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CARBON FOOTPRINT

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by EOS Intelligence EOS Intelligence No Comments

Growing Appetite for Plant-Based Foods Disrupts the Meat Market

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Not many years ago, veganism or consumption of only plant-based foods, was considered an extreme form of lifestyle. Food options that were available for vegans were very limited and meat alternatives were based mainly on tofu, tempeh, and nuts. However, this is not the case anymore. Not only has the mindset regarding vegan food changed in the recent times, but also plant-based alternatives have become the fastest growing food category in the USA. This is also driven by a greater number of meat eaters experimenting with plant-based meat alternatives, whether due to health benefits, growing awareness regarding animal cruelty, or environmental reasons. Moreover, tremendous amount of investment and research in this space has resulted in wide range of food options, including vegan cheese and vegan meats that taste similar to animal-based proteins.

Vegan food has been around for quite some time now, but it was largely considered to be a niche market having a separate shelf in the supermarkets or being served in vegan-only restaurants and cafes. Moreover, it was considered an extreme lifestyle by many. However, over recent years, vegan meal options have found their way into the mainstream, with more and more people embracing veganism and meat-eaters adding plant-based food options in their diet. This is clearly evident from the steep growth witnessed by this food category, especially in the western world.

As per a study commissioned by the Good Food Institute (GFI) and the Plant Based Food Association in the USA, the retail market for plant-based foods was valued at about US$4.5 billion in April 2019, registering a year-on-year increase of about 11% and a growth of 31% in the two-year period from April 2017 through April 2019. The largest segment of vegan food market in the year ending April 2019 was the plant-based milk segment, which comprised about 40% of sales (US$1.9 billion). This category witnessed a y-o-y increase of about 6%. To put this in further perspective, animal-derived milk sales for the same period declined by 3%. While plant-based meat alternatives, cheeses, yogurts, eggs, and creamers are relatively new and smaller categories, they are driving growth in the vegan food segment too.

The growing sales across most vegan food segments indicate a momentous shift towards a vegan diet, which is not only propelled by an increasing number of people turning purely vegan but also a rise in meat eaters that prefer plant-based alternatives in some food categories, such as milk and milk-based products. This is due to growing lactose intolerance among consumers, with about 65% of the world’s population estimated to be lactose intolerant. The environmental benefits (i.e. lower carbon footprint) of maintaining a vegan diet and a growing uproar regarding animal cruelty have also driven conscious consumers to adopt a vegan lifestyle.

The environmental benefits (i.e. lower carbon footprint) of maintaining a vegan diet and a growing uproar regarding animal cruelty have also driven conscious consumers to adopt a vegan lifestyle.

The trend is further supported by the launch of vegan meat substitutes that resemble meat products in taste, look, and even texture. US-based players, Impossible Foods and Beyond Meat, are leading this space with the latter having received investments from the likes of Bill Gates, Leonardo DiCaprio, and Twitter co-founders Biz Stone and Evan Williams.

Industry players are diversifying into plant-based foods

Understanding that this trend is more than just a fad, several food companies (including large meat producers) have started entering this space, by either buying or investing in plant-based food start-ups.

Tyson Foods, USA’s leading meat producer, invested in Beyond Meat in 2016 and 2017, by acquiring a 6.52% stake in the company. However, in April 2019, Tyson Foods sold its stake in Beyond Meat with an intention to develop its in-house line of alternative (plant-based) protein products.

Nestle, which is one of the largest food companies globally, has also been expanding its portfolio with a keen focus on plant-based alternatives. In 2017, the company purchased Sweet Earth, a California-based producer of vegan meals and snacks, while in 2018, it purchased majority stake in Terrafertil, a plant-based organic food player that was founded in Ecuador and has presence across the USA, UK, and Latin America.

In January 2019, Nestle expressed its plans to launch its in-house vegan burger patty, called the Incredible Burger under its Garden Gourmet brand. The company is also looking to develop a portfolio of dairy-free beverages, such as purple milk (which is made with walnuts and blueberries) and blue latte containing spirulina algae. It is also adding vegan options to its existing brands, such as Haagen-Dazs (which launched a range of dairy-free ice creams in July 2017) and Nescafe (which introduced vegan protein-based coffee smoothies in December 2018).

Similarly, Marfig, Brazil-based leading meat processor, also entered the plant-based food alternatives market through a partnership with Archer Daniels Midland in August 2019. Under the partnership, Archer Daniels Midland will produce the raw material while Marfig will produce and sell the end product through foodservice and retail channels.

