There are many unknowns about how societies will manage the climate transition. And the associated energy transition from fossil fuel-based energy to renewable energy.
The climate transition will require significant levels of investment – estimated at US$1 trillion a year in developing markets, excluding China. This raises important questions about the mix of public and private sector investments; whether to subsidise private sector investment; how to regulate private ownership; and how to make affordable energy available to all citizens.
The speed of technological change and the uncertainty about future policies makes it hard to answer these questions. But countries that have put their toe in the water offer clues. South Africa is one of them. It developed a process for renewable energy procurement 12 years ago.
The Renewable Energy Independent Power Producer Procurement Programme is still considered a pathbreaker. Many have seen it as a blueprint because of its success in attracting investment by independent power producers.
Without investments under the programme, the country’s electricity supply problems and power cuts would have been much worse.
The experience of the last 12 years therefore provides valuable insights about policy for the future. In a recent paper we reviewed the programme. We identified barriers and blind spots that have hindered South Africa from ramping up renewable energy generation at scale and speed.
We also found that the stop-start nature of the programme held back local production of new renewable technologies. And low risks for private investors did not trigger the required acceleration in the energy transition. This was related to the slow pace of government processes and the private sector’s inability to meet certain developmental obligations.
Based on our findings we point to ways to get closer to the country’s key targets. These include increased capacity, decarbonisation, local development, and addressing energy poverty among lower-income households.
We highlight the possibilities for an investment-centred approach in which an energy transition serves the public interest and balances competing interests. Those interests include sustainable security of electricity supply, returns to investors, improvements to local manufacturing, affordable pricing, and social needs. In this approach there is appropriate government regulation of private investment alongside public investments that focus on building a low-carbon economy and prioritising climate justice.
A boost for renewable energy investment
The government started the Renewable Energy Independent Power Producer Procurement Programme in 2011. The aim was to secure power supply and diversify the energy mix.
Since then, bidding rounds (reverse auctions) have been conducted for specified types and capacities of power generation technologies. Winners received 20-year agreements, guaranteed by the government, to buy the power. They had to meet obligations related to local content and local development.
There have been six bidding rounds. Over R200 billion (almost US$11 billion) has been invested for the construction of renewable energy. This has brought more than 6.2GW of power generating capacity to the grid. (The total grid capacity is estimated to be 58GW.)
Barriers and blind spots
The local content requirements failed to boost local production of renewable energy technologies.
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South African renewable energy producers were, in many instances, simply unable to compete with global producers on costs and scale.
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Delays in the timing of the bid processes caused knock-on delays and disruptions. Some manufacturing companies that supplied parts for renewable power stations had to shut down as a result.
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Some private investors preferred to negotiate their own off-take agreements and avoid local development obligations.
Financing has been skewed by the government taking on too much risk. And private investors earned very high profits, especially in earlier bidding rounds.
The analysis also showed foreign investors taking an increasing role in bidding rounds. Transnational investment accounted for 69.5% of projects. The least common type of investment was localised renewable energy ownership, at 30.5% of projects. Debt finance for these projects was usually from national or development banks.
We also considered the impact of rising costs of electricity in the energy transition. We observed a new pattern of supply and demand. As electricity fed from the grid becomes more expensive and unstable, wealthier households are getting off the grid and using privately funded renewables. This leaves a smaller pool of customers to bear the costs of maintaining the national system. This private investment is reducing scheduled power cuts, but it may be increasing energy poverty – lack of access to energy and more household income shifted to pay energy bills. And it has a negative impact on health, wellbeing, overall quality of life and equality.
The programme took some of the risk out of renewable energy at a time when the technology was new and there was uncertainty in the market. This was a useful first step to support investment. But a de-risking approach has not triggered an acceleration of the energy transition that is required globally to reduce emissions and prevent disastrous climate impacts. It also exposes the country to global financial shocks.
Our analysis suggests that it’s short-sighted to see government’s role purely as reducing risk for private investors. It places too much risk on the government and taxpayers.
What needs to be done
We argue that an investment-centred approach would be more appropriate, particularly for South Africa and other low- and middle-income countries. Most are grappling with the energy transition while also needing to address their industrialisation, development goals, unemployment and inequality.
An investment-centred approach to decarbonisation calls for state-directed and regulated investment and industrial policy.
Next steps for the renewable energy procurement programme:
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Update regulations to account for a more liberalised electricity market.
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Explore opportunities that focus on local development. A regional bidders round could develop renewable energy projects in provinces where there is no renewable energy at present, but where there is grid capacity.
Lessons for the energy transition:
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fund research and development for low-carbon technologies
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make support for private entities conditional, and monitor it
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promote energy efficiency, recycling and reduction of environmental harm in all sectors
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consider the broader impact of climate policy on the economy, particularly as it relates to employment, livelihoods and equitable access to basic services
An investment-centred approach to decarbonisation requires a capable, transparent and accountable state. The government’s lack of coordination across state entities and a lack of commitment to one vision means a misalignment persists between sustainable economy objectives and other policies and priorities.
These changes should flow into integrated regulation, energy planning, industrial policy and policy more broadly.
Aalia Cassim writes in her personal capacity
