“What do we want? Clarity over the Levy Control Framework! When do we want it? In the Budget would have been nice…”
On Wednesday, the Chancellor unveiled his 2016 Budget. Reports have unsurprisingly focused on the sugar tax (which some would argue has provided a distraction from some of the more contentious points of the Budget), the controversial decision to convert all schools to academies, and the significant downturn in economic growth forecasts. Energy announcements were generally fairly low-key: the headline announcements included the scrapping of the Carbon Reduction Commitment (to be replaced by increases in the Climate Change Levy), a big tax cut for oil and gas producers who are struggling with low fossil fuel prices, £730m for new Contracts for Difference (mainly for offshore wind), and some funding for demand response, storage and Small Modular Nuclear Reactors. Read more ›
Shale gas exploration in the UK has been in the headlines, but little activity has taken place so far. Whether unconventional gas should be part of the UK energy mix is not only the question of economic viability but also of public support. Jim Watson, Professor of Energy Policy at SPRU and Director of UKERC, argues in his latest blog for The ConversationRead more ›
South Africa has made domestic and international commitments to climate change mitigation. But the country continues to depend on coal-fired power plants, which provide 92% of its electricity. A key challenge for the country in dealing with electricity shortages is that the bulk of power comes from coal, which is harmful for the environment and local communities.
The electricity sector is responsible for almost half of South Africa’s carbon emissions. As discussed in our recent report, it will be difficult to overcome the important contribution that coal makes to the electricity sector and the economy.
Decarbonisation in the electricity sector cannot be achieved without reducing the absolute contribution of coal-fired power. This can be achieved by introducing a range of low-carbon energy options. These include wind, solar photovoltaics and concentrated solar power, in addition to rapidly developing technologies for energy storage. Demand-side measurement and energy efficiency could also play a key role. All these measures and interventions offer significant potential.
But moving away from coal is proving difficult.
Political tensions
The reasons for South Africa’s electricity crisis are long-term and complex. They include a severe backlog in maintenance of its plants and delays in the construction of new power plants. This poses several opportunities and challenges.
The opportunities it presents include increasing the contribution of renewable energy to the national power supply. But can renewable energy compete with existing coal-fired power and a potential nuclear fleet? And can renewable energy be implemented in a way that prioritises socio-economic well-being and transparent and democratic policy processes? In other words, will the country’s moves towards a lower-carbon economy incorporate a “just transition”?
Among the challenges is the fact that South Africa’s electricity crisis is compounded by a lack of transparency in decision-making and political power struggles. For example, there are long-standing tensions within the ruling party and the tripartite alliance made up of the African National Congress, the trade union congress and the South African Communist Party. These tensions can be found in the ideologically driven disagreement between those who want a liberalised electricity market and those who want the government to hold onto the crisis-ridden, state-owned utility, Eskom.
In addition, recent steps toward transparent and democratic energy planning and policies have been undermined. For example, the latest revision of the Integrated Resource Plan for electricity has been put on ice.
The electricity master plan was launched in 2011 following a prolonged and intense stakeholder engagement process. It covers the country’s total demand requirements from 2010 to 2030.
According to the plan, an electricity project must align with the technological allocations set by the country’s electricity plan to be granted a license. The plan includes:
a cap on CO2 emissions,
plans to include 17GW of renewable energy that will deliver 9% of supply by 2030,
9.6GW from a nuclear fleet.
Coal, nevertheless, dominates the electricity generation mix.
The nuclear complication
South African President Jacob Zuma and Russian President Vladimir Putin have discussed the option of nuclear energy for South Africa. Reuters
In 2013 a revised Integrated Resource Plan was put out for public comment. This was in keeping with the expectation that the original would be updated on a biennial basis. It proposed lower electricity demand because of a decline in economic growth, higher prices and increased energy efficiency. The revised plan also stated that commitments to long-range, large-scale investment decisions should be avoided. Notably the revised demand projections suggested that:
no new nuclear baseload capacity would be required until after 2025 and, for lower demand, not until at earliest 2035.
The revised plan is unlikely to be approved because it seriously challenges the case for the proposed 9.6GW nuclear power programme.
