# Gas Versus Solar: South Africa’s Battle to Ditch Coal

An episode of [Switched On](https://invisiblenetwork.ai/podcast/1469286286), 24 Jan 2024, 31 min.

Audio: https://podtrac.com/pts/redirect.mp3/traffic.omny.fm/d/clips/e73c998e-6e60-432f-8610-ae210140c5b1/01a10738-3608-4dec-883c-ae3c00026b36/59130bea-bbce-4a22-a6ff-b1010092337f/audio.mp3?utm_source=Podcast&in_playlist=6d114f63-833d-4b78-bbf5-ae3c00026b44

With an energy mix dominated by aging and increasingly unreliable coal power plants, South Africans have been putting up with rolling blackouts all the way back to 2007. The government’s latest energy strategy lays out a path to reduce these electricity shortages by replacing coal-fired generation. But rather than renewables being the natural successor, the focus is instead on gas. On today’s show, Dana is joined by BloombergNEF’s Head of Regional Energy Transitions, Emma Champion. Together they discuss why South Africa is still looking to fossil fuels for its power supply, why the new energy blueprint has rolled back utility-scale solar targets as smaller rooftop installations boom, and the attractiveness of the country as a renewable energy investment opportunity versus other markets in the region. Complementary BNEF research on the trends driving the transition to a lower-carbon economy can be found at BNEF<GO> on the Bloomberg Terminal, on bnef.com or on the BNEF mobile app. Links to research notes from this episode: South Africa Favors Gas Over Solar as Successor to Coal - https://www.bnef.com/insights/33121 Climatescope 2023 - https://www.bnef.com/insights/32751 South Africa Power Transition Outlook - https://www.bnef.com/insights/32751 See omnystudio.com/listener for privacy information.

## Transcript

[0:00] Speaker 1: This is Dana Perkins and you're listening to Switched on
[0:03] Speaker 1: the B and EF podcast. With an energy mix that's
[0:06] Speaker 1: largely made up of aging and increasingly unreliable coal power plants,
[0:10] Speaker 1: South Africans have been facing rolling blackouts and energy shortages
[0:14] Speaker 1: going all the way back to two thousand and seven.
[0:17] Speaker 1: To put the nation's energy issues into perspective, in twenty
[0:20] Speaker 1: twenty two, blackouts reach ten point nine terrawatt hours that's
[0:24] Speaker 1: five percent of the nation's net generation. The following year,
[0:27] Speaker 1: between January and June of twenty twenty three alone, this
[0:30] Speaker 1: figure rose to over fourteen terrawatt hours, or twelve percent
[0:34] Speaker 1: of net generation. The South African government has released the
[0:37] Speaker 1: latest Integrated Resource Plan or IRP for short, which we'll
[0:41] Speaker 1: talk about more on today's show, and it sets out
[0:43] Speaker 1: its strategy to combat these energy shortages. While other countries
[0:48] Speaker 1: are turning to renewable energy sources, the current South African
[0:51] Speaker 1: energy plan is looking to stabilize its domestic power production
[0:54] Speaker 1: with the inclusion of gas. On today's show, we talk
[0:58] Speaker 1: about the South African government's new new IRP and discuss
[1:01] Speaker 1: why they have rolled back on renewable energy and how
[1:04] Speaker 1: practical this new plan might be. We also discuss how
[1:07] Speaker 1: the IRP may have reduced South Africa's ambitions for utility
[1:11] Speaker 1: scale solar, while at the same time there has been
[1:13] Speaker 1: an increase in residential PV and small scale installations. And finally,
[1:18] Speaker 1: we look at the attractiveness of South Africa as an
[1:21] Speaker 1: investment opportunity in the energy sector by sharing some of
[1:24] Speaker 1: the results of Climate Scope. To speak with us about this,
[1:27] Speaker 1: we have Emma Champion on today's show. She is the
[1:30] Speaker 1: head of the team looking at regional energy transitions and
[1:33] Speaker 1: she drew upon two research notes titled South Africa Favors
[1:37] Speaker 1: Gas over Solar is Successor to Coal and the South
[1:41] Speaker 1: Africa Power Transition Outlook. Bn EF subscribers can find them
[1:45] Speaker 1: at BNF dot com or at bnfgo on the Bloomberg
[1:47] Speaker 1: terminal and to see the publicly available results of Climate Scope,
[1:51] Speaker 1: head to Global dash Climatescope dot org. As always, if
[1:56] Speaker 1: you like this podcast, make sure to subscribe or give
[1:59] Speaker 1: us a review on Apple Podcasts or Spotify to make
[2:01] Speaker 1: us more discoverable by other people. But right now, let's
[2:04] Speaker 1: jump into our conversation with Emma about what's happening in
[2:07] Speaker 1: South Africa. Emma, thank you for joining us today to
[2:20] Speaker 1: talk about South Africa.
[2:22] Speaker 2: Thank you so much for having me, Dana.
[2:23] Speaker 1: So one of the things that your team does is
[2:25] Speaker 1: look at various countries in in Mia in detail. So
[2:29] Speaker 1: it's really nice to have the opportunity to take a
[2:32] Speaker 1: moment to talk about South Africa specifically. And this is
[2:35] Speaker 1: going to be well, it's a story of change, definitely
[2:38] Speaker 1: has a bright future. But before we get to that,
[2:40] Speaker 1: let's talk a bit about history and one of the
[2:44] Speaker 1: things that has plagued South Africa, which have been rolling blackouts.
[2:48] Speaker 1: Can you talk a little bit about where these problems
[2:50] Speaker 1: have historically come from and just kind of the scale
[2:54] Speaker 1: of the problem for people in South Africa.
[2:56] Speaker 2: Yeah, sure, so I think this is a very complex
[3:00] Speaker 2: problem that South Africa has been facing for a number
[3:02] Speaker 2: of years. But there is kind of one clear smoking gun,
[3:05] Speaker 2: which is that the enormous coal fleet that South Africa
[3:08] Speaker 2: has has been performing really poorly in recent years. That's
[3:11] Speaker 2: largely due to things like maintenance issues and operational failures.
