Solar water heating to ease energy crunch in South Africa
Cape Town, 01.08.2007 - written by: Dr. Marianne Osterkorn
Finance minister Jabu Moleketi proudly announced in May that work on all stadiums to be used during the 2010 World Cup in South Africa will be finished by October 2009. Ten stadiums are to be used for the cup, five of which will be new - at locations such as Nelson Mandela Bay in Port Elizabeth. Others, such as the Green Point stadium at Cape Town, will be completely refurbished. The event will be enormous for the country and attract world media attention.
But it occurs at a delicate time in South Africa – not for its sporting heroes, but for its energy moguls. Eskom, the national utility, has warned that power cuts, which have plunged thousands of households into darkness on many occasions over the last two years and cost businesses millions of Rand, could continue in the coming years right through to 2010. There is a real possibility that these shortages will disrupt the matches and broadcasts during high demand periods.
“Eskom’s power system will remain tight over the next five years with an increased likelihood of power interruptions. This trend is set to continue at least until the first new coal-fired base load power station is commissioned in 2011,” reports a briefing on the company’s website.
Power hungry
It is a situation that local people have already become accustomed to. At times, they have been forced to adopt an unwelcome energy-saving mindset, urged to turn off electric equipment at the wall, avoid using washing machines during peak hours and bake less. It has been an inconvenience for consumers and businesses, even though Eskom managers have reshaped commercial policies by, for instance, encouraging the sale of efficient lighting.
This massive monopoly is in an unusual position. South Africa’s aggregate demand for energy is increasing faster every year than its supply, and is forecast to double within the next ten years. Under these circumstances, Eskom has had to open itself to solar, as government, regulators and businesses are beginning to favour solar energy for water heating (SWH) over solar electricity technology (PV) as an energy saving device,. This is resulting in new legal and financial instruments. “Eskom had in the past refused to admit any link between solar water heating and the blackouts, but has now finally acknowledged it,” comments consultant Glynn Morris of Agama Energy.
Cornered, the utility has had to turn its misfortune into an advantage, boasting of its “aggressive promotion of solar water heating systems” via Rand 300m subsidies alongside its energy saving offensives. It is one of the first utilities in the world turning to renewable energy as a result of supply problems rather than government targets and in June Eskom pledged R2bn over the next five years in support of a national SWH roll-out.
Fred Stammeshaus, development officer of clean energy investment company E+Co, is one of those engaged in building the new industry. It is a golden opportunity, since the government is now fully behind the new business. “We’ve been working on solutions to deal with the shortage and are figuring out how to scale up investments in solar water heating. During the past 18 months it has become clear that Eskom cannot fulfill its obligations to adequately supply electricity to households and businesses in South Africa without engaging renewable energy solutions. All pre arranged emergency options have been used,” he explains.
The potential is enormous. Between 20-30% of electricity use is dedicated to heating water, while there is no shortage of intense sun radiation in this climate. If South Africa’s low power prices rise in double digits as predicted, some of the financial barriers will clear as payback periods for new equipment shorten to close to five years. Stammeshaus forecasts that the market in domestic and commercial SWH systems will grow from US$10m in 2006 to more than US$90m by 2012 based on E+Co’s market assessment using a list of 23 SWH providers provided by the international clean energy coalition, Renewable Energy and Energy Efficiency Partnership (REEEP). The government aims to replace 10,000 GWh with renewable energy before 2013 and has stated that 14% of this should be achieved through commercial solar water heating.
Stammeshaus’s job is to lay down more favourable financial conditions for end-users in the short and medium term. Working alongside the REEEP, as well as governmental agencies, he has been trying to open the door to further investment in a sector previously ignored by banks. “Several banks have stated that they consider the SWH sector still an infant industry. A lack of experience necessary to evaluate returns and risks associated with loans tied to savings from reductions in energy demand has kept banks out of this potentially profitable and environmentally beneficial market,” says Stammeshaus.
Furthermore there is a perceived financial risk involved in end-user financing for SWH systems, with the equipment itself considered insecure collateral for which there is no second hand market yet in place in case of default. Representatives of financial institutions therefore emphasize that some sort of financial guarantee would definitely be needed in order to provide SWH end-user financing to businesses and consumers.
