South Africa requires an energy revolution. The reasons for investing in renewable energy: the energy crisis and increasing environmental consciousness. The fundamental challenge is that renewable energy systems possess a higher investment cost in comparison to conventional energy sources, even though lower fuel and operating costs make renewable energy cost-competitive on a life-cycle basis.

In South Africa the main constraint to the development of a dynamic renewable energy industry is the ‘energy sales price’. South Africa’s cheap energy supply is based on coal – with the cheapest coal-fired energy in the world, at 22 cents per kilowatt/hour. In comparison solar energy is approximately priced at 46 cents and wind energy at 57 cents per kilowatt/hour.

Government’s Proposed Feed-in Tariff System

Through the government's Renewable Energy White Paper, it is envisioned that a capacity of 10 000GWh will be generated by renewable energy sources by the year 2013 – comprising approximately 4% (1667 MW) of the country's energy supply. In a move to enlarge the market implementation of renewable energy, government has promised to reveal a strategy on feed-in tariffs (fixed price policies such as the EU’s energy feed-in law) by February 2009.

The feed-in tariff system will remunerate Independent Power Producers (IPP) for renewable power they feed into the national grid. IPP operators receive a preferential rate in a ‘pay-for-energy-delivered contract’, where payment is guaranteed above conventional prices. The feed-in-tariffs currently cover four renewable energy technologies, namely: wind, concentrated solar, landfill gas and small hydropower.

Thembani Bukula, head of electricity regulation at the national electricity regulator (Nersa), believes that the feed-in tariff system is the best mechanism to engender an economically viable renewable energy industry in South Africa. Germany and Denmark have successfully applied variations of feed-in systems.

The pricing system can be adjusted to promote investment in renewable energies. According to Peet du Plooy, trade and investment programme adviser for WWF South Africa, getting the price right is necessary to foster investment in renewable energy projects. The projected tariff range at this stage is 50 to 80c/kWh. Project developers have already expressed their concern about the expected price range.

Municipal Incentive Strategies for IPPs

IPPs have an option of selling electricity either to Eskom, the state-owned power supplier, or directly to the municipality (local authority), though the latter has so far been a complex process. However, new strategies for partnerships with municipalities have emerged, providing an attractive option for IPPs.

The successful application of these strategies is evident in the following cases: the Bethlehem hydropower project, the Darling wind farm and the Nelson Mandela Bay Renewable Energy Project. These projects were structured by a combination of incentive mechanisms: Clean Development Mechanism (CDM), Tradable Renewable Energy Certificate (TREC), grant financing and a premium power purchase price.

In short, these municipalities agree to a higher purchase price for electricity (green power) that has been facilitated through a Power Purchase Agreement (PPA). Municipalities then sell this electricity as green power at a premium price to a willing buyer (i.e. corporations). By securing agreements with corporate purchasers of green power, they are able to offset the higher costs of renewable energy.

Costing a 2020 target for 15% renewable energy in South Africa

At the National Renewable Energy Conference 2008 in Sandton (November 6-7), Dr Andrew Marquard (a researcher from the Energy Research Centre, University of Cape Town) presented the findings of a study exploring the implications of a revised energy target, with South Africa achieving 15% of electricity generated from renewables by 2020.

The alternatives to coal-fired energy in South Africa are renewable energy and nuclear, and the study suggests that the renewable energy option is no more expensive than nuclear. The study modelled a number of scenarios. Marquard highlighted: “The most promising scenario is a mix of solar thermal and wind, which benefits both from the lower cost of wind and the ability of solar thermal to contribute to peak demand.” The study incorporated new research on wind resources in South Africa, which indicates that the potential for wind power is far greater than previously assumed.

“It is challenging to implement, particularly the investment costs, but significant sustainable development will result from this. Partner programmes are very important in reducing costs and benefiting mitigation” said Marquard. The study posited that finance for renewable energy projects could be sourced via: a feed-in tariff system, tradable renewable energy certificates, international climate-related finance and through subsidies for technology development.

The study implied that with the right incentives, IPPs could play a key role in piloting solar thermal and wind technology in South Africa. Marquard concludes: “South Africa has the necessary institutional, technical and physical infrastructure to achieve this target, and committing to such a target would put South Africa in a leading position internationally among developing countries, making renewables part of a measurable, reportable, and verifiable mitigation action.”

The study showed that a renewable energy target of 15% by 2020 target is financially feasible. Moreover, if combined with an energy efficiency programme, this approach will provide greenhouse gas mitigation, “together with air quality, health and eco-system service co-benefits to South Africa.” This modelling exercise also indicated that such a programme would have less of an impact on the electricity price than this year’s price increase. In short, these are grounds to take renewable energy seriously in South Africa.