[3:14] Speaker 2: Just as an anecdote, the capacity factor, which basically measures
[3:17] Speaker 2: the operational output of the fleet over a year, has
[3:20] Speaker 2: gone down to fifty six percent in twenty twenty two,
[3:23] Speaker 2: and that's down from sixty eight percent just ten years earlier,
[3:26] Speaker 2: and that's despite all of this unserved demand, so you
[3:28] Speaker 2: have a clear indication that something's going wrong there. What
[3:31] Speaker 2: ESCOM has had to do as a result is basically
[3:33] Speaker 2: roll out load shedding. This is when they remove portions
[3:36] Speaker 2: of demand from the grid in order to prevent a
[3:38] Speaker 2: technical blackout. But as a consumer you experience it as
[3:40] Speaker 2: a period of outage of electricity, and just in the
[3:43] Speaker 2: first half of twenty twenty three this got really bad.
[3:45] Speaker 2: It was in the order of magnitude of twelve percent
[3:47] Speaker 2: of net generation not being met. So it's a massive problem.
[3:50] Speaker 2: It's been all over the news, extremely damaging for the economy.
[3:53] Speaker 2: The GDP outlook for South Africa has been weighed heavily
[3:56] Speaker 2: because of these rolling blackouts. So it's a really big problem.
[3:59] Speaker 2: But as I mentioned, it's not just this single smoking gun.
[4:01] Speaker 2: There are a number of structural factors that I think
[4:03] Speaker 2: have fed into that reality. One is maybe the setup
[4:07] Speaker 2: of the market itself. So the market's very much dominated
[4:10] Speaker 2: by the national utility ESCOM. It's essentially a single buyer model,
[4:13] Speaker 2: which has left the whole system pretty vulnerable to issues
[4:16] Speaker 2: with that company, for example, it's had quite limited cash
[4:19] Speaker 2: flow to deal with plant maintenance. There's also been another
[4:22] Speaker 2: supply side challenge, which is that there's been a lot
[4:24] Speaker 2: of delays in actually bringing on new capacity. So ESCOM
[4:27] Speaker 2: was due to build these two massive new coal power plants,
[4:30] Speaker 2: Medupi and Casilla, and there are also other technologies being
[4:33] Speaker 2: built by private developers that have been slow to come
[4:35] Speaker 2: to the markets as well, for various reasons that we'll
[4:37] Speaker 2: get to later on. But I think it's quite clear
[4:40] Speaker 2: that the system would not be as tight as it
[4:42] Speaker 2: is today if you were delivering that capacity that was
[4:46] Speaker 2: due to come online on time.
[4:47] Speaker 1: So that's really.
[4:48] Speaker 2: Limited the system's ability to diversify away from that reliance
[4:51] Speaker 2: on those old coal plants, which even still in twenty
[4:53] Speaker 2: twenty two are meeting well over eighty percent of total generation.
[4:57] Speaker 1: So you mentioned ESCAM, the national energy company for the country,
[5:01] Speaker 1: and you also had mentioned that there were maintenance issues
[5:05] Speaker 1: when it comes to the coal fired power stations. So
[5:07] Speaker 1: what I want to better understand is, you know what
[5:09] Speaker 1: is feeding into this is it essentially that the company
[5:12] Speaker 1: doesn't have the finances to essentially maintain their existing infrastructure
[5:18] Speaker 1: and can keep that power system going and is this
[5:21] Speaker 1: then becoming a self fulfilling prophecy with these blackouts? And
[5:24] Speaker 1: I guess understanding the scale of what the problem is
[5:27] Speaker 1: for s CLAM specifically is the first step in understanding
[5:29] Speaker 1: what the path out was.
[5:30] Speaker 2: Yeah, for sure, because ESCOM is so integral to the
[5:33] Speaker 2: entire electricity market, really you can't overestimate how important its
[5:37] Speaker 2: financial health is to the whole equation. And the government
[5:40] Speaker 2: has had to step in several times with debt support packages.
[5:43] Speaker 2: So escom's debt in twenty twenty three came in around
[5:46] Speaker 2: four hundred billion round which is around twenty two billion dollars.
[5:49] Speaker 2: And there are a few important drivers to understand, but
[5:52] Speaker 2: the biggest one is the construction of those two new
[5:55] Speaker 2: coal power plants, which come in at around three hundred
[5:57] Speaker 2: billion rounds, so a really significant portion of that total
[6:01] Speaker 2: can be attributed to the construction of those two new
[6:03] Speaker 2: power plants. There are other things relating to regulator Nurser
[6:07] Speaker 2: and Eskom keeping fairly low retail tariffs, so actually the
[6:10] Speaker 2: money that they can charge for the power that they're
[6:12] Speaker 2: selling being reasonably low. And there are some other issues
[6:14] Speaker 2: relating to some municipalities that by power have fallen behind
[6:18] Speaker 2: on payments to ESCOM, So there's this kind of vicious
[6:20] Speaker 2: cycle of some driving factors that haven't helped ESCOM to
[6:23] Speaker 2: maintain its debt servicing. So of course improving that performance
[6:26] Speaker 2: of ESCOM will be absolutely essential in order to ensure
[6:29] Speaker 2: that South Africa can deliver reliable power to its people
[6:33] Speaker 2: and to the companies and industries that operate in the market.
