Oct 2020

How new methods of procuring solar electricity enable more access to affordable power

Intuitively, solar-generated electricity is cheap: the sun, after all, is a free resource, and compared to fossil-based energy such as coal and gas that require constant inputs, once installed, solar PV systems harness the sun’s energy for “free”, providing years of clean energy. So why has solar taken a while to become mainstream?

This is, in part, due to the costs of setting up a solar PV system. Because whilst the solar resource itself is free, there is still an initial cost of setting up the equipment which harnesses the sun. And while electricity grid tariffs are typically made up of ‘pay-as-you-go’ charges for monthly energy and power use, a solar PV electricity generator requires an upfront investment in equipment, which is then followed by minimal operational costs and zero fuel costs. This means that whilst the overall lifetime costs of solar PV are significantly lower than equivalent grid costs, the upfront investment has historically often exceeded the available capital of electricity consumers seeking alternatives.

However, this pattern is changing. For years, businesses with sensitive balance sheets that would not have cause to justify a large capex expenditure on an asset that doesn’t relate to their core business have struggled to justify the costs of a solar PV system – even if it would result in significant cost reductions over time. For this reason, new ways of procuring solar electricity have grown, and many businesses are now choosing to buy power from independent power producers (IPPs) who own and finance the solar assets on their behalf. 

Independent Power Producers (IPPs) gained some traction in the years of South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPP), which started in 2008 to see the first renewable energy integrated on to the main grid. Since 2008 a few trustworthy IPPs have stood the test of time and are able to provide Power Purchase Agreements (PPAs) that reliably smooth out the costs of a solar PV generator, making it more affordable and accessible to businesses. In addition, their owning of the solar PV asset removes the technical and operational risks that a business might face through ownership.

Several years ago, small-scale PPA agreements for typical businesses were inflexible and difficult to structure. As mentioned in the previous piece on how energy generation has changed, lower grid tariffs and higher solar equipment costs in the past reduced the financial benefit of solar for the end user. In addition to this, local solar companies were less experienced and technical risks were higher, increasing the costs of finance. Buying solar power from an IPP was akin to renting a house at above market rates, from a landlord who overpaid for the property and got an expensive bond from their bank.

But this has been fundamentally changed by the cost dynamics of the energy sector. Reputable IPPs now have the skills and experience to offer clean solar power at a substantial discount relative to the grid, even for commercial energy consumers. In addition to unlocking greater overall savings, the growing cost gap is enhancing the commercial flexibility of IPP services, and making solar electricity available to a wider pool of consumers. 
A typical PPA can now range from 5-20 years, with the most popular being somewhere around the 10 – 15 year mark. During that time, the offtaker (the company buying the power) and the IPP (the company providing the power), agree to pay for power and provide power, respectively, at an agreed tariff. It’s very similar to buying power from Eskom, except that the companies know upfront how much they’ll be spending on power – and how much that tariff will increase in the coming years. These solar procurement options enable customers with sensitive balance sheets to reduce costs immediately, without the risks of owning or running a solar PV system, and without the risks of unpredictable tariff increases over time.

How electricity generation has changed over the past 10 years – and what it bodes for our future

Alongside the global pandemic, electricity has been on many South African’s minds this year. And rightly so: South Africans can expect a 15% increase in their electricity costs from mid-2021, based on a recent court ruling which grants Eskom the right to recover operating costs through additional tariff escalations. This will mark more than a decade of average annual increases of 14%, relative to average inflation of just under 6%.

These escalations have fundamentally changed South Africa’s economy: the manufacturing and mining sectors have been particularly affected by the rising tariffs, and are doubly affected by the inconsistent supply caused by load shedding. South Africa’s electricity supply from the grid is subject to decreasing reliability, with 2020 already shaping up to be the worst on record for load shedding.

What South Africa is experiencing is not unique, but exposes the global trends that expose the high costs of maintaining an aging and centralised coal fleet. A decade ago, average Eskom tariffs were two times lower than they are today, and the costs of installing solar PV were two to three times higher. That situation is very different today: Eskom and municipal electricity tariffs are now substantially more expensive than solar PV installations on an average, lifetime cost basis. This is driving strong uptake of own-use solar generators, despite persistent policy and regulatory barriers.

This is because the electricity market has fundamentally changed over the last 10 years. The growing cost gap between the grid and solar PV means that the benefits of solar are more economically viable, even if the PV plants generate more power than required (for example on weekends, when a factory does not operate). 

For private electricity consumers, solar electricity is typically used to offset daytime electricity consumption through ‘own-use’ or ‘embedded’ generators that service the electricity needs of the facility on-site. The uptake of embedded solar generation has exploded in South Africa, particularly amongst the retail and manufacturing sectors, because of the cost savings generated by the plants. Despite this, embedded generators are largely restricted from selling power into the grid, although it is looking hopeful that this might change

The fact that solar PV is so much more affordable than Eskom’s grid is also changing the way in which solar PV is consumed by large commercial and industrial facilities. For example, some facilities choose to oversize their solar PV system relative to on-site electricity demand in order to increase morning and afternoon solar electricity production, generate more power in winter, save more diesel during load shedding, reduce peak grid demand charges, and achieve higher overall reductions in grid electricity consumption. 


Other commercial and industrial facilities are opting to oversize their solar PV systems and store the excess affordable power in battery banks – something that, 10 years ago, would have been ludicrously expensive. However, with Eskom’s tariffs increasing the way they are, and with the reduction in the costs of energy storage components, the business case is starting to emerge. The advancement in electricity generation technology gives businesses more flexibility and options when it comes to their energy choices. Own-use solar – whether on or off grid – is an affordable and, by now, well-used option.