powered stations over the next 20 years and it resulted in the coal-fired power becoming the cheapest in the world. As a result, I think there was some apathy around looking further than coal and it was only in the early 2000’s when there had been no further investment in power generation that the country – and Eskom, in particular – suddenly woke up to a huge shock that really, there wasn’t enough supply to meet the country’s growing requirements. It was at that point that we realised something had to be done quickly and renewable energy, apart from the green and environmental benefits that it has, was a lot quicker to implement and deliver electricity than it would be to build a huge coal-fired plant.
ALEC HOGG: So how has progress been since those early 2000’s – on renewables?
@alechogg carbon tax will shift these numbers too. Starting to price in externalities as coal must also meet new pollution/emission regs
— Chris Loker (@WaterFinancial) September 9, 2014
PAUL SEMPLE: Well, the renewable program started three years ago. There have been four rounds of bidding over the last three years. The first round of projects started to come on-line over the last six months, so to date, we have 21 projects that have connected to the grid and they’re delivering over 600 megawatts of power. Over the next couple of months, that should increase to well over 1000 megawatts.
ALEC HOGG: So it’s a good start. However, if you take all four of those processes (the bids that you were talking about before), how much power will then be injected into the grid?
PAUL SEMPLE: We’re looking at just under 4000 megawatts from those four rounds of projects and that is around ten percent of the total power supply currently in the country. It is sizeable and it is expected to grow even further in the years ahead. The Government has indicated that they wish to make renewable power a much bigger source of energy supply over the next ten to 15 years.
ALEC HOGG: I guess price plays a big part, though: price (on the one hand) of what Eskom is prepared to pay for renewables, which clearly, has to be at some kind of a premium to what it’s total cost is now.
PAUL SEMPLE: Absolutely. Price was an issue for Government in the first two rounds, in fact and it was really, because there wasn’t enough competition/bidders competing for these projects. That was in the early days, though. That was back in 2011/2012. As this program has generated more and more interest from international developers, there’s been increased competition to win projects and the increased bidding has pushed the bidding prices down. Government is now paying much less for taking power off a new renewable energy plant, than it is to produce a megawatt electricity coal-fired station that’s been built by Eskom.
ALEC HOGG: That’s fascinating, so it’s actually cheaper now for the country to buy solar or wind power, than it is to buy it from these new coal-powered power stations.
PAUL SEMPLE: That’s right. That’s what has transpired over the last three years. The latest round of bidding has proved that the price that Government is paying per megawatt is cheaper than the price that they will pay per megawatt out of a coal-fired station, such as Medupi or Kusile.
ALEC HOGG: Paul, what does that mean for the longer term? We still hear stories about ‘we need more coal-powered power stations and we need a nuclear power station’. If it’s cheaper to go with renewables, surely that would be a better option.
PAUL SEMPLE: It is a better option from a price point of view, although I must just add a caveat that renewable prices are at their lowest now. International developers are becoming less excited about investing in the country at current prices, and particularly if they decrease even more, so take it for granted that prices in renewables have bottomed out now. I think the benefit of renewables is that they can be delivered at speed, so within two years, a new renewable project can be generating power into the grid whereas coal-fired stations take up to ten years to be developed.
ALEC HOGG: We’ve spoken broadly about renewables. However, what areas are we seeing most of the investment in – what particular areas of the renewable energy spectrum in South Africa?
PAUL SEMPLE: It’s mostly in solar-powered energy and wind-powered energy, Alec. That’s where most of the projects are currently, with the wind-powered projects being along the coast and naturally, the solar-powered in the middle/northern parts of the country.
ALEC HOGG: Given our climate, that sounds like the obvious way to go.
PAUL SEMPLE: Absolutely. Yes, it’s proven to be very successful. South Africa has one of the best natural resources in terms of sunlight in particular, in the world, which makes these projects produce very optimally.
ALEC HOGG: It’s interesting, though. With any new area, as you get better technology, it generally becomes more efficient and if you’re delivering something into the market, the prices continue to fall. What you said earlier about pricing probably being at its trough: does that take into account the possible technological advances?
PAUL SEMPLE: Yes, it does. I think technological prices have bottomed out as well. Over the last couple of years, many technology producers have started to hit the wall, particularly in places such as China where there are burgeoning producers of technology and solar panels etcetera. They’ve started to make investments in a solar producer, for example become unviable.
ALEC HOGG: So far it’s a very good story but its one where that you have to be aware of the background, too. Part of the success I guess, is also related to the public/private partnership and in this case, almost like Gautrain, public sector and private sector came together and seemed to have made a success of it.
PAUL SEMPLE: Absolutely. That’s been one of the successes of the program. There’s been fantastic collaboration between the Departments who have set up a dedicated unit for the renewables program and the private sector. It’s encouraged just under R100bn of investment from the private sector into the renewable program.
ALEC HOGG: How much have you guys in Futuregrowth been putting in?
PAUL SEMPLE: Futuregrowth has committed investment in 19 debt projects, so it committed debt to 19 projects totalling just under R4.6bn.