[6:36] Speaker 2: It will also be important to lower off take risks
[6:38] Speaker 2: and things like reducing the overall debt burden on the
[6:41] Speaker 2: South African government. The two ways that this has been
[6:44] Speaker 2: tackled is obviously, I guess we can think short term
[6:46] Speaker 2: and long term. So the immediate relief I mentioned this
[6:48] Speaker 2: government debt relief plan is a three year payout period
[6:51] Speaker 2: and process at the moment to support over two hundred
[6:53] Speaker 2: and fifty billion rund of the debt total bill. And
[6:55] Speaker 2: ESCOM has a lot of restrictions over this time. It's
[6:58] Speaker 2: prohibited from building new power plants, it can't borrow any
[7:01] Speaker 2: additional funds, and some capital expenditure even existing is going
[7:05] Speaker 2: to be limited. So as you can imagine, with this
[7:07] Speaker 2: ongoing power crisis, the role of ESCOM is also going
[7:11] Speaker 2: to be limited. In what it can do to help
[7:13] Speaker 2: address that problem beyond its existing requirements for like transmission
[7:16] Speaker 2: and distribution investments and just finishing the construction of those
[7:19] Speaker 2: two power plants that it intended to build. Longer term,
[7:23] Speaker 2: their plan is to really continue the unbundling process and
[7:25] Speaker 2: liberalize the power sector more so ESCOM will still maintain
[7:28] Speaker 2: a really important role, but I think proportionally its role
[7:32] Speaker 2: in generation supply. Possibly even on the grid side. They're
[7:35] Speaker 2: exploring options with private investment in grid infrastructure, and potentially
[7:38] Speaker 2: even the retail market could really shift away from just
[7:41] Speaker 2: this kind of escum only model. So yeah, I think
[7:43] Speaker 2: there's there's a number of things that need to go right,
[7:46] Speaker 2: but definitely we can't underestimate the importance of how the
[7:49] Speaker 2: financial health of ESCOM has contributed to the crisis that
[7:52] Speaker 2: we're in today.
[7:53] Speaker 1: We want to come to renewables, but before we go there,
[7:55] Speaker 1: you know, one of the things that's really resonating with
[7:57] Speaker 1: me with you what you just said is the fact
[7:59] Speaker 1: that they're two new coal fired power stations going in
[8:02] Speaker 1: in South Africa and closing coal fired powered stations has
[8:06] Speaker 1: been a strategy in various parts of the world to
[8:09] Speaker 1: reduce one's emissions and become more paras aligned in these
[8:13] Speaker 1: twenty fifteen net zero targets. So when we talk about
[8:15] Speaker 1: South Africa and them improving their security of supply, is
[8:19] Speaker 1: coal really an integral part of this, especially given some
[8:24] Speaker 1: of the considerations they need to think about associated with
[8:27] Speaker 1: their debt relief package, as you pointed out, means that
[8:30] Speaker 1: they can't build new things really and maybe that path
[8:33] Speaker 1: forward to retiring coal fired power stations and building more
[8:37] Speaker 1: renewables capacity might be a little bit out of reach
[8:40] Speaker 1: in the near term. So, yeah, let's talk about the
[8:42] Speaker 1: near term. Is coal essentially a big part of their
[8:45] Speaker 1: strategy out of blackouts? Yeah?
[8:48] Speaker 2: Sure, So, I think the biggest challenge for the government
[8:50] Speaker 2: over the next decade, and they are starting to think
[8:52] Speaker 2: about their twenty to thirty plan. On January fourth, they
[8:54] Speaker 2: just released their new Integrated Resource Plan, which basically is
[8:58] Speaker 2: a really important energy strategy for the outlook for the
[9:00] Speaker 2: sector because it then determines how things like procurement rounds
[9:03] Speaker 2: take place and the volumes that actually get contracted, and
[9:06] Speaker 2: so it's a really important document and they are starting
[9:08] Speaker 2: to think forward. One of the biggest challenges about thinking
[9:11] Speaker 2: that far ahead and trying to plan to actually solve
[9:14] Speaker 2: the electricity crisis within this decade. Is that the coal
[9:17] Speaker 2: fleet is very old. These plants are built for fifty
[9:19] Speaker 2: year lifetimes, and already by next year we estimate that
[9:22] Speaker 2: another two and a half gigawatts, which is maybe just
[9:25] Speaker 2: under eight per cent of the total, will have reached
[9:27] Speaker 2: this age. We see retirements are coming due to accelerate
[9:31] Speaker 2: through the twenty twenties, and most plants will need to
[9:33] Speaker 2: close by twenty forty. So yeah, given the load talling
[9:36] Speaker 2: crisis and where we are today, there are real discussions
[9:38] Speaker 2: happening about delaying those plant closures, and that could make
[9:41] Speaker 2: sense under very certain conditions, but the strategy really needs
[9:45] Speaker 2: to be to figure out how to replace the coal
[9:46] Speaker 2: fleet in the long term. Either way, you know, these
[9:48] Speaker 2: plants are very old, and it's certainly not going to
[9:50] Speaker 2: be a situation that we're seeing lots of new build
[9:52] Speaker 2: coal plants. I don't think anyone, even the government, is
[9:55] Speaker 2: entertaining that idea, but these delays are being actively considered
[9:58] Speaker 2: and there is press for it. Escom had planned to
[10:01] Speaker 2: decommission a couple of its plants by twenty twenty, and
[10:03] Speaker 2: it's already delayed. Those till twenty twenty seven. We've actually
[10:07] Speaker 2: run some of our power models to try and understand
[10:09] Speaker 2: what would happen if South Africa were to do a
[10:11] Speaker 2: really aggressive lifetime extension scenario on the coal fleet and
[10:15] Speaker 2: see how it actually compares to let's say, if you
[10:17] Speaker 2: allowed just economics to play out and for them to
[10:19] Speaker 2: build enough capacity to meet demand on an economic basis,
[10:23] Speaker 2: and we find that actually extending the coal plants would
[10:26] Speaker 2: probably increase running costs of the fleet. So obviously you're
[10:29] Speaker 2: burning more coal over a longer period. So that's probably
[10:32] Speaker 2: in the order of four billion dollars by twenty forty
[10:34] Speaker 2: cumulative running cost editions, which is around four percent increase
[10:38] Speaker 2: on what our baseline scenario would be. And then the
[10:40] Speaker 2: capital side of things, we actually don't know what it
[10:42] Speaker 2: would cost to retrofit the fleet in order to allow
[10:45] Speaker 2: them to extend longer. That's definitely something that you would
[10:48] Speaker 2: need kind of a very in depth technical analysis on
[10:50] Speaker 2: each plant to understand, but we can give a ballpark
[10:54] Speaker 2: on what we think you would need, what the budget
[10:56] Speaker 2: would need to be. Essentially, so per mega what of retrofit,
[10:59] Speaker 2: what would the cost need to be in order for it
[11:00] Speaker 2: to be a cheaper outcome, and if you extended the
[11:03] Speaker 2: coal fleet for less than we estimate three hundred and
[11:06] Speaker 2: eighty thousand US dollars per megawatt, then you're in the money.
