South African wind industry faces setback after failed auction

The South African government announced the results of its latest auction for independent power producers at the end of December – and the news made for grim reading for the wind industry. While the government awarded ‘preferred bidder’ status to eight solar projects, with a combined capacity of 1,760 MW, it demurred on selecting any new wind power capacity.

The government sugar-coated the news by designating four wind projects as ‘eligible bidders’ – but stated that the selection of these projects would depend on “value for money negotiations”. It added that it would consider reallocating some of the new capacity it had originally planned to allocate to wind projects to solar alternatives.

The previous bidding window, which closed in 2022, also brought disappointment for the wind industry. The government realised it did not have the grid capacity to allocate the new generation projects it had originally planned to award. Preferred bidder status was granted to just six solar projects and no wind projects in that round.

Vincent Kok, senior technical advisor at the South African Wind Energy Association, tells African Business that the absence of wind projects in the latest bidding window is a “setback”. The “start-stop nature of public procurement” has disrupted efforts to develop the industry’s supply chain, he adds, making it more difficult to achieve economies of scale.

Price pressures

Amid growing questions over the future of the wind industry, it is clear that the sector faces several major hurdles in South Africa.

One is that the country’s grid infrastructure is struggling to connect new sources of power generation. Grid bottlenecks are most severe in the relatively remote areas in the west of the country where wind power potential is greatest. Wind project developers that place turbines in less favourable areas generate less power, meaning they are forced to charge higher tariffs to ensure a return on investment.

These projects then struggle to compete with solar alternatives. Indeed, the difference in the tariffs proposed by wind and solar developers would appear to explain the government’s insistence on “value for money negotiations” with IPPs before it hands out new wind contracts.

The wind industry’s struggles are certainly not unique to South Africa.

“Wind is slightly more complicated in terms of development. It takes a bit longer from an environment and social point of view, especially an environmental point of view,” points out Terje Pilskog, CEO of renewable energy systems company Scatec. Even some of the global leaders in wind power generation, including Britain, Denmark and Taiwan, have struggled in recent years to find a formula that allows wind power to be sold at competitive prices, while guaranteeing a return on investment for developers.

But although solar panels may often be cheaper and quicker to deploy than wind turbines, the two technologies in fact complement each other in many ways.

“While the development costs of wind may in general be higher than for solar in South Africa due to the specific requirements for compliant permitting, the respective technologies do not necessarily compete with each other,” says Rob Invernizzi, general manager of renewables developer ABO Energy in South Africa.

“They are subject to different development requirements and different investment considerations due to the different technologies in use.”

“Furthermore, one technology may be more suited to an offtaker’s requirements than the other,” adds Invernizzi, noting that requirements may vary based on the time that power is needed. Solar generation depends on daylight, whereas wind speeds are often highest during the night – meaning a mix of solar and wind are needed to maintain a supply of power.

The South African government, despite sending distinctly lukewarm signals in the past two bidding windows, continues to recognise the role that wind will play alongside solar in the future energy mix. The latest update to its draft Integrated Resource Plan, which serves as a masterplan for the electricity sector, envisions a massive 76 GW of wind capacity by 2050, compared to 42 GW it had earmarked in a much-criticised previous draft published in 2023.

Business drives demand

In spite of the challenges, Pilskog told African Business that Scatec intends to continue participating in wind tenders. He suggests, though that reforms to the bidding process are needed.

“We believe that if we could take a slightly longer term perspective on implementation timelines due to the required grid upgrades, there will be a possibility to do more wind in South Africa,” he says. “The implementation timeline for wind in terms of interconnection is a bit longer than what has typically been allowed under the tender guidelines.”

Vuyo Ntoi, co-managing director at African Infrastructure Asset Managers, adds that the government needs to clarify rules on ‘curtailment’ to allow wind developers to submit more competitive bids. “There might be times when you’ve got too much wind or too much electricity in the system, and you actually need to cut off supply to maintain grid stability,” he explains.

As grid availability becomes increasingly scarce, Ntoi notes that the rules on curtailment are becoming “more of an issue”. Developers need clarity on whether or not they will be fully or partly compensated for being forced to curtail output, he argues. The guarantee of compensation for curtailment will encourage them to submit more competitive bids.

But Ntoi emphasises that AIIM remains “very keen” on financing wind projects, particularly in the commercial and industrial wheeling market. The practice of ‘wheeling’ in South Africa means that industrial enterprises, such as mining companies, can purchase power from distant wind or solar sources; this power is then transmitted or ‘wheeled’ to their facilities through the grid.

Wind and solar can work together

If companies purchase both solar and wind power – which, in combination, can sometimes supply power for 24 hours a day – then they can make a major cost saving by replacing a large share of the electricity they would have purchased from the grid.

“It actually works out significantly cheaper for you from an electricity perspective,” says Ntoi. Purchasing electricity in this way is, he says, “almost a no brainer”.

Kok agrees. “The envisioned liberalised wholesale electricity market is set to be a gamechanger for the industry, alongside bilateral wheeling agreements,” he says.

A key trend now beginning to emerge is that a wider range of customers are able to purchase power from private wind or solar projects, as traders increasingly look to procure power from developers.

“Traders can sell on to multiple clients on a more flexible basis,” says Ntoi; this means that customers can sign shorter-term or more flexible power purchase agreements, potentially blending power from wind and other sources.

While the problem of grid access will take many years to fix, the continuous rise in tariffs charged by Eskom, the troubled state-owned utility, mean that private wind projects will enjoy a competitive advantage.

“With the Eskom tariffs increasing more, it actually increases the scope for wind from a geographical perspective,” says Ntoi.

“Even areas with poorer wind become more competitive from a tariff perspective …. The more your grid cost increases, the more viable wind projects that can produce at lower than grid parity become.”