South Africa’s energy sector has undergone a remarkable transformation, RMB senior investment banker for infrastructure sector solutions Keith Webb says.

The country, once plagued by loadshedding, has seen a huge expansion in renewable-energy capacity.

Operational green generation capacity now exceeds 7 GW, with another 4 GW being built. Major energy users, such as mining and large industrial groups, have procured another 5 GW of privately-generated renewable power. Further, private households, small businesses, and small industries have installed 7 GW of rooftop solar capacity countrywide. When all forms of renewable energy are added together, the country’s total capacity in operation, or set to start operating soon, is more than 26 GW.

Another 14 GW is planned to come online by 2032.

“The economic logic behind this boom is simple: renewable energy is now incredibly cheap. When contrasted against [national electricity utility] Eskom’s standard daytime wholesale tariffs, the financial signal is clear. Building renewable generation remains a highly profitable move for investors and users," Webb states.

There is, however, a problem. There is a “profound mismatch” between renewable-energy generation and the ability of the national transmission grid to manage it.

South Africa’s most wind-rich provinces are the Eastern Cape and the Western Cape. Wind, of course, could blow any time of the day or night. However, these two provinces also suffer from “severe” grid congestion, which is a major constraint on the development of large-scale wind energy projects. As a result, the country’s renewable energy generation capacity and project development pipeline is heavily imbalanced towards solar, which naturally only functions in daylight. Daytime electricity generation capacity is poised to exceed daytime energy demand, which will require the excess electricity generation to be curtailed.

“During peak daylight hours, South Africa’s electricity demand hovers between 20 GW and 25 GW – a load that can increasingly be met almost entirely by renewables,” Webb points out. “However, when the sun sets and millions of households turn on their stoves and appliances, demand spikes sharply into the evening peak. Because renewables cannot bridge this gap, the country’s ageing coal fleet must remain online, idling at minimum capacity throughout the day simply to be ready to ramp up for the evening surge. The financial consequence of this bottleneck is severe," he adds.

Soon, the country would simultaneously have too much energy during the day and not enough energy for the morning and evening peak demand periods. That excess daylight energy would have to be paid for, under ‘take-or-pay’ contracts, and then go to waste.

“Historically, our renewable energy procurement mechanisms rewarded the sheer volume of green electrons produced,” Webb mentions. “In the next phase of the energy transition, the market must explicitly reward the ability to deliver that electron at a certain time and to improve grid resilience – both of which can be provided by energy storage. Currently, South Africa’s storage pipeline is painfully inadequate.”

Currently, South Africa uses about 3 GW of pumped-hydro capacity and the State has committed itself to battery programmes with a total capacity of 2 GW. Under the current Integrated Resources Plan, only another 4 GW of battery storage will be developed by 2032, while the expansion of pumped-hydro capacity is only to take place by 2037.

As for the 5 GW to 6 GW capacity to be provided by gas-to-power projects, global supply chain bottlenecks for gas turbines mean that these will likely be delayed.

“To safeguard the 26 GW of renewable-energy capital already deployed, our models indicate that South Africa requires an additional 2 GW to 5 GW of commercial energy storage online well before 2030,” Webb reports. “Without it, the grid will choke on its own clean energy, and the country will miss its legally binding international decarbonisation targets.”

The country has to create a transparent and market-determined price for “capacity” and grid ancillary services. That would give participants in the electricity market a clearer view of the true cost of maintaining grid stability. And that would lead to the market naturally allocating capital across a healthy technological mix.