[11:09] Speaker 2: So if you can do it at that cheap, and
[11:11] Speaker 2: that's not a lot of money, but if you can
[11:12] Speaker 2: do it on that basis, then the coal extension scenario
[11:15] Speaker 2: may be cheaper. But overall, we think there's a high
[11:17] Speaker 2: degree of uncertainty that on the cost and viability side
[11:20] Speaker 2: of things that you could even do this. So I
[11:22] Speaker 2: think maybe it's maybe an immediate near term patch solution
[11:26] Speaker 2: to where they are today, but it's definitely not going
[11:28] Speaker 2: to be a long term fix.
[11:29] Speaker 1: A patch solution for roughly how long because you would
[11:32] Speaker 1: reference it essentially they will need to be closed that
[11:35] Speaker 1: twenty forty is sort of that year where a large
[11:38] Speaker 1: amount of what's in their existing coal fleet really is
[11:42] Speaker 1: going to get to a point where even with great
[11:45] Speaker 1: maintenance and looking at elongating the lifetime, maybe that's the
[11:49] Speaker 1: end of it. Is that the year essentially that everyone
[11:51] Speaker 1: needs to be planning towards.
[11:53] Speaker 2: I think it's actually even sooner than that we see
[11:56] Speaker 2: the latest plan still keeping online a decent amount of
[12:00] Speaker 2: by twenty thirty but then the onslaught of coal retirements
[12:03] Speaker 2: really kicks in, and that's just a function of the
[12:05] Speaker 2: age of these assets. They will probably not be able
[12:07] Speaker 2: to operate beyond that time period. So even by twenty
[12:10] Speaker 2: thirty one, you're starting to have to replace significant amounts
[12:13] Speaker 2: of gig what volumes of coal capacity with something else,
[12:17] Speaker 2: and then what that would be. You know, the government
[12:19] Speaker 2: is leaning towards a lot more gas. Our models tend
[12:22] Speaker 2: to build a little bit more on the solar and
[12:24] Speaker 2: the storage side than the gas capacity that the government's targeting.
[12:27] Speaker 2: So yeah, the question of what comes next will definitely
[12:30] Speaker 2: be largely led by policy, but we are seeing some
[12:33] Speaker 2: shakeups happening already on the ground with more solar build
[12:35] Speaker 2: is essentially than what the government is thinking will happen.
[12:38] Speaker 1: I mean, it has certainly been a volatile couple of
[12:41] Speaker 1: years for gas prices. So that's an interesting forwardlooking strategy.
[12:45] Speaker 1: But let's talk about that with South Africa some of
[12:48] Speaker 1: the things that they're putting in place to think about
[12:50] Speaker 1: the future. So they have a new Integrated Resource Plan,
[12:53] Speaker 1: can you explain, well, first of all what that is,
[12:56] Speaker 1: and then let's talk about what's in it?
[12:58] Speaker 2: Yeah, So the Integrated Resource Plan is a document that
[13:00] Speaker 2: has existed for a long time in South Africa and
[13:02] Speaker 2: essentially governs how the government wants to see capacity in
[13:06] Speaker 2: the electricity mix going forward. It's been out or twenty
[13:09] Speaker 2: thirty for a number of years, but the new one
[13:11] Speaker 2: actually goes all the way out to twenty fifty, so
[13:13] Speaker 2: we can see how they're thinking about under different scenarios,
[13:16] Speaker 2: the evolution of what replaces coal essentially in those different parameters. Now,
[13:20] Speaker 2: the IRP that's just come out doubles the previous target
[13:24] Speaker 2: for new gas build so we're eight and a half
[13:26] Speaker 2: giga what's actually of additional gas plants by twenty thirty
[13:29] Speaker 2: And we've kind of touched on this a little bit already,
[13:31] Speaker 2: but the conditions for getting new build online has been
[13:34] Speaker 2: quite a difficult challenge for a number of technologies, including
[13:37] Speaker 2: thermal capacity. So actually giving a route to market for
[13:40] Speaker 2: private generators because largely this is going to have to
[13:42] Speaker 2: be non escumentities that are building new gas plants. That's
[13:45] Speaker 2: going to have to be solved very quickly if you
[13:46] Speaker 2: want that capacity online by twenty thirty, and you're also
[13:49] Speaker 2: going to have to build out the adjacent gas fuel
[13:51] Speaker 2: supply infrastructure, because South Africa isn't exactly a large gas
[13:54] Speaker 2: market at the moment, so it will be hard given
[13:56] Speaker 2: that relative early stage of the market. I want to
[13:59] Speaker 2: like caveat that by saying we do see an important
[14:01] Speaker 2: role for gas in South Africa's electricity mix after coal
[14:05] Speaker 2: and especially to help with some of the I guess
[14:07] Speaker 2: flexibility needs of the system as it moves towards more renewables,
[14:11] Speaker 2: But it's certainly nowhere near in the order of magnitude
[14:14] Speaker 2: of what the IRP is currently dictating.
[14:17] Speaker 1: Within that, what role does solar play because you see
[14:20] Speaker 1: in other parts of the continent that solar has become
[14:23] Speaker 1: a popular source of new builds across other different countries
[14:27] Speaker 1: in Africa, and rightfully so, given that you know, solar
[14:30] Speaker 1: modules are at an all time low in terms of price,
[14:33] Speaker 1: and it will be interesting to see what that means,
[14:35] Speaker 1: just even in the near term in twenty twenty four,
[14:37] Speaker 1: is solar featuring heavily in South Africa's path forward once
[14:41] Speaker 1: they are looking to replace what's in the coal fired
[14:45] Speaker 1: power space.
