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Energize The development and sustainability of the SA PV market
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The development and sustainability of the SA PV market

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An industry survey was recently conducted of over 100 leading professionals to get their view on the commercial development and sustainability of the South African photovoltaic (PV) market. The survey addressed issues regarding regulatory barriers for projects, the sustainability of the industry and which markets in sub-Saharan Africa are regarded as the best development opportunity.

These results have been collated into a single defining report with feedback and expert analysis on the survey results. This report has been produced in conjunction with PV Project Development Africa 2014 event which is to be held at the Maslow hotel in Sandton on 9 and 10 September, 2014. The event will gather key industry stakeholders, including multinational and local developers and EPCs to discuss the commercial evolution and sustainability of the PV market in South Africa.

Overview

The photovoltaic market in South Africa holds huge potential for developers with a cumulative target of 9770 MW worth of PV deployments by 2030. Recent alterations to the Integrated Resource Plan (IRP) have seen the targets for PV deployment continue to increase only further. The market has shown tremendous growth as a result of the REIPPP and it seems likely that this growth is going to continue in the next five years.

Market revenues

Revenue patterns of industry stakeholders over the past twelve months were examined. The results are overwhelmingly positive with 47,8% of respondents reporting a revenue increase in the past year. Of the balance, 41,9% said their revenue streams had remained constant, and only 10,3% of those surveyed said that they had experienced a revenue decrease.

With just under 90% of respondents reporting constant or increasing revenue streams as a product of their activities in the South African PV market it is clear that the market is providing ample opportunities and growth for those involved in the market. Despite an increasingly competitive landscape which has seen new firms enter the market, revenues across the industry have been sustained and grown in the past year. The guarantee of the REIPPP drives overall capacity growth and together with an under-supply of power in the market, companies have become increasingly competitive.

Sustainable development

Sixty-five percent of respondents believe the market to be either “fairly sustainable” or “totally sustainable”; which shows a very high degree of confidence in the ability of the market to develop in the next three to seven years. While the mood was generally very positive it is clear that there is also an underbelly of uncertainty in the market, with 24,1% stating that they were unsure about how the market would develop and 10,3% going as far as to say the development of the market was either “slightly unsustainable” or “very unsustainable”.

This concern is based on the question of how long the REIPPP will continue to provide the project pipeline which has sustained so many in the industry. Competition in the industry is increasing and price points have become increasingly squeezed as a result – making it harder for firms to stay active in the market.

The results from this question show a general level of confidence in the development of the market which is important for continual investment into the industry. Along with the results from the revenue question it is clear that many companies have found good profitability in the market and continue to expect this to be the case.

While there is an undercurrent of uncertainty about the continual development of the market it is far from a situation of panic. Spare capacity in the grid, demand growth and the supply deficiency justify this general level of optimism. The continued roll out of REIPPP guarantees demand and firms are aware that this continues to make their presence in the market profitable and sustainable.

What could cause uncertainty?

Half of the respondents considered their businesses being too dependent of the REIPPP. Interestingly, 34,3% of them felt that price levels were dropping too low in order for them to remain competitive. The figures show that the average price of awarded projects in Round 1 was about 270c/kWh compared to about 95c in Round 3.

 

Fig. 1: Factors which could make the South African PV market unsustainable
Fig. 1: Factors which could make the South African PV market unsustainable.

 

While the REIPPP has been a tremendous driver for the industry it is acknowledged that the PV industry could be too dependent on it and companies may start taking steps to mitigate against this risk by sourcing a private client base. A lack of domestic manufacturing was seen as a potential problem as the industry developed, and almost a quarter of those polled felt there were too many companies entering the market.

Other concerns

  • Unfavourable exchange rates
  • Insecure political ambience
  • Lack of skills and support infrastructure
  • Limited supply of long term finance for non REIPPP projects
  • Eskom’s potential inability to pay for what is available
  • Problems with small-scale feed-in domestic and commercial installations

What regulators can do to develop a sustainable industry?

Only 4,8% of respondents cited restrictions on foreign companies entering the market as being of benefit to the development of the industry. It is clear that South Africa will continue to benefit from keeping its doors open to investment and expertise from foreign companies as the market continues to grow.

 

04-vco-PVinsder-Fig-02
Fig. 2: Factors which could facilitate sustainable development.

 

The majority (55,8%) believed that a decrease in bureaucracy would allow the industry to develop most effectively. The process for development is currently notoriously arduous and makes it extremely difficult for firms without a large capital base to stay active in the market – especially as competition for projects continues to get tougher. Some (20,2%) cited a change in the way the REIPPP is administered as something which would be the most beneficial to them, while 19,2% felt that higher local content requirements are something which regulators need to take in order to develop the industry.

