Dr Tobias Bischof-NiemzChief Engineer

Recognizing and Unlocking the potential of Renewable Energy in South Africa

Light-based Technologies Innovation Forum

14 March 2016

Dominic MilaziCell: +27 71 618 9357Email: DMilazi@csir.co.za

1

Why you should know about energy policy

Policy often shapes offtake markets which is key for innovation

Policy is often a major driver for localisation (and opportunities for skills transfer)

Regulatory and policy environment is key in driving growth for solar

Understanding how solar fits into the energy mix from a power system perspective

Seeing the far-reaching implications of your work for a South African priority area

Photonics/optics is positioned to make a major contribution in wind energy as well (wind and solar make up about 90% of all new utility scale renewable since 2011)

Photonics/optics have potential in wind farm operations as well (smart turbines/blades)

Smart grids may become necessary at very high penetration of renewables

2

Agenda

RECOGNIZING

Global trends in renewable energy

Renewable Energy targets in major economies

Price trends in South Africa

Cost comparisons to conventional generation options

Future plans for renewables in South Africa

UNLOCKING

Nature of renewable energy investments

Requirements for attracting investments in renewable energy

Does South Africa have all these ingredients?

Where can South Africa improve?

CONCLUSIONS

3

Renewable Energy coming of age

Power Generation Additions in Gigawatts (GW)Bloomberg New Energy Finance

4

Energy targets in select countries globally

France:Increase RE to 40% of total

China:100GW solar200GW Wind

Bloomberg New Energy Finance

5

Coal/gas new-build options

Actual results: PV and wind in South Africa are cost competitive todayFirst four bid windows’ results of Department of Energy’s RE IPP Procurement Programme (REIPPPP)

3.13.13.4

0.8

1.1

2.1

3.4

0.6

0.8

1.1

1.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Average tariffin R/kWh

(May-2015-R)

Bid Window 4(18 Aug 2014)

Bid Window 3(19 Aug 2013)

Bid Window 2(5 Mar 2012)

Bid Window 1(4 Nov 2011)

WindCSP PV

Bid sub-missiondates

6

Consequence of renewables’ cost reduction:PV & wind are now the cheapest new-build options on a per kWh basis

6

0.81.1

3.1

0.7 0.5

2.5

0.4 0.8

0.7

0.6

0.6

0.40.30.5

0.1

R/kWh(May-2015-R)

Diesel (OCGT)

3.8

0.1

Gas (OCGT)

1.9

0.1

Mid-merit Coal

1.3

0.2

Gas (CCGT)

1.00.2

Nuclear

1.0

0.1 0.1

Baseload Coal

0.8

0.1

CSP

3.1

Wind

0.6

0.1

PV

0.8

0.1

Fuel

Capital

Fixed O&M

Renewables Conventionals

50%92% 50% 10%Assumed load factor

Fuel cost @ 92 R/GJ

Fuel cost @ 110 R/GJ

10%

Lifetime cost per energy unit

85%

7

Integrated Resource Plan 2010 (IRP 2010) plans generation mix for South Africa until 2030 – 8.4 GW of PV is planned by 2030

Installed capacity Energy mix

CO2

intensity

Carbon free TWh'sin 2030(34%)

Re-newableTWh's in 2030(14%)

5% 14%Share re-

newables

90

80

70

60

50

40

30

20

10

0

Total installed Capacity in GW

Coal

Gas

Peaking

Nuclear

Hydro

Wind

CSP

PV

2030

86

2025202020152010

42

8.4

0

250

200

150

100

50

450

400

350

300

Coal

Gas

Peaking

Nuclear

Hydro

Wind

CSP

PV

2030

436

2025202020152010

Electricity suppliedin TWh per year

255

Source: Integrated Resource Plan 2010, as promulgated in 2011; CSIR analysis

The draft of the IRP 2010 Update was published end of 2013 – in the Update, PV capacity increased to 9.8 GW by 2030

8

Addressing the current situation

The South African Power System is currently under severe constraints, with several controlled load shedding events in late 2014 and in the first months of 2015

(at present, between 10-15% of national capacity remains offline due to maintenance backlogs)

Renewable Energy fulfils key requirements in three dimensions to address current crisis:

- Low cost (0.8 – 0.9 R/kWh)- Fastest deployment (4-5 years from project inception to COD)- Deployment at scale (multiple utility scale projects at a time)

Integrated Resource Plan can already accommodate deployment of further renewable energy capacity

9

Nature of renewable energy projects and key ingredients for market success

Investment characteristics

Capital intensive

Requires upfront capital mobilisation

Long term investments

Require long term revenue certainty

- Offtake certainty

- Tariff certainty

Market success factors

Overall long term regulatory certainty

Stable economic outlook assists with steady returns for investment

Strong financial services sector

Strong local infrastructure

Grid availability

Primary energy resource

Available land

10

Two PV markets in South Africa

1: Department of Energy’s competitive tender space (REIPPPP) large projects

2: Self-generation, embedded generators small projects

Source: CSIR analysis

IRP does not specifically plan for small scale PV, but mentions it as a mean to achieve the planned capacity

11

Higher CAPEX of residential or commercial PV can be (partly) compensated by lower cost of capital for residential home owners

0

5

10

15

20

25

30

35

4% 6% 8% 10% 12% 14% 16% 18%

LCOE = 1.2 R/kWh

LCOE = 1.0 R/kWh

LCOE = 0.8 R/kWh

LCOE = 0.6 R/kWh

WACC (nominal)

CAPEX in R/Wp (excl. VAT)

Assumptions: 20 years lifetime, 1,700 kWh/kWp/yr specific energy yield in year 1, 0.8% annual degradation, 200 R/kWp/yr OPEX, 6% inflationSource: CSIR analysis

Residential

Commercial

Utility-scale

LCOE = Levelised Cost of ElectricityThese are the lifetime costs of the PV system per lifetime energy output, i.e in R/kWh

12

Lack of tariff and offtake certainty

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5kW

Load supplied directly by PV

Load supplied by the grid

Excess PV power fed into the grid

Source: CSIR analysis

Feed-in Tariff (FIT) required

Electricity Tariff

1.3 R/kWh

Avoided electricity tariff

1.3 R/kWh

12h006h00 18h00

Load shifting

13

Where can South Africa improve or clear obstacles?

Municipal Finance Management Act (no long term procurement contracts permitted)

Compensation mechanism for electricity distributors (revenue or gross margin loss)

Regulatory framework for small scale embedded generation

Attractive tariff structures (municipalities have applied but NERSA waits for DOE)

Demonstration that a renewables based power system is viable

Understanding how variability can be managed (spatial distribution, flexible demand/supply)

14

Advantages unlocking renewable energy in South Africa

Transparency & Safety• Cost structures and levels are well understood

Job creation & local content• Huge potential for SMMEs in PV design, installation & verification for residential & commercial customers

Reduced grid losses and system costs• Renewable Energy can be deployed close to the load, i.e. grid losses are low (saves add. up to 5% of costs)

• Generally only very little grid strengthening and no grid extension required (PV follows the grid)

Reduced transaction costs• Project development costs, legal fees, environmental assessment, etc. are all reduced or non existent for embedded PV as compared to

large PV installations

Funding easier due to granularity (smaller project sizes)• Proper standard offer defined for utility scale project (more work needed work the small scale market)

Source: CSIR analysis

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Thank youDominic Milazi

CSIR Energy Centre: Markets and Policy Team012 842 7247 or 071 618 9357