[14:46] Speaker 2: And how important is solid Yeah, so I think the
[14:48] Speaker 2: answer is very The government has set its biggest target
[14:52] Speaker 2: for solar that it ever has done in these plant exercises,
[14:56] Speaker 2: but it still comes in at what we estimate around
[14:58] Speaker 2: thirteen percent of generation by twenty That compares with BNFS
[15:01] Speaker 2: twenty five percent. So even though it's a step up
[15:04] Speaker 2: in ambition from the government's perspective, it's nowhere near where
[15:07] Speaker 2: we expect the market to be by that point in
[15:09] Speaker 2: time and our forecast. This is largely driven by benf's
[15:12] Speaker 2: outlook on what solar build will actually happen in South Africa.
[15:14] Speaker 2: It's not just economic building our in our models, it's
[15:17] Speaker 2: much more aggressive because the market conditions have changed really
[15:20] Speaker 2: rapidly over the last few years that have led already
[15:24] Speaker 2: to a big uptick in solar build. So rooftop solar
[15:27] Speaker 2: is growing rapidly because of the load shedding that we're
[15:30] Speaker 2: seeing and some regulatory changes like additional tax incentives that
[15:34] Speaker 2: are now in place. They've removed some of the generator
[15:36] Speaker 2: licensing requirements that was previously hampering the small scale solar sector.
[15:40] Speaker 2: Businesses can add their own solar for on site consumption
[15:43] Speaker 2: and even sell it to the grid. This is really
[15:45] Speaker 2: boosting activity both on residential, commercial and industrial for things
[15:49] Speaker 2: like mines and factories, and we're already seeing that in
[15:52] Speaker 2: the data. We can track export data of solar cells
[15:55] Speaker 2: and modules from China that boomed in twenty twenty three.
[15:58] Speaker 2: We tracked over three giga whatt'sth of shipments in the
[16:01] Speaker 2: first three quarters directed to South Africa. That aligns roughly
[16:04] Speaker 2: with what Escom's saying as well. They estimated around two
[16:06] Speaker 2: and a half giga what's was commissioned just over the
[16:08] Speaker 2: first three quarters of twenty twenty three. So we think
[16:11] Speaker 2: and our forecast maintains around that four giga what benchmark
[16:15] Speaker 2: for these small scale solar additions from twenty twenty four
[16:17] Speaker 2: through twenty twenty five, or maybe even longer if the
[16:20] Speaker 2: load shedding crisis takes longer to solve. So in our view,
[16:22] Speaker 2: the IRP, which just by comparison from that four gigga
[16:25] Speaker 2: what I mentioned for BENA forecast, it's around nine hundred
[16:28] Speaker 2: megawat's a year, so it's not even twenty five percent
[16:31] Speaker 2: of what we're expecting to happen. That's in the IRP.
[16:34] Speaker 2: So I think the ballpark estimates of where of where
[16:37] Speaker 2: the solar industry is from what we're observing versus what
[16:39] Speaker 2: the government actually thinks is happening and what will happen
[16:42] Speaker 2: is there's quite a disjunct there. I think the only
[16:44] Speaker 2: risk to our outlook being wrong is if Escorm manages
[16:47] Speaker 2: to deliver more reliable power sooner hopefully it does, then
[16:50] Speaker 2: the small scale solar industry might slow down a little bit.
[16:53] Speaker 2: Load shedding did e's a little bit in the last
[16:55] Speaker 2: part of twenty twenty three, and we did see some
[16:57] Speaker 2: downturn in the solar installations and volumes, but largely, like
[17:02] Speaker 2: the big picture is, we think this trend is definitely
[17:04] Speaker 2: here to stay in the immediate term.
[17:06] Speaker 1: Because small scale soilar is essentially a way to get
[17:08] Speaker 1: around the reliance on a grid, which then brings us
[17:11] Speaker 1: to another technology, which is batteries and storage. Is that
[17:15] Speaker 1: popular in South Africa and our individual companies and individuals
[17:20] Speaker 1: going out there and actually acquiring battery to guarantee security
[17:23] Speaker 1: of supply when the grid goes through a blackout and
[17:25] Speaker 1: has the See.
[17:26] Speaker 2: Yeah, storage storage is a really important part of our
[17:29] Speaker 2: outlook and we certainly expect there to be tens of
[17:32] Speaker 2: gig lots of installations by twenty forty in the market
[17:35] Speaker 2: to help accommodate that influx of solar. Even we were
[17:39] Speaker 2: there on a research visit just doing some of this
[17:41] Speaker 2: work in the build up for our outlook in October
[17:43] Speaker 2: last year, and in you land in the airports, and
[17:45] Speaker 2: there's adverts for residential storage solutions like all over everywhere
[17:49] Speaker 2: you see it. So there's definitely a big market for
[17:52] Speaker 2: the small scale battery installations. People want to have that
[17:55] Speaker 2: reliable power in their homes or businesses. And then equally,
[17:58] Speaker 2: Escom is interestingly actually one of the bigger buyers of
[18:01] Speaker 2: battery storage at the moment, and it's using it to
[18:03] Speaker 2: help manage some of the grid issues that it's having.
[18:05] Speaker 2: So they did a big like five hundred megawat plus
[18:08] Speaker 2: tend around reasonably recently. That's actually driving some utility scale
[18:12] Speaker 2: battery storage installations on the grid today. So we are
[18:15] Speaker 2: already seeing that similar uptick that again exceeds what the
[18:18] Speaker 2: government is expecting in the IP but yeah, it's definitely
[18:21] Speaker 2: someone to watch. The government is also expecting electricity demand
[18:25] Speaker 2: itself to recover and grow much faster than we are,
[18:28] Speaker 2: so we expect about twenty percent increase in demand by
[18:31] Speaker 2: twenty forty, whereas the government expects forty percent. So that's
[18:34] Speaker 2: another driver of their system needing more gas because obviously,
[18:37] Speaker 2: if you're limiting wind and solar and you're increasing demand,
[18:41] Speaker 2: something has to fill that gap for the core retirement.
[18:44] Speaker 2: So that's why they're leaning a lot more on gas.
[18:46] Speaker 2: We think than our outlook suggests.
[18:48] Speaker 1: Is that because it's going to be a nearer term solution,
[18:53] Speaker 1: that they can implement more quickly, because my understanding is
[18:55] Speaker 1: that building a new gas fired power station is not
[18:58] Speaker 1: a quick fix. And then actually you'd probably be able
[19:01] Speaker 1: to get something like solar online more quickly.
