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May 11, 2012

Progress and risks as SA moves to deal with power crisis

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Africa|Building|CoAL|Development Bank Of Southern Africa|Environment|Eskom|Industrial|Ment Corporation|Projects|Renewable Energy|Renewable-Energy|SECURITY|Step Strategic Venturing|Water|Africa|South Africa|Electricity|Energy|Energy Consumption|Energy Efficient Solutions|Energy Industry|Energy Needs|Energy Sector|Energy Sources|Green Solutions|Obvious Solutions|Potential Energy Developers|Power Producer|Services|Solutions|Francis Gray|Mike Bean|Power|Water
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Government’s proposed allocation of an additional R4.7-billion for solar water geysers has been welcomed as a step in the right direction, but other savings initiatives will be required to mitigate the prevailing risk to businesses and consumers of the country’s power shortages.

Research conducted by professional services company Step Strategic Venturing shows that South Africa has been in a precarious position for the last eight years, with the reserve margin – the level of extra power capacity above what is expected to be needed – falling below the globally accepted safe limit of 15%. This margin has been steadily decreasing over the last ten years and is currently sitting at only 3%.

Director Francis Gray believes consumers and businesses have been lulled into a false sense of security that the issue of load- shedding is a thing of the past. But he also says that there are a number of obvious solutions available. “It is 50% cheaper to gain the energy needed from saving energy than from building new energy sources in South Africa. This is particularly relevant for the residential sector, which is the most inefficient in terms of energy consumption. Often residential consumers are put off by the upfront costs of installing green solutions, so there is a need for, innovative business models to allow end-users to access energy efficient solutions cost effectively.

Gray stresses, too, that the additional R4.7-billion for solar geysers should be coupled with regulatory reforms that facilitate growth. The industry, he argues, is also currently structured to contradict its own mandate. “Particularly looking at parastatal Eskom, in many respects, they are there to build and supply megawatts; however, government is calling for the saving of megawatts.

Meanwhile, on the supply side, government is expected to announce more details on its independent power producer (IPP) procurement process, following a request for information (RFI) from potential energy developers and suppliers that closed in March.

Step’s Mike Bean says the IPP process will enable a greater number of private companies to participate in the energy sector, which is critical if South Africa is to meet its energy needs in the future.

“Three significant factors are shifting the energy industry, namely an ever-increasing demand for electricity, depleting fossil fuels and the ominous signs of climate change,” says Bean.

“These undercurrents are driving significant price increases and it is becoming increasingly critical to find ways of generating power that are less hazardous to the environment as well as technical innovations that enable us to achieve more with the power we are already generating.

“In South Africa, demand for electricity is also showing no sign of slowing down. In fact, it is expected to grow faster than any other final form of energy. Power shortages, rising prices and government commitments to reduce our reliance on coal power mean that South Africa, and indeed the African continent, are not immune to these changes in the energy industry.”

Bean says this presents a significant number of opportunities for those companies ope- rating within the clean energy and energy efficient space. “Government has demon- strated a clear commitment to growing alternative sources. Significant change carries with it tremendous opportunities. Traditional energy companies need to consider how these factors will affect their businesses into the future, while new entrants and investors both have a window of opportunity to break into an industry where traditionally the economies of scale were significant barriers to entry.”

He says that while start-up costs for businesses operating within the energy space may be significant, there are a number of options available to access capital from both private and public sources. “Development finance institutions such as the Industrial Develop- ment Corporation (IDC), the Development Bank of Southern Africa (DBSA) and gov- ernment bodies have set funds aside to specifically innovate in the energy space. The IDC has announced that it intends to spend approximately R25-billion over the next five years on green projects, including financing for 12 of the 28 IPP projects in the country.”

There is a vibrant and active renewable- energy community in South Africa. Technical industries attract technical people and there may be a tendency to overinvest in the technology without clearly understanding the basic needs of the target market.

“In order to increase the benefits available, it is crucial that emerging energy businesses ensure they have a well-structured business model and growth strategy in place in order to raise the capital necessary to reach an attractive scale. In our experience of a number of capital projects in the renewable-energy sector, while the technology may be innovative, the benefits still need to be communicated effectively in order to access capital and ensure buy-in from key stakeholders.

“As a result, it is important for new energy businesses to ensure they carve out their own space in the market now, as growth in the renewable-energy industry is set to accelerate,” concludes Bean.

Edited by: Martin Zhuwakinyu
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