Solar power may heal SA woes
Metier Private Equity seeks smaller efforts outside of South Africa.
China has solar power plants that cumulatively produce more than four times our total electricity needs.
As a South African, looking at statistics like this, it is difficult not to feel that something is horribly amiss in our country.
Whereas we are in the grips of “load shedding” blackouts that are crippling an already-fragile economy; other countries are making massive strides in power production technology. China is a good example. From a virtual non-contender in the field of renewable energy production just over 10 years ago, the country has now become a world leader in renewables.
China’s massive economic growth has always been driven by coal-powered electricity plants.
Coal was an obvious choice, since they have an abundance of it.
But coal is the dirtiest of the fossil fuels, and releases extremely high amounts of carbon and other greenhouse gases into the atmosphere when burnt. The smoke from power plants also caused large-scale pollution in nearby cities, making the air, water and soil toxic.
Things became so bad, people had to wear masks throughout the day, to protect themselves from breathing in poisonous gases. Despite this and other measures, people became seriously ill, and began to protest about the unacceptable pollution levels.
China gained a nasty reputation as the world’s biggest polluter.
Something had to be done urgently, and in 2007 the National Development and Reform Commission of the People’s Republic of China (NDRC) unveiled plans to increase solar power production to 1800 megawatts (MW) by 2020.
Solar farms began to spring up all over China, like the massive 27km2 Longyangxia Dam Solar Park in north-western Qinghai province, which is the biggest solar farm in the world. The facility is installed with 4 million photovoltaic panels and has a production capacity of 850MW, enough to power 200000 average households.
China is also home to the world’s largest floating solar farm, the 40MW power plant in central Anhui province, which floats on a lake that was formed when an underground coal mine collapsed. The water in the lake is full of toxins, and hence unusable for any other purpose.
Building the plant on a lake provides two advantages: it makes use of wasted space, plus the water helps to keep the panels cool, thereby optimising performance.
But China was about to outdo itself. By 2012, China’s total solar power production was already sitting at nearly 47000MW. Consequently, the government set a new target of 100000MW by 2020. By the end of 2018, China’s cumulative solar power production was 174000MW.
Just to put that number into perspective, according to Eskom South Africa’s total electricity production is about 40000MW; so China is now producing four times South Africa’s total electricity requirement through solar power alone.
Other countries are also going all-out in adopting renewable power.
Germany, for example, has pledged to close down all its coal-powered plants by 2038.
It will be a remarkable achievement for a country that still relies on coal for about 40% of its electricity.
India is not too far behind, with aspirations to make a complete shift to renewables within a couple of decades.
India had an initial target of 20000MW capacity for 2022, but their total capacity tipped 26000MW by the end of 2018, four years ahead of schedule.
The question is, why now? Why have all these countries accelerated their solar power production in the past five years, even though solar technology was available for decades previously?
The answer has to do with the cost and efficiency of solar panels.
Every year since they were invented in the 1960s, solar panels have become cheaper and more efficient, until they reached a point about a decade ago, when solar became a strong contender to coal.
Although still in its infancy, solar power technology has tremendous potential.
According to Kunal Mushi, founder at India-based Sunrator technologies, just 500000km2 of solar cells, about the size of Northern Cape and Western Cape combined, can power the entire world with clean, renewable energy forever, ending all our energy-related problems like global warming and oil wars.
The best part about solar power for a country like South Africa, is not just that it is free and renewable, but that solar power can be generated at three levels: on a massive scale to supply the national grid; on a city, town or village scale, to provide just that area; or on a domestic level to supply power to a single home.
Clusters of villages that are far from the national grid can benefit from small-scale solar plants that are set up close by to provide them with power, without the overhead of setting up distribution lines.
The question is, why has South Africa lagged so far behind the rest of the world in solar power production?
Solar energy investors may pivot away from high-cost projects
Metier Private Equity seeks smaller efforts outside of South Africa.
When officials cut the ribbon on the R12 billion Kathu Solar Park near Sishen in the sun-baked Northern Cape on April 4, they will officially open the most expensive independent power producer (IPP) project so far in South Africa. The high cost may make it one of the last of its kind, with some investors now searching for smaller energy ventures that retain returns.
The 100 megawatt (MW) Kathu Solar Park uses sunlight reflected from 384 000 mirrors on a 4.5km² site to boil water into steam that spins turbines. It is novel for incorporating four and a half hours of energy storage. The process retains the sun’s heat in tons of molten salt acting as a battery that is tapped by heat exchangers to keep the turbines spinning long after the sun has set or if it’s too overcast.
Wind farms and photovoltaic (PV) solar energy – using panels to create electricity as opposed to a thermal plant like Kathu – don’t offer this capability to cope with the vagaries of demand.