[19:03] Speaker 2: Yeah, no, and it definitely can take time. And there's
[19:07] Speaker 2: even the government did a kind of short term emergency
[19:11] Speaker 2: tender for capacity in twenty twenty one where actually a
[19:13] Speaker 2: bunch of gas powerships bid in to secure some of
[19:16] Speaker 2: those contracts and supply the system when it was down,
[19:18] Speaker 2: and they would do to come on within two years
[19:20] Speaker 2: of that tender happening, and there's still nowhere here because
[19:23] Speaker 2: they've been hamstrung by a lot of these environmental permitting arrangements,
[19:26] Speaker 2: like lots of local resistance, let's say, to gas power
[19:30] Speaker 2: supply in South Africa as well. So that's another element
[19:32] Speaker 2: that can delay things, and we see that all over
[19:34] Speaker 2: the world. Right there's challenges to actually procuring new gossil.
[19:37] Speaker 1: Generation which is largely coming from other countries and being
[19:41] Speaker 1: shipped in as LNG at this point exactly. So you
[19:43] Speaker 1: mentioned ever so briefly wind, but I think it's worth
[19:46] Speaker 1: bringing it up here since we're kind of doing this
[19:48] Speaker 1: around around our sources tour for escam in for South Africa.
[19:53] Speaker 1: So what about wind? Previous IRPs had a wind allocation
[19:57] Speaker 1: with something that they were actually looking at building out.
[19:59] Speaker 1: Is it still there and how much of the role
[20:01] Speaker 1: is it going to play in the future.
[20:03] Speaker 2: Yeah, kind of the opposite story to gas. Actually, they've
[20:05] Speaker 2: almost halved their previous target of over fourteen gigawats to
[20:09] Speaker 2: around eight and a half by twenty thirty, so it
[20:11] Speaker 2: is much more conservative. But in our view this is
[20:14] Speaker 2: actually a much more realistic alignment. Our forecast for wind
[20:17] Speaker 2: gets to around ten gigga what's by twenty thirty. I'd
[20:20] Speaker 2: say that's still somewhat conservative to what could happen if
[20:22] Speaker 2: stronger enabling policies were put in place. But for sure
[20:25] Speaker 2: it's a wind build on the ground has actually been slowing.
[20:29] Speaker 2: Grid connections are hard to obtain. We also do find
[20:31] Speaker 2: wind to be on a levelized basis more expensive than solar,
[20:35] Speaker 2: so that also weighs on the economics of the technology.
[20:38] Speaker 2: Just to give an example of this grid connection challenge
[20:40] Speaker 2: as well and the challenging conditions that some wind developers
[20:43] Speaker 2: are facing. One of the auctions run in twenty twenty
[20:45] Speaker 2: two for new renewbal capacity, they were targeting i think
[20:48] Speaker 2: around five gigawats of wind and solar build, but there
[20:50] Speaker 2: was basically no grid capacity for connections where wind developers
[20:53] Speaker 2: had proposed to build their project, and that led to
[20:55] Speaker 2: zero megawatts of wind clearing in this auction. So of
[20:58] Speaker 2: a massive target, they are ended up with nothing. Hopefully
[21:01] Speaker 2: that will change in the forthcoming round. That's happening actually
[21:04] Speaker 2: imminently as we speak. But yeah, it's certainly been a
[21:06] Speaker 2: difficult number of years for wind.
[21:08] Speaker 1: Even if you're thinking about existing grid connections and on
[21:12] Speaker 1: the same sites where you have coal fired power stations,
[21:15] Speaker 1: you're maybe putting something right there, gas fired power station
[21:18] Speaker 1: or a new coal fired power station perhaps, whatever it
[21:21] Speaker 1: is you're putting on there, the grid is very, very important,
[21:24] Speaker 1: but you're referencing that we're likely to see more demand.
[21:27] Speaker 1: So if you have more demand, you're going to need
[21:29] Speaker 1: more grid connections. Do you think that South Africa is
[21:31] Speaker 1: going to be able to rise to the challenge on
[21:34] Speaker 1: making a more robust grid now?
[21:36] Speaker 2: I think this is really important because ESCOM has been
[21:40] Speaker 2: raising for a while now that it needs to increase
[21:42] Speaker 2: its plans for spending on transmission and distribution grids. There
[21:46] Speaker 2: are a number of issues, not just new connections, but
[21:49] Speaker 2: actually operating the existing network is also quite old in
[21:52] Speaker 2: places and needs retrofit investments. So there's a number of
[21:55] Speaker 2: things that need to happen in order to enable that
[21:57] Speaker 2: new capacity to come in.
[21:59] Speaker 1: Right.
[22:00] Speaker 2: Figuring out what to do about multi giga what grid
[22:02] Speaker 2: connections that are attached to large core plants that get retired.
[22:05] Speaker 2: This is a big story elsewhere, and you know, I
[22:08] Speaker 2: usually cover the European market and we see this in
[22:10] Speaker 2: Germany and Poland. Lots of discussions around what to do
[22:12] Speaker 2: with those multi giga what grid connection assets. In some
[22:15] Speaker 2: places interesting discussions around tendering them out and trying to
[22:17] Speaker 2: allow new capacity to come in so that you're transitioning
[22:20] Speaker 2: the local economy. But I think, yeah, getting that right
[22:23] Speaker 2: is going to be absolutely essential. I think the positive
[22:26] Speaker 2: thing is that the tide is really starting to turn
[22:28] Speaker 2: and we are seeing investment in both renewables and discussions
[22:32] Speaker 2: around maybe more innovative financing mechanisms to help grid investment
[22:36] Speaker 2: to get where it needs to be in South Africa
[22:38] Speaker 2: take place.
[22:40] Speaker 1: Well, so then let's talk a little bit more about
[22:42] Speaker 1: the investment environment. One of the things we being in
[22:45] Speaker 1: the f do is our Climate Scope data and the
[22:49] Speaker 1: reports that come off the back of that, And for
[22:50] Speaker 1: those who want to check it out, there is a
[22:52] Speaker 1: website look for b and EF Climate Scope and you'll
[22:55] Speaker 1: find your way to that website. And one of the
[22:57] Speaker 1: outputs of that is to better understand of which countries
[23:01] Speaker 1: are favorable across various parts of the world for investment
[23:04] Speaker 1: in clean energy. How does South Africa really score in
[23:08] Speaker 1: that exercise?