The cost of the programme has yet to be determined and it is still unclear if it will be affordable. This programme, which is being pushed by the Presidency, is tied up in broader political wrangling. Serious questions over affordability have been linked to the firing of the finance minister Nhlanhla Nene in December 2015 who opposed the programme on the grounds of cost.
If the nuclear programme is approved, it will shape the country’s electricity mix, infrastructure and related tariffs for years to come. While it may reduce carbon emissions in the long term, this will come at a greater cost than other options.
The role of renewables
South Africa has made a significant move toward decarbonisation through a renewable energy procurement programme. Launched in 2011, the programme followed the inclusion of a carbon constraint in the country’s Integrated Resource Plan for electricity. Since then there has been significant growth in the renewable sector backed by South Africa’s banks and private investors.
The country’s renewable energy programme is internationally celebrated as a success for the procurement of renewable energy from independent power producers. In addition the costs of these renewable energy technologies have decreased dramatically in the past four years. Utility-scale wind and solar photovoltaics are now cost competitive with Eskom’s new-build coal.
Grid-tied, roof-top solar photovoltaics are also rapidly emerging, despite the continued absence of an appropriate regulatory framework. These are being installed by wealthy households and businesses who are trying to buy independence from an increasingly unreliable grid and rising electricity tariffs.
Some large industrial players are also trying to connect their own generation plants to the grid through wheeling agreements. These involve independent power producers selling electricity to a third party via Eskom’s grid.
These agreements suddenly seem more attractive in light of the supply-side crisis and the uncertainty of Eskom’s ability to meet the electricity demand.
But they have been stymied because rules around their cost have not been established.
The final piece of the puzzle is to ensure that all decarbonisation efforts and energy supply reach low income consumers. If the country’s tariffs continue to increase it will become even more difficult for the lower income bracket to have access to modern energy services.
Lucy Baker, Research Fellow, International Relations, The Sussex Energy Group, Centre for Global Political Economy, University of Sussex and Jesse Burton, PhD Candidate in energy and industrial policy, economic history, domestic and international coal markets, the mining and minerals sectors, and state-business relations in South Africa, University of Cape Town
China is Africa’s largest trading partner, providing demand for the continent’s energy and minerals, and its direct investments in the continent are also on the rise. When Chinese Premier Li Keqiang visited the African Union in 2014, he announced that China would raise its direct investment in the continent to $100 billion by 2020, mostly in infrastructure development.
Solar panels and telephones in Qunu in the Eastern Cape. South Africa. Creative Commons photo: Trevor Samson / World Bank.
While Chinese companies have been involved in Africa’s energy industry for years, particularly in hydro-electricity and fossil fuel extraction, the rise of China’s involvement in the continent’s renewable energy sector is relatively recent and an area ripe for further research.
New research, which aims to better understand China’s investment in South Africa’s renewable energy sector, will help provide some answers. Lucy Baker, from the Science Policy Research Unit at the University of Sussex and Wei Shen, from the Institute of Development Studies, have received a fellowship to better understand the drivers and obstacles to the expansion of Chinese renewable energy activities in South Africa.
There has been growing Chinese involvement in the wind and solar PV industries under South Africa’s renewable energy independent power producers’ procurement programme (RE IPPPP), a competitive bidding system for renewable energy generation by independent power producers. The research will focus on how Chinese companies and investors are involved in South Africa’s renewable energy, including their engagement in project development, investment, technology supply and manufacturing.
The research will also consider implications for Chinese involvement in emerging renewable energy development elsewhere in the region and for other middle-income economies with a significant renewable energy programme under development, such as Argentina, India and Brazil.
Their findings will be shared as a policy brief to be published by SAIS-CARI. The SAIS-CARI Fellowship they have been awarded allows researchers, policy-makers, or journalists to do field research on an under-explored policy issue related to China’s African engagement.
The answers offered at the workshop, or occasionally the lack of them, pose serious research and policy challenges.
Gregor Semieniuk from the University of Sussex, leads a discussion on who is financing renewable energy at the workshop. Image by Pelin Demirel.
