Independent Power Producers (IPPs) and developers venturing into South Africa’s renewable energy sector face an onerous and challenging regulatory landscape characterised by uncertainty in securing grid connections and considerable development costs.
This is according to Stefan Bothma, Senior Project Developer at Sustainable Power Solutions (SPS), who explains that Eskom’s approval processes, coupled with complex environmental and land use procedures, contribute to the complexities encountered by IPPs and supplementary power suppliers.
This creates challenges for project developers to enter the renewable energy market without the support of development funds and strategic partners who can provide the necessary support to guide projects to financial closure.
SPS is a renewable energy asset management company that is actively expanding into the energy trading and wheeling market, which will enable businesses to buy and sell energy directly, promoting a more flexible and cost-effective energy market. These projects enable more businesses to transition to renewable energy.
Grid connection uncertainty
“The regulatory process to obtain grid connection can be quite intricate. While the regulations are clearly defined, the certainty of connection and grid capacity remains variable. Eskom operates within a dynamic market, and although they may indicate capacity availability at the time of application, this status can change by the time the application process is finalised. This variability introduces a level of uncertainty for IPPs navigating this regulatory landscape,” explains Bothma.
However, he adds that the uncertainty in the regulatory environment presents an opportunity for a company like SPS, due to the significant financial resources, experience and patience required to navigate this challenging landscape.
“While the process can be quite challenging, SPS has the potential to leverage its capabilities to capitalise on opportunities that may be out of reach for smaller players. The regulatory requirements, including the need for substantial financial guarantees, have increased the costs involved in getting an application approved. Consequently, not every small developer has the financial resources to see a project through to completion,” adds Bothma.
Opportunities for bigger players
“This has created a positive outlook for companies like SPS, as we now see more developers approaching us at an earlier stage, once they have secured the land and some of the necessary permits. Previously, these developers would have been able to take projects all the way to grid connection without needing a partner who can cover the increased costs of the grid application until approval,” Bothma notes.
He further adds that now, these developers require the involvement of companies like SPS much earlier in the process. This has led to more opportunities for the company, and a significant part of their work is evaluating which of them they want to pursue.
Francois van Themaat, Managing Director: Large Projects at SPS, says ideally, he would like to see more certainty around grid capacity, which is one of the biggest challenges faced by IPPs currently.
“By the time the application process is complete, the applicant may have already spent millions of Rands, yet there is no guarantee that the required grid capacity will still be available. This uncertainty around capacity availability is a major pain point for IPPs traversing the regulatory environment,” says van Themaat.
Tariff structures
The ongoing restructuring of Eskom and the uncertainty around future tariff changes also pose significant challenges for IPPs. It is challenging for IPPs to sign long-term agreements with clients, as they are essentially locking the client into a certain tariff structure.
This does create some uncertainty for IPPs looking to secure long-term offtake agreements, which are crucial for the viability of their projects.
The Growing Potential of South Africa’s Renewable Energy Sector
Despite the challenges, van Themaat says the outlook for the renewables sector is promising as South Africa has abundant solar and wind resources that provide fantastic potential for renewable energy development.
“Renewable energy prices are continuing to come down, making it more viable. The growth of electric vehicles and energy-hungry data centres in South Africa create increasing demand for renewable power,” says van Themaat.
“At the same time, there is a skilled workforce in South Africa capable of developing renewable energy plants and sufficient funding available through companies like SPS to support renewable energy projects.”