[23:09] Speaker 2: So South Africa is now actually one of the most
[23:12] Speaker 2: attractive markets for renewable investment and the whole continent of
[23:15] Speaker 2: Africa according to Climate Scope. So in twenty twenty two
[23:18] Speaker 2: we saw that South Africa attracted over five and a
[23:21] Speaker 2: half billion dollars in renewable energy investment, and that's three
[23:24] Speaker 2: times what they attracted in twenty twenty one, which was
[23:27] Speaker 2: around the two billion dollar mark. Now, a number of
[23:29] Speaker 2: things have been driving that we've mentioned the small scale
[23:31] Speaker 2: solar boom that's really helped improve the outlook for that
[23:35] Speaker 2: part of the sector. But the country has also made
[23:37] Speaker 2: a lot of progress in re establishing itself as a
[23:41] Speaker 2: major auctions market. I mentioned some of the challenges with
[23:43] Speaker 2: the grid connection thing. I think they are starting to
[23:45] Speaker 2: iron out some of those creases and fix those problems.
[23:49] Speaker 2: But there is some good news from that same program,
[23:51] Speaker 2: the Round five that they ran for over two and
[23:53] Speaker 2: a half giga lots of wind and solar capacity in
[23:56] Speaker 2: twenty twenty one. We're seeing reports that most of those
[23:58] Speaker 2: projects have now reached FID so they're finance or they're
[24:01] Speaker 2: even under construction already, so that's great. That's a positive
[24:05] Speaker 2: sign that the auction program that was a very important
[24:07] Speaker 2: part of getting South Africa an early adopter of renewables
[24:11] Speaker 2: is starting to revive itself as one of the key
[24:14] Speaker 2: ways that developers can go at scale in this market.
[24:17] Speaker 2: Round seven was just launched, as I mentioned in December,
[24:20] Speaker 2: that will aim for five gigabats of wind and soda again.
[24:22] Speaker 2: Round eight will do the same again. So they're just
[24:24] Speaker 2: going with this like more frequent, more regular, less unstable
[24:27] Speaker 2: policy environment and that should really help to crowd in
[24:30] Speaker 2: private investment and help to keep that momentum that we've
[24:32] Speaker 2: seen in that you mentioned climate scope. I'd expect South
[24:35] Speaker 2: Africa to stay in that position as one of the
[24:37] Speaker 2: leading emerging markets and growth markets for renewables over the
[24:40] Speaker 2: coming years, particularly because of those two things.
[24:43] Speaker 1: You know, you're seeing inflation in interst rates and causing
[24:46] Speaker 1: problems for wind development, for example in the United States,
[24:49] Speaker 1: and with that also some considerations around supply chains. Is
[24:53] Speaker 1: South Africa also dealing with that because it sounds like
[24:56] Speaker 1: these auctions are actually resulting in the projects being built,
[24:59] Speaker 1: which is the desired outcome of any action. Are the
[25:02] Speaker 1: auctions just very well designed?
[25:04] Speaker 2: I think it's not immune to the same challenges. I'll
[25:07] Speaker 2: be honest. There have been lots of instances and news
[25:10] Speaker 2: coverage of the fact that many developers are thinking that
[25:12] Speaker 2: some of their bids from some previous rounds may be
[25:15] Speaker 2: too low for them to finish getting across construction. I
[25:17] Speaker 2: think the overarching trend that some of those supply chain
[25:20] Speaker 2: shocks have started to ease is maybe improving the picture slightly,
[25:23] Speaker 2: But I think it's definitely not the case that South
[25:26] Speaker 2: Africa is immune to those same macro challenges that are
[25:29] Speaker 2: affecting how policymakers are thinking about what works well in
[25:32] Speaker 2: auction designs and how do you make auction programs that
[25:35] Speaker 2: you need to have being regular and things that investors
[25:37] Speaker 2: can rely upon be really effective and resilient to those
[25:41] Speaker 2: kind of exogynous shocks that can deter them from, you know,
[25:44] Speaker 2: just derail them from being effective.
[25:46] Speaker 1: Let's talk emissions for South Africa, because on one hand,
[25:50] Speaker 1: there is of course creating a power system that provides
[25:54] Speaker 1: consistence supply, and I think for many countries that is
[25:57] Speaker 1: the number one most important thing. But we also need
[25:59] Speaker 1: to think about the Paris Agreement in the fact that
[26:01] Speaker 1: South Africa is one of the countries that has come
[26:04] Speaker 1: forward and said that, you know, it is in all
[26:05] Speaker 1: of our best interest to have net zero by twenty fifty.
[26:09] Speaker 1: What is the current state of play in terms of
[26:12] Speaker 1: South Africa and their emissions and how are they moving
[26:15] Speaker 1: towards their climate targets and how does the power system
[26:18] Speaker 1: feature in their view on their climate targets.
[26:21] Speaker 2: So, yeah, you're right, South Africa is a really important
[26:24] Speaker 2: market globally in terms of the greenhouse gas emissions challenge.
[26:28] Speaker 2: I think it's fourteenth worldwide for total GHD emissions every year,
[26:33] Speaker 2: and over half of South Africa's emissions come from the
[26:35] Speaker 2: power sector, So this is a really important problem to fix.
[26:38] Speaker 2: It's like a decent chunk of the challenge. It's contributions
[26:41] Speaker 2: to the Paris Agreement and what South Africa's currently committed to.
[26:44] Speaker 2: They're aiming for their emissions to fall within a range,
[26:47] Speaker 2: So a lot of emerging markets and developing economy set
[26:50] Speaker 2: targets in this way. They aim for a range of
[26:53] Speaker 2: emissions in absolute terms, which I think is helpful to
[26:56] Speaker 2: fall within within that twenty thirty time frame. And the
[26:58] Speaker 2: upper bound of that is four hundred and forty million
[27:01] Speaker 2: metric tons of CO two and the lower bound is
[27:03] Speaker 2: three hundred and fifty so it's quite a large range.
