Page 47 - Energize November 2021

VIEWS AND OPINION

Myths and truths around South Africa’s recent

renewable energy auction

by Wikus Kruger, University of Cape Town

outh Africa’s department of mineral resources and energy recently announced its
choice of companies to build and operate a new batch of renewable energy projects.
SThis is part of a programme in which the government invites private companies to
compete for contracts to produce electricity and sell it to the national utility, Eskom.
In this most recent auction of contracts, known as “bid window 5” (BW5), 25 projects
– 12 solar and 13 wind – totalling close to 2600 MW of capacity got the go-ahead. These
projects are expected to come online in the next two to three years. The contracts last for
20 years.
The power companies’ bids are scored mainly (90%) on the price at which they will sell
electricity. The rest of the scoring (10%) is based on socio-economic development criteria. Wikus Kruger
BW5 marks the end of a long gap in procurement of renewable energy. South Africa
started the procurement programme in 2011, and over the next four years awarded 102
renewable energy projects totalling more than 6300 MW. The programme was stopped these prices are feasible.
in 2015 when Eskom’s leadership at the time refused to sign any more of these power South Africa also has one of the
purchase agreements. most onerous and expensive bidding
The BW5 results announcement signals a renewed commitment. Prices of awarded programmes in the world. This is to
projects are extremely competitive – as low as 34,4c/kWh (about US$0.02) for onshore guard against unrealistic bids being
wind and 37,4c/kWh for solar PV. The average price for projects in the previous bid window made. The country’s rate of successful
was R1,03/kWh (about US$0.07) in April 2021 terms. The prices are now competitive with bids that translate into projects is more
Eskom’s average cost of buying coal in the past financial year: 42c/kWh. And, of course, than 95% – one of the best in the world.
Eskom has the additional cost of running coal-powered plants. In short, there’s no reason to
Thus, it is now theoretically cheaper for Eskom to buy renewable energy from believe that new projects will not reach
independent power producers than to run its more expensive coal power stations. commercial operation because of price.
The problem is that the power system is severely constrained and needs much more Second, there’s the concern that due
capacity before this is a realistic option. One also needs more flexible resources on the grid to projects increasingly being awarded
to ensure reliability and this adds to the costs. to fewer and fewer bidders, the market
But I’ve been involved in research that shows renewable energy procurement will be dominated by only a handful of
programmes like this can secure projects that are built cost competitively – if well designed international companies.
and implemented. This is so even in difficult investment contexts in the global south. While it’s true that a small number
My view is that South Africa’s renewable energy procurement programme has the of winning bidders were awarded
potential to help restore energy security and eventually reduce power prices. This is the lion’s share of projects in this
despite some concerns that have been raised about the latest bid results. I will explain here latest auction, it’s not true that this
why these issues aren’t reasons for concern. has resulted in market domination.
The fact is that competition has been
The concerns fiercer in each consecutive bidding
Three main concerns have emerged in response to BW5: round, and no company has been able
• The prices are too low to be realistic to dominate the market from one
• A few bidders will dominate the market round to the next.
• Tariffs for renewables can’t be compared with baseload tariffs. A degree of market concentration
is inevitable in a competitive bidding
First, let’s consider the claim that these prices are way too low and the projects will never process such as South Africa’s. This is
be built at these costs. because the larger, more experienced
While the announced prices are indeed around half of those of previous rounds, bidders are able to use economies of
they aren’t unrealistic. Global renewable energy auctions have regularly delivered scale, financial innovation, stronger
prices like these or even lower in the past two or three years. Examples can be found in negotiation positions with suppliers and
Kazakhstan, Saudi Arabia, Portugal, Chile, Abu Dhabi, the US, Brazil and Uzbekistan. That’s contractors and vertical integration to
of course without the additional requirements embedded in South Africa’s procurement reduce costs. In turn, they can offer more
programme – which push up capital and operating costs – but the point remains that competitive tariffs. But a number of

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