Image problem
Memories are long enough to remember incidents back in the 1980s when solar panels broke down after a severe winter. “Its image is still suffering, people don’t easily forget” but with the increasing quality of SWH-systems and the positive initial experience with quality control and quality testing that the Central Energy Fund’s (CEF) Energy Development Corporation (EDC) started this year, a major condition for a rapid scaling-up of the market is being fulfilled,” continues Stammeshaus. The EDC was established in January 2004 to invest in renewable energy and alternate energy fields. It targets market sectors where there is insufficient private sector activity as well as where the government, for strategic reasons, believes state investment is required.
Morris agrees that “there’s a lot of uncertainty about renewable energy and not a lot of experience,” citing a failed investment spurt in the 1990s in which funds dried up. CEF and their partners have tackled this lack of confidence through a series of rigorous equipment tests to help satisfy the bankers and encourage them to finance end users.
Eskom’s subsidies and the government’s recently announced renewable energy targets are not enough in themselves to encourage a solid investment climate. To do this, more thorough groundwork is required. One solution is to improve the financial framework for both lender and buyer to release more capital. Another is to shift the quality and perception of the investment. A third is to approach the market from another angle.
Global investments company E+Co’s strategy, with South African offices in Centurion, has been to focus on commercial end users rather than individual householders first, creating economies of scale and attractive deal sizes for banks, as well as gaining experience of the technology more quickly. These end users include residential care homes, hotels, schools, apartment blocks and mining businesses as well as many other companies, each of which will invest in systems with a minimum of US$14,000 each.
Guarantee
To further bolster up confidence, E+Co, together with local partners, using some of REEEP’s funding, is now developing a facility to partially guarantee the loan repayment by the end—user to the financial institution, so that there is even more security than the collateral of the solar water heating equipment itself. Stammeshaus expects that this should help get the local banks on board especially in the early years, building on E+Co’s experience in financing the leasing of systems via local SME-providers.
“The guarantee facility intends to be an engine to start scaling up investments in the solar water heating industry. Once the industry has matured and the financing of equipment for end users has become successful, financial institutions are assumed to finance solar water heating systems without the support of a guarantee facility,” he explains.
A radical rethink at Nelson Mandela Bay Metro (local council), part of Port Elizabeth, could also help ease the pressure once the new stadium is built in 2010. The area has suffered several power shortages in recent times. “The Metro is facing electricity shortages and seeking ways to save electricity, so it’s looking to contract energy services in an innovative way,” says Glynn Morris.
The government is thus testing legislation that would allow the council to engage in private partnerships for the supply of services, creating new types of procurement contract. His consultancy, Agama, would both supply and maintain energy in a new legal relationship that changes the nature of solar water heating investment because the investment is consolidated.
“This will alter the quality of the discussion around this type of investment and involve infrastructure investors that would never normally have got close to households and that are more likely to be interested in this scale of project. It will create a macro-level change in the energy economy, helping to lift people’s gaze from the micro, personal choice level of current home owners,” remarks Morris. If one service provider engages in solar water heating systems, the supply can be managed in an aggregated way, rather than – as in the past – be viewed as little more than an appliance purchase.
Scale
In both E+Co’s and Agama’s cases, the issue of scale has been an important factor to attracting greater attention from investors. If solar water heating investment filters through on a commercial level via the guarantee, or on a municipal level via new contracts, critical mass is more likely to develop, providing a stronger alternative to conventional fossil-based energy.
At the end user level, consumers are increasingly very keen to buy into the systems but find themselves blocked because of the lack of bank engagement. “Lots of people would like to buy because they know they will save themselves money. They need the finance but can’t get it,” says Fred Stammeshaus. These two projects, as well as the changes in national laws, a new Cape Town city ordinance and changes within both the central government administration and funding, will help the sector make more impact.
But Eskom’s role will continue to be crucial, even in the development of solar water heating as well as other renewables. “They’ve agreed for the first time to subsidize solar thermal, because they’ve seen the benefits in terms of shaving the peaks,” comments Morris. Further problems are on the horizon. According to the International Energy Agency, not nearly enough global investment in new energy capacity is being made to match expected future demand or cut emissions. The South African crisis may eventually generate solutions that could unlock more capital in other countries too.