[27:05] Speaker 2: But actually even the upper bound of that target I
[27:09] Speaker 2: would describe as fairly ambitious, and you would have to
[27:11] Speaker 2: do quite a lot in the power sector even just
[27:13] Speaker 2: to achieve that. Obviously, if you want to move towards
[27:16] Speaker 2: the lower bound, you really start to look outside of
[27:18] Speaker 2: power and solving the emissions challenge in other sectors. So
[27:21] Speaker 2: I guess on that and what can you do to
[27:23] Speaker 2: actually scale up clean power faster and accelerate the transition
[27:27] Speaker 2: from coal. We have actually run a few scenarios and
[27:30] Speaker 2: checked our models to see what it tells us about
[27:32] Speaker 2: what would it look like to actually transition South Africa's
[27:34] Speaker 2: power system even faster, and we can put some numbers
[27:37] Speaker 2: on that. So if let's say the power sector wanted
[27:39] Speaker 2: to contribute around eighty percent of the total NDC budget,
[27:43] Speaker 2: you would need to really accelerate the transition from coal,
[27:46] Speaker 2: largely replacing that with wind, solar and storage. So renewables
[27:49] Speaker 2: grow absolutely the fastest in our models when we force
[27:52] Speaker 2: the system to solve for both cost and carbon constraints.
[27:55] Speaker 2: So over half of electricity generation by twenty thirty two
[27:59] Speaker 2: would just come from those renewables. So that's the first
[28:02] Speaker 2: step of the challenge. But it's not even just that.
[28:04] Speaker 2: You then need to start thinking about what can replace
[28:06] Speaker 2: coal even faster that's low carbon, and in this scenario
[28:10] Speaker 2: we do actually end up with slightly larger gas flle
[28:13] Speaker 2: including gas power plants that could be using carbon capture
[28:16] Speaker 2: and storage or burning clean hydrogen. So there's a decent
[28:20] Speaker 2: chunk of that question that not only I guess today
[28:22] Speaker 2: the dialogue is very much about investment in wind and
[28:25] Speaker 2: solar and storage. But actually you would need to have
[28:27] Speaker 2: conversations much sooner and have incentives to help support those
[28:31] Speaker 2: clean backup generators as well to come to the market sooner.
[28:34] Speaker 2: So you're solving both challenges at a very quick pace.
[28:37] Speaker 2: In terms of cost, we estimate that decarbonizing the power
[28:40] Speaker 2: system that quickly would probably be around seven billion dollars
[28:43] Speaker 2: a year between now and twenty forty and that's compared
[28:46] Speaker 2: to our base case of around six billion dollars. So
[28:48] Speaker 2: the fact of the matter is South Africa needs to
[28:51] Speaker 2: spend most of its money on new capacity anyway, so
[28:53] Speaker 2: the marginal addition to actually get to that climate target
[28:56] Speaker 2: is not that significant. So yeah, it's a big challenge
[28:59] Speaker 2: by I definitely think it would be doable.
[29:01] Speaker 1: So we've spent a lot of time talking about national
[29:04] Speaker 1: utility as well as nationally stated targets and stated goals
[29:09] Speaker 1: like Landc's and also the IERP. But if this is
[29:13] Speaker 1: becoming an increasingly liberalized market structure in South Africa, what
[29:18] Speaker 1: does that change and what do you see actually happening
[29:21] Speaker 1: in the future.
[29:22] Speaker 2: Yeah, I think this is going to be a really
[29:24] Speaker 2: interesting time because all of the rules of the game
[29:27] Speaker 2: that used to apply and it being a very high
[29:29] Speaker 2: You're right, a very highly regulated market where policy documents
[29:32] Speaker 2: like the Integrated Resource Plan really took center stage and
[29:35] Speaker 2: determining outcomes and essentially determining investment as well and opportunities
[29:40] Speaker 2: for developers. If you're starting to move to this more
[29:42] Speaker 2: liberalized market, we're already seeing that glimpse of change happening
[29:46] Speaker 2: in the small scale solar side, and I don't think
[29:47] Speaker 2: we're far from seeing that on the utility scale side either.
[29:50] Speaker 2: So I think the energy is changing on the ground,
[29:52] Speaker 2: and that could really change the game for do documents
[29:56] Speaker 2: like the IRP start to lose their relevance in terms
[29:58] Speaker 2: of determining the outcomes and their for DO economics and
[30:01] Speaker 2: the competitive drivers that we're seeing take place in other
[30:03] Speaker 2: markets around the world, and as a result, outlooks like
[30:07] Speaker 2: like we run a penf in These scenarios actually maybe
[30:09] Speaker 2: are more likely to happen in reality compared to what
[30:12] Speaker 2: the government wants to happen with its own capacity determination.
[30:15] Speaker 2: So yeah, it will be a really interesting one to
[30:17] Speaker 2: watch for sure.
[30:18] Speaker 1: It will certainly keep your team busy. Thank you very much,
[30:21] Speaker 1: Emma for sharing your thoughts on what the future holds
[30:23] Speaker 1: in store for South Africa.
[30:25] Speaker 2: Thank you so much.
[30:26] Speaker 1: Dana Switched On is produced by cam Gray with production
[30:37] Speaker 1: assistance from Camela Shelling and Alushi Corunarete. Bloomberg NEIF is
[30:41] Speaker 1: a service provided by Bloomberg Finance LP and its affiliates.
[30:45] Speaker 1: This recording does not constitute, nor should it be construed,
[30:47] Speaker 1: as investment advice, investment recommendations, or a recommendation as to
[30:51] Speaker 1: an investment or other strategy. Bloomberg NIF should not be
[30:54] Speaker 1: considered as information sufficient upon which to base an investment decision.
[30:58] Speaker 1: Neither Bloomberg Finance Lp nor any of its affiliates makes
[31:01] Speaker 1: any representation or warranty as to the accuracy or completeness
[31:05] Speaker 1: of the information contained in this recording, and any liability
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