South African National Electricity Market Investment Research

Country profile

1、 Overview

The Republic of جنوب أفريقيا (hereinafter referred to as "South Africa") is located in the southernmost part of the African continent, with a total land area of 1.219 million km2, ranking 25th in the world. South Africa is divided into nine provinces and three administrative capitals, namely Pretoria, Cape Town, the legislative capital, and Bloemfontein, the judicial capital. The official language is English.

Due to the diversity of human species, South Africa is known as the "rainbow country". According to the latest population statistics of the South African Bureau of Statistics, the total population of the country is 56.52 million. There are black people (81%), white people (9%), colored people and Asians. The population under 15 years old and over 60 years old accounted for 29.6% and 8.1% respectively, and most of the residents believed in Christianity.

South Africa implements a multi-party democracy, with the main political parties including the ANC and the League for Democracy. After the end of apartheid in 1994, Mandela became the country's first black president and was honored as the "father of South Africa". At present, the President of South Africa, Ramafosa, is from the African National Congress, with a term of office from 2019 to 2024.

2、 Energy and resource endowment

South Africa is rich in coal, rich in scenery, and poor in water resources. Oil and gas mainly depend on imports. South Africa is a major coal country in the world. Its output ranks eighth in the world and its export ranks third. Its coal resources rank first in Africa

Most of them are located in the northeast of South Africa. The average wind speed at the height of 100m in South Africa is about 7m/s, and the southeast coastal area is particularly rich in wind resources. The inland is rich in light resources, and the total horizontal radiation is about 2157kW · h/m2/year, which is equivalent to the level of Class I regions in China.

3、 Overview of investment environment

1. Political stability and warming

South Africa is a member of more than 70 organizations including the G20, the BRICS countries and the Southeast African Community. The two sides will step up the implementation of the "nine projects" of the Forum on China-Africa Cooperation and the "strategic plan for China-South Africa ten-year cooperation". China will also encourage Chinese enterprises to carry out investment cooperation in South Africa and help South Africa achieve the development goal of the "new investment initiative".

2. Trade continues to be strong

As of October 2021, the South African government's foreign exchange reserves amounted to US $43.63 billion. South Africa is a major trading country in Africa, with the largest trade volume in Africa, accounting for more than 20% of Africa's total trade. China has become South Africa's largest trading partner for 12 consecutive years, and South Africa has become China's largest trading partner in Africa for 11 consecutive years.

3. After the COVID-19, the credit rating is expected to be raised

As of October 2021, China Export and Credit Insurance Corporation rated South Africa's sovereign credit as medium and the country's risk level as medium and low. Fitch rated South Africa's sovereign credit rating as BB, with a negative outlook; Moody's is Ba2 and the outlook is negative; The S&P is BB - and the outlook is stable.

In the long run, the investment environment in South Africa is generally improving. With the help of the BRICS countries, the New Development Bank, the Forum on China-Africa Cooperation and the China-Africa Development Fund and other platforms, China-South Africa cooperation is getting better.

Overall electricity market analysis

1、 Government administration

The competent authorities of the power industry in South Africa mainly include the Ministry of Energy and the National Energy Regulatory Authority. The Ministry of Energy is responsible for formulating industry rules and regulations and plans, supervising the implementation of power projects, organizing the bidding and management of new energy projects, and managing independent power generation enterprises. The National Energy Regulatory Authority is responsible for the issuance of licenses for power producers and distributors and the management of electricity prices.

2、 Eskom

The electricity production and supply structure in South Africa is mainly composed of the vertically integrated Eskom and supplemented by the local and enterprise owned electricity. Eskom is a state-owned monopoly enterprise integrating power generation, power supply and distribution. It is the seventh largest power company in the world. It operates 30 household appliance plants and supplies 95% of South Africa's electricity and 40% of all Africa's electricity. It has an irreplaceable monopoly position in South Africa's energy sector. Because the South African government has neglected the maintenance and development of power facilities in recent years, a large-scale power crisis has broken out, and it is difficult to fully recover at the moment. Although the government has issued an emergency expansion plan, affected by the financial crisis and COVID-19 epidemic and other factors, the domestic power companies are short of funds. Foreign companies are more cautious in investment, but it is also a window period for entry.

3、 National power generation installation and capacity

According to Eskom's 2021 annual report data, as of March 31, 2021, the total installed capacity of power generation in South Africa was 52550MW, of which the total installed capacity of Eskom was 46470MW, accounting for 88%; The total installed capacity of independent power producers (IPPs) is 6080MW, accounting for 12%, most of which are renewable energy. The total installed capacity is subdivided as follows, and coal power still accounts for the highest proportion, accounting for 73.78%; The installed capacity of hydropower accounts for 6.36%; Nuclear power installation accounted for 3.54%; The total installed capacity of scenery accounts for 8.85%; The installed proportion of natural gas and diesel is 6.50%.