First, with regard to the data itself: what goes into the data, what does not, and who are the data collectors? As researchers and analysts we cannot always get the numbers and stakes that underlie investment deals. Sometimes this is cultural, as some countries are reluctant to disclose data. This means trends in the categories of investment, especially with organisations like the China Development Bank, are very hard to get at.
Second, what does the data already collated tell us about the financing of green energy in 2016? We know we have an issue following on from Basel III, a set of banking regulations which aimed to bring about more stability within the banking sector. Long-term, patient capital is now more difficult to raise. We see this in other sectors, such as green technology. The venture capitalists too have shorter exit windows.
So what does this do for the renewable energy industry? And do these two factors mean the development banks have to take a bigger role? If so, how is the public market creation agenda going to emerge to let this happen?
In terms of finance, renewable technologies have two important characteristics. They are highly sensitive to the cost of capital and are highly sensitive to policy. The former suggests that the European interest rate regime of the last few years was a perfect opportunity to deliver growth. The latter tells us it’s a “perfectly missed opportunity”.
The UK is an exemplar here. The coalition government most definitely did not fix the renewables roof while the sun was shining. Not only has this situation regressed under the current incumbents, it looks like they’ve knocked down the walls of the house to boot. Furthermore, despite the headline figures, it would seem from some of the discussion at the workshop, green energy finance is in less than robust health. According to a senior executive at one large financial player, utilities are walking wounded, commercial banks are in trouble, public funding is locked within the vault of austerity, and markets are our only hope. In other words, the pension funds and ‘yield-cos’, companies formed to own operating assets that produce a predictable cash flow, and other institutional investors looking for long-term yields are key potential investors in renewable energy.
Yet, these funds are significantly under-invested in green energy. Only 1-3% of pension fund assets are invested directly in infrastructure, and here lies an opportunity. But these investors are not motivated, and it’s up to renewables boosters to transform their assets into a suitably attractive product.
Here then is the substantive issue of the day. How is the direction of development in the green energy sector set, and what role does finance have in this? This issue was addressed by Gregor Semieniuk at the workshop who reminded us that:
A) Finance is not neutral. Who finances what may impact direction and pace of renewable scale-up.
B) But we don’t know much about sources or destination of finance, and
C) The biggest part, asset finance, is just a “green bar” and we never know about who is financing it.
Much emphasis has been on how public policies effect finance flows, but the actors are not distinguished between public and private, or institutional types. We’re simply unsure about what their motivations for investing are. This brings us to directionality, and à la Andy Stirling’s 2007 contribution, the appropriate question follows: why do some energy infrastructures get funded and some do not?
To date, both investors and civil society advocates of renewables have explicitly privileged speed of scale-up over alternative considerations, such as distribution of benefits. Yet as lead renewable technologies such as onshore wind and solar PV gain cost of production parity with fossil production, we have some serious choices to make about whether there is a role for public market creation, how it is financed and how costs and benefits are distributed.
In other words, it may be time to reframe the policy prescriptions to move beyond addressing merely urgency and scale. The alternative course of action discussed in the previous paragraph sees the promotion of renewables as a type of game playing, wrapping assets up in attractive packages for institutional investors. And we have evidence from the great crash of 2008 that the financialisation of fixed assets – in that case people’s homes – does not always end well.
Bring together a large enough cohort of researchers, and a workshop will always produce more questions than answers. This was no different and a number of future challenges were substantiated. There is a significant challenge of governance levels. Can we afford to apply only national policy to global issues? Solar PV and wind in particular are now global industries with global value chains. So, how should a country like the UK identify where to make interventions? For example, if you are ‘UK PLC’, should interventions be made only at home, or also abroad? This is both a policy and research challenge.
We might also usefully ask what the mechanisms are by which flows of finance enter countries, particular developing countries. For example India’s Prime Minister Narendra Modi’s alliance of industry and 120 nations investing in solar energy made waves at COP21. It was a big deal, but how will the finance on this work? Conversely, we might ask, who benefits from a feed-in tariff introduced in Germany, the UK or Ireland, and where are they? This question gets to the heart of directionality issues. Who makes the decisions, where are they located, and what is the distribution of costs and benefits?
