By Mathapelo Malao, head of Energy, Environment, and ICT, Development Bank of Southern Africa
The lifting of restrictions on the licencing and registration requirements is contributing significantly towards making renewable energy more accessible to intensive energy users, particularly to the industrial and mining users, and as a result this has become a more compelling and strategic investment for such entities.
Mathapelo Malao, head of Energy, Environment, and ICT, Development Bank of Southern Africa . Image supplied by Development Bank of Southern Africa
The amendment of the Electricity Regulation Act is one such action that has seen the easing of the capacity threshold requirement for embedded generation projects. The need to obtain an electricity generation licence has resulted in the growth of the electricity self-generation market as the threshold was increased from 1MW to 100MW in August 2021, which saw a significant increase in the pursuit of commercial and industrial (C&I) related renewable energy projects.
The increasing ease of access to alternate electricity supply not only serves as a means to ensuring security of electricity supply, but also enables businesses to achieve their internal decarbonisation efforts. The level of investment required to support the many commercial users of energy will need significant capital outlay which commercial and development finance institutions will be required to support, this will once again highlight the significant impact and strategic role that the development finance institutions such as the Development Bank of Southern Africa (DBSA) continue to play in the energy sector.
The significant amount of funding required to develop and support the C&I energy ecosystem has seen the DBSA emerge as a lender
of preference in this market particularly in unlocking of funding for black economic empowerment shareholders as well as also playing a role in the senior debt market alongside commercial banks.
Important to note is the investment initiative developed by the European Investment Bank (EIB) together with the DBSA to
stimulate the funding of C&I energy projects. This programme has seen the EIB and DBSA launch a South African renewable energy investment initiative which was established in November 2022 called the Embedded Generation Investment Programme (EGIP). This initiative has been backed by a facility of EUR200- million from the EIB to provide financing for a range of new renewable embedded generation energy projects across South Africa.
This, the largest ever EIB investment in South Africa, was signed at COP27. The investment initiative promises to support clean energy power generation in South Africa and will also contribute towards alleviating energy supply challenges.
DBSA’s Embedded Generation Investment Programme (EGIP) supports the development and upscaling of solar photovoltaic and wind renewable energy embedded generation projects, developed by independent power producers (IPPs) operating in South Africa. Embedded generation is the production of electricity from small to large-scale power generation facilities and usually defined as projects that are connected to customers directly for their own use or indirectly via wheeling arrangements.
EGIP offers a blended finance structure to credit enhanced renewable energy projects through the provision of a subordinated debt facility or first risk loss cover. The EGIP initiative is intended to provide funding to non-sovereign backed Power Purchase Agreement led projects with an energy output capacity of between 10MW and 75MW that are implemented
by private sector entities (in their capacity as IPP and off-takers).
Our Energy, Environment and ICT unit is pursuing a number of significant transactions in the C&I market and has also finalised a few landmark deals which include, among others, the 100MW ABO Wind Project located in the North West Province which entails the development, construction, operation and maintenance of a 100MWAC solar PV renewable energy facility. The project will supply power to four of ARM Platinum’s sites (Bokoni Mine, Komati Mine, Two Rivers Mine and Modikwa Platinum Mine) through an Eskom wheeling arrangement. Under this arrangement, the buyer will be liable to pay for the energy that is metered at the seller’s (IPP) point of delivery. The Project is also adjacent to the Tronox PV projects (ABO Wind Lichtenburg 2 PV and ABO Wind Lichtenburg 3 PV sites) which were developed by the same investors and also funded by the DBSA. DBSA participated in the senior debt, mezzanine debt as well as BEE funding in these respective projects.
Despite the number of opportunities available in this sector, the key challenge remains severe grid constraint experienced on the Eskom grid, particularly in areas where wind and solar resources are abundant such as the Northern Cape, Western Cape and Eastern Cape. These grid constraint issues need to be dealt with as a matter of urgency in order to enable further energy generation and to avoid a complete collapse of the grid system.
The other energy technology which has also received significant focus is the Green Hydrogen economy. This technology is based on the generation of hydrogen, a universal, light, and highly reactive fuel, through a chemical process known as electrolysis. This method uses an electrical current to separate the hydrogen from the oxygen in water, and the process is able to produce energy without emitting carbon dioxide into the atmosphere. Green hydrogen also has significantly lower greenhouse gas emissions than grey hydrogen, which is derived from fossil fuels without carbon capture. There are, however, some questions about the viability of green hydrogen given its high production costs, which will require significant amount of commercialisation before the generation of the energy becomes more cost effective to produce.
According to research report conducted by Grand View Research, the Asia Pacific dominated the global market in 2022 and accounted for the largest revenue share of over 34.94%. China led the Asia Pacific regional market in 2022, in terms of revenue. The presence of a high number of refineries in the Asia Pacific region, particularly in major countries such as China and India have driven the utilisation of hydrogen generation in the region. Hydrogen producers in the region are looking to also expand their geographical reach and target countries like Vietnam, Indonesia and South Africa among other developing nations, to boost their revenue. There are a few green hydrogen opportunities that are being pursued locally. South Africa has reached an agreement to launch a USD1-billion blended finance fund to help accelerate the development of the green hydrogen sector in the country. The fund is supported by the climate finance investment firm, Climate Fund Managers (CFM), as well as Invest International of the Netherlands, financial services group Sanlam, the Development Bank of Southern Africa and the Industrial Development Corporation (IDC), in collaboration with other strategic partners.
The DBSA is currently investing in several green hydrogen projects which include the support of Hive Hydrogen South Africa, which entails the development of a green hydrogen and ammonia plant comprising of 1 200MW electrolyser; a concomitant renewable energy feed of 1 250MW of Solar PV and 2 230MW of Onshore Wind; and a green ammonia plant to produce 940 000–1 000 000 tonnes of green ammonia per annum. The Hive project, together with associated infrastructure, has been registered as one of the Strategic Integrated Projects (SIPs). The project has the potential to attract and unlock foreign direct investment, local funding, climate and green capital given the Just Transition initiatives. There are other green hydrogen transactions that the bank is pursuing which are seeking project preparation support funding.
Local fuel cell and electrolyser development could lead to export sales as well as building a South African Green Hydrogen ecosystem, resulting in jobs and significant skills development.