Merchant Power Plants in South Africa

President Cyril Ramaphosa's Energy Action Plan, launched in 2022, aims to address this issue through five pillars, including enabling and accelerating private investment in the electricity sector. The USAID Southern Africa Energy Program (SAEP) has undertaken a study to examine the feasibility of renewable energy (RE) merchant power plants in South Africa. Merchant power plants are defined as those built without a Power Purchase Agreement (PPA) in place ex-ante and plants that may have a PPA but have not committed all of the plant's output to one off-taker. These plants can engage in various activities, including selling to the Southern Africa Power Pool (SAPP), generating power for their own use, selling directly to local businesses, selling to the utility Eskom, and selling via bilateral contracts with customers in other countries. The study evaluates the feasibility of RE merchant power plants in South Africa based on four criteria: market opportunity, regulatory barriers, grid constraints, and viability of merchant plant financing. The market opportunity is assessed by examining the revenue streams required by merchant plants, the market structure, and whether the market revenues will be sufficient to meet the generator's costs. The cost structure of power plants is divided into variable costs and fixed costs. Variable costs include fuel, variable operating and maintenance (O&M) costs, variable environmental costs, and opportunity costs. Fixed costs include the recovery of capital invested (return and depreciation) and fixed O&M costs. For renewable power plants, the variable costs are low, and fixed costs represent the bulk of the overall costs. In contrast, fossil-powered plants have higher variable costs due to fuel costs. The study notes that the output from renewable plants is intermittent and has low capacity factors, whereas fossil plants have firmer output and higher capacity factors. An illustrative cost structure of various technologies is presented, showing the costs per megawatt-hour (MWH) and as a percentage of total costs. The study also highlights the importance of generation characteristics, including energy characteristics and reliability attributes, which affect how much a power plant can produce, when it can produce, and how much value the production offers to the electric system. For example, solar PV plant output is limited to the hours of sunshine in the day and is intermittent. The USAID SAEP study concludes that the market opportunity for RE merchant power plants in South Africa is influenced by the revenue streams required, the market structure, and the sufficiency of market revenues to meet the generator's costs. The study also notes that regulatory barriers, grid constraints, and the viability of merchant plant financing are critical factors in determining the feasibility of RE merchant power plants in South Africa. The study provides a case study from Spain, focusing on plant financing, to illustrate the challenges and opportunities faced by merchant power plants. The conclusions drawn from the study highlight the need for a vibrant competitive wholesale market and creditworthy customers ready to enter a PPA with the merchant generator. The study's findings have significant implications for the development of the South African energy sector, particularly in the context of the Energy Action Plan. The study's recommendations and conclusions provide valuable insights for policymakers, regulators, and private sector investors seeking to promote the development of RE merchant power plants in South Africa. The study's focus on the enabling environment for private sector investment in the electricity sector is critical in addressing the energy challenges facing South Africa. The study's conclusions and recommendations provide a framework for policymakers and regulators to create a favorable environment for the development of RE merchant power plants, ultimately contributing to the achievement of the Energy Action Plan's objectives. The study's emphasis on the importance of market opportunity, regulatory barriers, grid constraints, and viability of merchant plant financing highlights the complexity of the issues involved in developing RE merchant power plants in South Africa. The study's findings and recommendations provide a comprehensive understanding of the challenges and opportunities facing the development of RE merchant power plants in South Africa.