From the perspective of power generation, the national power supply in 2021 will total 219.23 billion kW · h (2290.92 kW · h in 2020), of which Eskom's power generation will account for 92%, IPP's power generation will account for 6%, and electricity imported from neighboring countries will account for 4%. In 2021, Eskom's coal power generation will still account for the largest proportion, accounting for 91% of the total power generation (90% in 2020), and nuclear power generation will account for 5% (6% in 2020). From this, it can be seen that the vast majority of power sources in South Africa still rely on coal, which is difficult to reverse in the short term.

4、 Development history of renewable energy

1. Public bidding of renewable energy independent power producers (REIPPPs)

As of December 2021, the South African Ministry of Energy has organized and carried out the international public bidding for five renewable energy projects since 2011, with a total capacity of 8721MW. According to the relevant policies and regulations of South Africa, in the first four phases of the international public bidding for renewable energy in South Africa, the shareholding of foreign enterprises shall not exceed 60%. In order to protect more black and local interests, the maximum shareholding ratio of foreign-funded enterprises was reduced to 51% in the fifth international public bidding for renewable energy.

Due to the increasingly fierce competition of renewable energy projects, the bid-winning electricity price has dropped significantly, the requirements for the localization of participants are higher, and the income space has been significantly compressed. In the second half of 2015, due to the easing of the tension between power supply and demand and the high price of renewable energy, the PPA of the second round and the fourth round of REI PPPP phase 3 project failed to be signed in time, and the bidding for subsequent projects was also forced to be suspended. In April 2018, under the promotion and coordination of the Ministry of Energy, the above PPA was signed. In 2021, the fifth phase of bidding will be completed, with a total of 2600 MW of wind power projects, including 1600 MW of wind power and 1000 MW of photovoltaic power.

After sorting out the bidding results of the first five phases, the total installed capacity of wind power is 4947MW, the total installed capacity of photovoltaic power generation is 3296MW, and the total installed capacity of other projects is 478MW. The total installed capacity of the first five rounds is 8721MW.

2. Average bid price of REIPPPP

The average bid-winning price of wind power in Phase 5 is 3.2 cents/kW · h, while the average bid-winning price in Phase 1 is 18.8 cents/kW · h. The price trend is obvious (also related to the large change of exchange rate). Photovoltaic power generation projects also have similar problems. The electricity price has dropped from 45.4 cents/kW · h in the first phase to 2.8 cents/kW · h in the fifth phase (according to the regulations of the Ministry of Energy, after the power generation enterprise is put into operation, its on-grid electricity price is increased annually according to the CPI published by the South African government).

3. The situation of major developers in the wind power and photovoltaic power generation market in South Africa. After sorting out the winning of the first four REIPPPs, companies from فرنسا, إيطاليا، الولايات المتحدة, Ireland, الهند and other countries are active in the renewable energy power generation field in South Africa, and the competition in the new energy market is fierce.

In the first four phases of bidding, wind power awarded a total of 3347MW, including 6 wind power projects with a total winning capacity of 748MW won by Mainst ream of Ireland; The Indian T ata Group has won a total of 2 wind power projects, with a total winning capacity of 227MW, and has been put into operation; Eskom Italia has won seven wind power projects with a total bid capacity of 899MW; France Electric Power has won three wind power projects with a total bid capacity of 103.8MW and has been put into operation; China Longyuan Power has won two wind power projects with a total bid capacity of 244.5MW and has been put into operation. The winning capacity of the above five companies is 2222.3MW in total, accounting for 66.4% of the total installed capacity awarded.

A total of 2296MW was awarded for solar power generation, of which SunEdison of the United States won a total of 7 projects, with a total winning capacity of 457.9MW; النرويج Scatec has won a total of 6 projects with a total winning capacity of 411.8MW; Solar Capital of the United States won a total of 3 projects, with a total winning capacity of 255MW; Yidian won a total of 5 projects with a total bid capacity of 323.5MW; Mulilo, South Africa, won a total of 4 projects with a total bid capacity of 179.93MW. The winning capacity of the above five companies is 1598.13MW, accounting for 70% of the total installed capacity awarded.

Problems faced by South Africa's electricity market

1、 Power rationing seriously affects economic development

Since 2018, South Africa has experienced severe power rationing. In 2021, there will be 47 days of power rationing (46 days in 2020), including 42 days of power rationing at level 2, 3 days of power rationing at level 3, 2 days of power rationing at level 4, and 9 consecutive days of power rationing on March 10-18, 2021, which is the longest record since power rationing.

In 2021, the power limit will be 666 hours, 1.034 billion kW · h (816 hours, 1.291 billion kW · h in 2020; 417 hours, 812 million kW · h in 2019), and the level 6 power limit will only be implemented on December 9, 2019.

