South Africa has long had an energy problem.
Because of overcapacity, in the 1990s the country’s electricity prices were among the lowest in the world. But after a long-overdue electrification for vast swaths of the populace and subsequent underinvestment, capacity constraints started becoming an issue.
In recent years, prices have been rising faster than inflation and rolling blackouts are common.
On top of that, South Africa has a disproportionately high emissions rate because of energy-intensive activities like mining and the country’s reliance on coal for its power production.
Though it is only responsible for about 1 percent of global emissions, regulators put these two issues together and saw an opportunity for change, and so was born the Renewable Energy Independent Power Procurement Program (the REIPPP) in 2011.
Put simply, it has been, in the words of Margo Buchanan, specialist consultant in the power sector for Futuregrowth Asset Management, “hugely successful.”
Buchanan told AFKInsider that there are 39 projects already online producing 2,050 megawatts of clean energy, in addition to the numerous projects in various states of development.
This is “the big story on the continent. You don’t see that kind of level of investment anywhere else in Sub-Saharan Africa,” she said.
The original plan was to generate just over 3,600 megawatts of power using renewable sources; according to Buchanan, “They’ve had four rounds of bidding so far, they’ve now made an additional determination of an extra few thousand megawatts.”
She says, “It’s really the big story on the continent. You definitely don’t see that kind of scale or that kind of level of investment, nor participation from international investors” anywhere else in Sub-Saharan Africa.
Because the projects are so competitive, bidders are bidding at the maximum number of megawatts allowed in order to get economies of scale — meaning more power eventually being generated. In other words, the program is helping to generate clean energy for a country that desperately needs it.
The other benefit is that REIPPP may help to encourage more investment into energy infrastructure — but not in the way you might think.
“[REIPPP] allows the eventual creation of a secondary market in power assets,” says Du Toit. “I firmly believe the lack of a secondary market in all African infrastructure to date has been one of the constraining factors to new investment.”
With a secondary market, investors will be able to buy and sell their holdings, making it possible to realize investment returns — an important issue for institutional investors needing to redistribute those returns.
It helps that South Africa is one of the most favorable settings for solar power in the world, and that the country also has ample wind resources. But there’s more to it than that.
“It was a well-run process which could be duplicated in other countries, and hopefully also in other sectors in South Africa,” Emile Du Toit, head of infrastructure investment with Harith General Partners and chairman of the Southern African Venture Capital and Private Equity Association, told AFKInsider.
In fact, the program has been considered so successful that the World Bank wrote a report on it. Documenting the REIPPP’s numerous innovations and risk-factors, the authors outline a few key differentiators that made it so powerful and credible among participants.
The first was the creation of a small, interdepartmental team with extensive experience and credibility both in the public and private sector. This team created the program with a great deal of expert guidance, with the goal of encouraging as much enthusiasm from the private sector as possible. With a focus on transparency, credibility, and results, the program’s high standards attracted the attention of potential participants.
The program also requires potential participatns to lock in their lending prior to submitting bids. This brilliant move not only outsources some of the diligence process to banks, it avoids a common problem in the bidding process: lowball offers that seem attractive but are not practically affordable after the contract is awarded.
Of course, the global economy also cooperated.
With sluggish economic growth in Europe and the U.S., and an attendant decline in interest in the renewables market, the South African opportunity attracted much more attention than it might have otherwise.
That being said, REIPPP won’t solve all of South Africa’s electricity problems. Though they’ve contributed to Eskom’s overall capacity of just over 40,000 megawatts, renewable sources have yet to solve the country’s ongoing provision issues.
This is because renewables are, according to Alastair Herbertson, investment specialist with Investec Asset Management, “Less than a tenth [of total capacity], and of that it’s renewable, which means that it’s not stable electricity, so I think it’s still far too soon for the renewables to be offsetting the mismatch between demand and supply.”
However, Herbertson pointed out to AFKInsider that it doesn’t mean renewable sources aren’t contributing.
“Eskom even phrased it pretty well themselves: When renewables are generating capacity, the turbines aren’t having to run,” so while the extra electricity isn’t adding a significant amount of capacity or solving blackout problems, they are helping to reduce costs.
REIPPP is, in other words, a start.
While there are shortcomings — confusion about community responsibility requirements, delays in the approval process, and some ambitious goals for job creation and local ownership chief among them — the program has managed to avoid many of the pitfalls that plague public-private partnerships and get real projects off the ground.
It may, in other words, be a small step in terms of megawatts and investment size, but the significance of that step for both South Africa and its peers across the continent cannot be underestimated.
