Over the last 5 years, how has the energy mix changed, and what have been the key drivers?

The energy supply mix in South Africa is currently about 84% coal, 5.6% renewable energy and 5.2% nuclear energy with the balance being shared between other sources (such as diesel, hydro and pumped storage plants).

While South Africa remains very reliant on fossil fuels (mainly because coal is in abundant supply in-country and is the cheapest energy source), there has been an increased supply and use of renewable energy, particularly wind and solar. This is mainly a direct result of the 2019 Integrated Resource Plan in 2019 (IRP) which sets out the South African government's diversification targets for the energy supply mix by 2030. Also, in certain regions the country receives large amounts of sunlight and wind consistently throughout the year and benefits from a notable reduction in costs related to solar and wind power generation.

In addition, the South African government has adopted the Low Emissions Development Strategy (LEDS), which aims to reduce the country's greenhouse gas emissions to net zero emissions by 2050.

The country has also pledged to meet the goals contained in the Paris Agreement through the First Nationally Determined Contribution under the Paris Agreement (NDC). This currently provides for peak greenhouse gas emissions until 2025 in a range with a lower limit of 398 megatons of carbon dioxide equivalent annually (MtCO2-eq) and upper limits of 583 MtCO2-eq for 2020 and 614 MtCO2-eq for 2025; plateau emissions until 2035 between 398 MtCO2-eq and 614 MtCO2-eq by 2035; and a decline in emissions from 2036 to 2050 between 212 MtCO2-eq and 428 MtCO2-eq. As one of the world's largest carbon emitters, mainly due to its reliance on coal, the shift towards renewable energy may enable South Africa to meet the goals set out in the strategies it has adopted.

What is the outlook for the energy and natural resources sector in the next 5 years? In particular:

Key policy decisions

The outlook is promising and remains as set out in the IRP, the LEDS and the NDC.On 10 June 2021, the President of South Africa announced a series of positive proposed amendments to the Electricity Regulation Act (ERA), one of which being that embedded generation projects with a capacity of up to 100 MW will become exempt from being required to be licensed with the National Energy Regulator of South Africa (NERSA). This is an increase from 1 MW which evidences a significant policy shift and should promote welcome investment in embedded energy generation projects.

Another notable amendment to schedule 2 of the ERA: generators are permitted to wheel electricity through the transmission grid, subject to the conclusion of connection agreements with the relevant municipalities and Eskom (the South African public power utility) and the payment of wheeling charges. Municipalities will have the discretion to approve grid connection applications in their networks based on an assessment of the impact on their grid.

While the above amendments directly benefit business, the government is expected to amend the ERA further to cater for specific exemptions and allowances for individuals and households and issue related policies to give them effect.

In terms of the IRP, the government contemplates restricting solar installations to 1,000 MW and wind to 1,600 MW per annum. It is also anticipated that government will remove this cap.

On 30 April 2021, the period for written public comments on the draft updated NDC closed. The draft updated NDC proposes emission targets for 2025 and 2030 which, notably, have upper limits that are below the current NDC’s upper limits for 2025 and 2030.

Main policy challenges

In order to ensure that market confidence is maintained, the amendments to schedule 2 of the ERA must be finalised and published without delay and in line with the President’s statements referred to above.

While embedded generation projects with a capacity of up to 100 MW will become exempt from being required to be licensed, they will be required to be registered with NERSA. NERSA should make this as quick and easy a process as possible.

In addition, the generation facility will need to comply with the grid code(s) and, if the energy is to be wheeled, it will be required to obtain connection approvals. Both may present challenges from a capacity perspective – to be able to determine grid code compliance or consider connection applications efficiently.

The proposed greenhouse gas emissions targets have been criticized as not being ambitious enough. Yet other than there being delays in implementing regulatory and appropriate process framework and policies, it is not anticipated that there are any other challenges in implementing the policies set out above.

The anticipated role that renewables and/or new technologies will play

Renewables and/or new technologies will play an important role in South Africa, including by:

• acting as a means by which the country attracts and secures infrastructure and foreign direct investment, which could lead to job creation;
• contributing to economic recovery and growth as businesses obtain energy certainty and security; and
• continuing to lessen the demand burden on Eskom which has the potential to substantially reduce loadshedding.

What are the key investment opportunities in the energy and natural resources sectors over the next 5 to 10 years?

• One of the current obstacles to greater uptake of renewable energy relates to the challenges around storing and transferring energy to the national grid. Possible investments in battery and storage technologies could be a potential solution.
• A greater focus on the use of natural gas. Natural gas is readily available in Southern Africa, cleaner than coal and currently cheaper than renewable energy (it also features prominently in the IRP).
• Based on the number of renewable energy sources available in South Africa, the growing number of renewable energy generation facilities in the country as well as recent policy reform, green hydrogen is expected to emerge as a viable investment opportunity.
• Renewable energy projects have attracted significant investment from the private sector and it is anticipated that they will continue to be a worthwhile investment.
• Renewable energy projects potentially being financed or refinanced through the issuance of green bonds or other green, sustainability or social-linked instruments are also an opportunity to consider.

With particular focus on sustainability, and on reducing carbon emissions, how will the energy and natural resources landscape change over the next 5 to 10 years?

A gradual reduction in the use of coal is expected, which should enable the following:

• a significant increase in the use of renewable sources and natural gas, as opposed to other sources of energy;
• green hydrogen becoming a viable investment opportunity and energy source both for domestic and export markets;
• an increase in financing and refinancing transactions through the issuance of green bonds or other green instruments; and
• renewable energy projects and financing transactions that prioritize sustainability, the environment, social benefits and good governance.

Considering the abundance of coal in South Africa, and its cost effectiveness, it is uncertain as to how realistic a significant reduction in the use of coal can be in the next 5 to 10 years. Any reduction will probably have to be gradual. However, it is believed that the country wants to give effect to the commitments in the IRP, LEDS and NDC. Based on the optimistic developments in the energy and natural resources landscape over the last 5 years, the points set out above are realistic and can be achievable.