2、 Most of Eskom's power plants are old and have frequent accidents

1. Coal power unit

Basically, it was built in the 1980s or before, with an average service life of more than 30 years and more than 50% more than 35 years. According to the latest South African national power plan, Eskom's coal power decommissioning plan is as follows: 5400MW in 2022, 10500MW in 2030 and 35000MW in 2050.

2. Koeberg Nuclear Power

The only nuclear power plant in South Africa and the only one on the African continent, located on the Atlantic Ocean north of Cape Town, is equipped with two pressurized water reactors with a rated capacity of 970MW. At present, the effective supply capacity is 1860MW, reaching the design life in 2024.

3. Medupi and Kusile coal power are newly built, with a total installed capacity of 9600MW (4800 * 2). Due to design defects, the rated output cannot be reached, and Medupi had an explosion accident in August 2021.

4. Mozambique HCB Hydropower

With an installed capacity of 2700MW, it is the largest hydropower plant in southern Africa and the second largest hydropower plant in Africa. South Africa will purchase electricity from it. The PPA will expire in 2029.

National electricity market planning

In August 2018, the Ministry of Energy of South Africa released the revised version of the National Electricity Market Plan (IRP) of South Africa, which was publicly solicited for comments in the same year, and officially released IRP2019 in October 2019. The main adjustments were as follows: first, lowered the expectation of South Africa's economic growth and load demand; The second is to moderately adjust the power supply structure on the premise of diversification. According to IRP2019, by 2030, we will vigorously develop wind power and solar power generation, moderately develop gas power generation and use foreign hydropower, prudently develop coal power and stop developing nuclear power.

In order to cope with the uncertainty of the macro environment, IRP2019 has adopted a more flexible method and adopted different calculation schemes, such as high, middle and low, to adapt to changes in economic growth, fluctuations in electricity demand, industrial structure adjustment and other factors.

According to the plan, by 2030, South Africa will add 29000MW of installed power, of which the total installed capacity of wind power and photovoltaic power will be 20400MW, accounting for about 70%.

Through the plan, we can see the determination of the South African government to vigorously develop renewable energy, especially wind power and photovoltaic power generation. The plan also increases confidence in the future renewable energy market and investment in South Africa.

Challenges in developing South African electricity market

1、 Black Economic Empowerment Act (BEE)

BEE is an economic policy issued by the South African government in 1994 in response to the legacy problems caused by racial segregation in history, aiming at solving the problems of low economic status of black people and too little equity in enterprises. The policy sets hard targets for each enterprise from five aspects and gives quantitative scores, including black shareholding ratio (25 points), participation in management (19 points), skill training (25 points), driving the development of enterprises and suppliers (44 points) and driving social and economic development (5 points), with a total of 118 points, in order to comprehensively improve the degree of black integration into the economy.

Therefore, according to BEE policy requirements, electric power enterprises entering the South African market in green space or acquisition mode need to find black people to form a BEE partner to form a consortium to carry out work. Therefore, Chinese investors should understand the detailed rules of the BEE Act and understand the actual implementation of the BEE and relevant cases. At the same time, the selection of partners should be cautious. Enterprises with strong strength, good reputation and guarantee ability should be selected as BEE partners as far as possible to avoid unnecessary disputes and troubles in future cooperation.

2、 Market compliance risk

South Africa has a high degree of marketization, a perfect market system and laws, and a developed financial industry. Government construction projects are conducted through international public bidding. This is quite different from other African countries that can notify them to obtain projects through direct negotiation. Therefore, it is recommended that Chinese enterprises reduce costs, improve their international bidding ability, and operate in compliance with international market rules.

The South African government has high requirements for local content. In all projects subject to public bidding, the requirements for indicators in BEE account for a large proportion in bid evaluation. However, according to the practice, Chinese enterprises tend to pay more attention to technical and economic indicators, while ignoring social responsibility and local content, so not only the probability of winning the bid is low, but also the impression is poor.

3、 Exchange rate risk

As an emerging country, South Africa's exchange rate fluctuates significantly with the changes in the international market. During 2011-2011, the rand depreciated significantly, from 7.21 rand to 16.5 rand in 2011, with a depreciation rate of nearly 130%. For Chinese-funded enterprises, when investing in South Africa, the income is the local currency rand. When the income is converted into US dollars and remitted back to China, there is an exchange rate risk.

Suggestions for investment and development in South Africa

According to the working idea of paying equal attention to the acquisition of green space, promoting development through project implementation, and driving comprehensive development through key projects, actively implement the role of South Africa's bridgehead and focus on the development of clean energy, and fully promote high-quality development.

Focusing on high-quality new energy wind power and photovoltaic, and taking high-quality gas turbine as the reserve, we will seek powerful local strategic partners, explore the best investment model, and deepen the power market in South Africa.

Focus on the reform opportunities of South Africa's electricity market. At present, South Africa allows large municipalities, large mines and large private enterprises with good financial conditions to purchase electricity from independent power producers. Take advantage of the power reform opportunity to find opportunities for developing green space projects,