Business development budgets

The survey asked respondents if they expected their business development budget to be increase or decrease in the next three years. A staggering 86,7% of respondents stated that they were expecting to see an increase in their business development budget over the period. Only 6,2% of respondents were expecting a decrease in their business development budget and 7,1% were expecting their budget to stay the same.

 

04-vco-PVinsder-Fig-03
Fig. 3: Budget expectations for PV focused business development in Africa.

 

This is a clear signal of intent that companies are looking to expand their operations in sub-Saharan Africa and view it as a growth market of high potential. Many (39,8%) of those asked indicated that they expect a rise in revenues and profitability and believe there are still huge gains to be made in the market.

Which Sub-Saharan African market looks the most promising?

The survey asked respondents to identify which market they regard as having the most credible prospects for growth in the next five years. Namibia topped the polling with 33,3% and was a clear leader of the countries listed. Ghana, Nigeria and Kenya all polled very similarly with 18,1%, 18,1% and 21% respectively.

 

04-vco-PVinsder-Fig-04
Fig. 4: Sub-Saharan countries with the most credible prospects for growth.

 

It is clear that South Africa has the potential to act as a centre of excellence for the development of the PV industry in sub-Saharan Africa and this could be a prevailing trend which is seen over the next five years. Although there is no general consensus on which market is the best opportunity it seems that South African PV companies are viewing all markets in the region as an opportunity.

Where can business develop?

This question examined what companies’ business development focus would be in sub-Saharan Africa in the next five years. The responses reveal that many companies (53,3%) see the highest potential for growth in the South African market, while 33,3% of respondents suggested that expanding into other sub-Saharan African markets would be their business development priority for the next five years. Only 13,3% of respondents stated that cost reduction or technological development was their development focus. This does suggest that most companies are content with the technology at their disposal and their primary focus is concerned with market opportunities than research and development.

 

04-vco-PVinsder-Fig-05
Fig. 5: Largest part of business development spend in Africa in the next five years.

 

Who is needed to develop business?

This question asked respondents to identify who they needed to meet in order to most effectively develop their business strategy. Financiers polled top with 40,4% of respondents stating that meeting with financiers would best help them develop their business. Polling second with 21,2% were developers, which suggests that many of the suppliers in the industry are still seeking closer relationships with those who are developing projects. Only 14,4% of respondents felt that regulators would be the most effective people to meet to expand their business, so while over 54% felt that a decrease in bureaucracy would help their business development actually meeting with regulators is not a high priority for many companies.

 

04-vco-PVinsder-Fig-06
Fig. 6: Type of partners needed for business expansion in Africa.

 

Market evolution

This question examined which PV market is viewed as the most credible prospect for growth in the next five to ten years. Despite being the current driver of growth in the market the REIPPP only polled 21,5%. Only 10,3% of those surveyed identifying utility scale generation outside of REIPPP as something they viewed as the most credible area for growth.

Over half of those in the industry (51,4%) are seeking industrial, commercial and residential contracts to grow their business. The market views small to medium scale deployment of PV as a bigger commercial opportunity than the REIPPP.

 

04-vco-PVinsder-Fig-07
Fig. 7: Markets with the most credible prospects.

 

Summary

There are three key conclusions which can be summarised from survey:

  • Revenues are rising, business development budgets are expected to increase and companies are focused on how they can expand within South Africa. While it is evident that companies are looking to expand into other sub-Saharan African markets there is certainly no homogenous strategy for growth in a particular country.
  • Although the REIPPP has been a tremendous driver, firms are also looking beyond it: A majority of respondents stated that being too dependent on the programme could be the biggest cause of making the industry unsustainable.
  • Companies see the future in distributed generation: The greatest conclusion from this survey data is that companies view the potential of distributed generation over and beyond that of utility scale deployment. This is evidenced by over two thirds of respondents stating that they believed that residential, industrial and commercial deployment represented the most credible prospects for the next five to ten years.

Conclusion

The South African PV market is currently on a steep upward curve of project development which is seeing revenues rise and business opportunities aplenty. While these profits are of course a welcome boost to company’s balance sheets it is clear that companies are wary of the ability of the market to sustain this growth over the next five years. Companies are focusing on developing their client base among the industrial and commercial sectors where they can build a sustainable project pipeline where they are not reliant on the REIPPP.

Acknowledgement

This article was previously published by PV Insider, a division of FC Business Intelligence, and is republished  here with permission.

Contact Marco Geraghty, PV Insider, marco@pv-insider.com

 

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