Johannesburg-based Metier Private Equity, which manages about $500 million, invested R350 million in Kathu, the largest investment from the R1.5 billion in its Sustainable Fund division managed by Marc Immerman. He was attracted to the project because of its energy storage capability and the somewhat higher internal rates of returns offered by thermal solar plants as opposed to photovoltaic projects and wind farms.
“Photovoltaics is a completely commoditised project investment that’s now dominated by the various international utilities that can accept much lower returns but also extract value throughout the value chain including the operation, maintenance and some elements of the construction as well,” Immerman said by phone. “Because the wind and photovoltaic solar tariffs have gone so low, the equity returns have dipped below private equity returns generally.”
Wind farms and photovoltaic solar energy can produce a kilowatt hour for about R0.60 while new-build coal plants will cost at least R1.20 per kilowatt hour, says Immerman. A thermal solar plant like Kathu has a much higher cost per kilowatt hour, though the exact amount is confidential in terms of the sales agreement with Eskom, he says.
The high cost of solar thermal plants means they are largely on the way out as projects, says Immerman.
Meantime, the low prices for larger-scale wind and solar PV mean private equity houses such as Metier are looking elsewhere for returns because they are below targeted return levels, Immerman said. The internal rate of return for Kathu Solar Park is “more or less aligned with the rest of our projects,” he said. The Metier Sustainable Capital Fund targets a 25% internal rate of return (IRR), he said.
“This target can be realised through a sale after the construction risks have been mitigated. Given that the returns of the project largely replicate a yield instrument once construction is complete, there is an active buying market using discount rate pricing in the low double-digits. This IRR [internal rate of return] compression lifts the fund’s final IRR delivered to investors and the fund’s ability to invest during the development stage also offers return enhancement.”
The Kathu project, which actually started producing electricity for the national grid on January 30, was funded by a consortium led by Paris-based Engie with a 48.5% stake. Engie is the world’s largest independent power producer with 2017 revenue of €65 billion (more than R1 trillion). Other investors include South Africa’s Public Investment Corporation (PIC), the Sishen Iron Ore Company-Community Development Trust, Investec Bank, FMO (the Dutch development bank) and DEG (the German investment and development company).
Kathu is part of the government’s world-renowned Renewable Energy Independent Power Producer Procurement (REIPPP) Programme. Metier has helped develop seven REIPPP projects and has sold two of them. Those remaining include three wind farms producing 360MW and two thermal solar plants including Kathu totalling 150MW, says Immerman.
“The programme is a real achievement in that the government effectively learned lessons from other countries that have rolled out renewable energy procurement,” he adds.
“The costs of energy have dropped very significantly.”
For Metier’s renewable energy push, the future is in smaller projects in sub-Saharan Africa. “Thinking about the actual energy landscape in Africa, there’s a lot more opportunity for a required energy supply in countries other than South Africa,” says Immerman
Metier already has an 88% stake in a $20 million 5.25MW hydroelectric project in Uganda nearly ready for commissioning. It could be a model of sorts for so-called captive production projects, as opposed to national grid hookups, says Immerman. The investor is considering projects in Ghana, Cameroon, Kenya, Mozambique, Malawi, Zambia, Uganda, Rwanda, Senegal and Ivory Coast.
To that end, Metier is raising $200 million for another sustainable unit fund due for a first close in August after investments from German, Dutch, French and Swedish development finance institutions. Other banks in Europe may also be interested, says Immerman.
Back in South Africa, the first new REIPPP bidding round in several years could start later this year, according to energy minister Jeff Radebe.
The ministry sidelined renewable sources during the presidency of Jacob Zuma with its push for nuclear reactors and coal. “There were interests at play in terms of protecting not just the nuclear ambition but also coal,” says Immerman. “People wanted to continue with coal, increase the level of coal generation, deliveries and so on.”
Those deliveries were the subject of a court ruling last week as the union of coal truck drivers sought unsuccessfully to stop the government from pursuing renewable energy sources, out of fear of job losses. Proponents of renewable energy point out that these projects in fact create jobs, but like most so-called disruptive technologies, they are often different jobs than the old ones.
Read: Truckers lose court challenge against solar arrays and wind farms
The REIPPP programme has drawn some R209 billion in private sector investment in eight years from investors such as Old Mutual, solar and wind farm developers Red Cap Energy, Phakwe Group and Pele Green as well as the PIC, according to the ministry. The initiative has connected 3 776MW from 62 independent power producers to the grid out of a total of 6 422MW procured from more than 100 IPPs through five bidding windows, ministry stats show.
However, this is just 5% of the total energy sold to South Africans, according to the ministry. The National Development Plan adopted in 2012 states that South Africa needs at least 20 000MW of renewable energy by 2030. By that time, 13 000MW of coal-fired capacity is scheduled for decommissioning as plants reach the end of their commercial and operational life, the ministry says.