Canada-based Maple Leaf has also made significant investments in plant-based food players to expand its product portfolio and brand positioning. In February 2018, it acquired US-based plant protein manufacturer, Lightlife Foods, for US$140 million. Through this acquisition, it added Lightlife’s refrigerated plant-based products, such as hot dogs, breakfast foods, and burgers, to its portfolio and garnered a strong footprint in the US plant-based food market. To further strengthen its hold in this market, in December 2018, the company entered into an agreement to buy US-based Field Roast Grain Meat Co. for US$120 million. Field Roast Grain Meat supplies grain-based meat alternatives (including sausages, burgers, etc.) and vegan cheese products to the North American market.

Danone, a global food company with large number of dairy products is also bullish on the growing popularity of plant-based foods. In April 2017, it purchased WhiteWave Foods, a US-based leading player in plant-based food and beverage for US$10 billion. It rebranded the company to DanoneWave and in October 2017, further invested US$60 million into its plant-based milk operations. In 2019, the company expressed plans to triple its revenue (to about US$5.6 billion) from its plant-based food line by 2025.

In addition to these, many other large food processors and retailers have entered the plant-based food market either through acquisitions or the launch of in-house products and brands. These include Brazil-based JBS Foods, US-based Smithfield Foods, UK-based Hilton Food Group, Germany-based Wiesenhof, UK-based Heck Food, Canada-based Saputo, and US-based Dean Foods Company, among many others.

In addition to these leading food producers, many other large food processors and retailers have entered the plant-based food market either through acquisitions or the launch of in-house products and brands.

Fast food chains have also joined the vegan bandwagon. In April 2019, Burger King introduced a vegan version of its classic sandwich, called the Impossible Whopper. Similarly, Dunkin introduced a vegan breakfast sausage made by Beyond Meat, while KFC launched vegan fried chicken also made by Beyond Meat. In 2017, McDonald’s launched a vegan burger in Finland and Sweden and has plans to launch the same in Germany. In 2016, UK-based café, Pret a Manger opened a vegan pop-up store in central London and later made it permanent in 2017. Over the years, it opened three more stores (two in London and one in Manchester) under the name Veggie Pret. In April 2019, the company purchased rival food chain, Eat, and aims to convert about 90 of its stores into its vegan chain, Veggie Pret.

Just like the food producers and quick service restaurant chains, supermarkets have also been quick to respond to the vegan trend. In 2018, Tesco, a leading UK-based supermarket chain, launched its own range of vegan foods under the name Wicked Kitchen. Similarly, British department store chain, Marks & Spencer has also introduced a vegan food range in its food department. Vegan options have been introduced and are easily available across a wide range of US-based departmental stores such as Whole Foods, Target, and Kroger.

However, the key shift seen in departmental stores regarding plant-based meals is their placement. Traditionally, vegan food including plant-based meats and dairy were stocked together in a ‘vegetarian’ or ‘vegan’ isle or section. However, recently, these options have begun to be stored alongside their animal-based counterparts. For instance, plant-based dairy has now been moved to the beverage or dairy case. This exposes shoppers to a wider range of options for milk and increases the shopper’s chances of trying plant-based alternatives. This thereby opens the category to shoppers who otherwise would have not explored the separate vegan section in the store.

Similarly, plant-based meat options are also being increasingly stored along with traditional meat items, widening the choice for consumers who are flexitarians (i.e. consumers who are not completely vegan but do also consume vegan food from time to time). UK-based department chain, Sainsbury, was the first supermarket in the UK to place vegan products that are designed to look and taste like meat within the meat section.

Challenges ahead

While the number of vegan consumers is on the rise, it is still very low when compared with people consuming a meat-based diet. Moreover, while a great number of people are exploring vegan options, vegan meals are still largely perceived as offering limited nutritional value when compared with traditional meat-based meals, especially with regards to protein intake. While there is limited truth to this, companies offering vegan options have to invest substantially to educate consumers regarding the nutritional value of vegan meals.

In addition to this, vegan or plant-based meal options face another mindset block. Meat eating has long been associated with masculinity. This by contrary gives vegan meals a perception of being less ‘manly’ and thereby limiting the number of men who are open to embracing this meal option. To counter this, market leaders such as Impossible Foods and Beyond Meat have been avoiding terms such as vegan and vegetarian in their marketing strategy and have been promoting their burgers at male-centric locations such as sports events. Instead of pushing men to eat less meat, they are working towards expanding the definition of meat in the consumer’s mind to include plant-based options. They have also included ingredients (such as beet juice) in their burger to resemble a bleeding beef, making it clone the beef burger in terms of appearance, texture, and experience of consuming.

Other than mindset, price is also currently a considerable barrier for consumers. Plant-based meat substitutes are more expensive when compared with animal meat. While the Beyond Burger sells for about US$12 a pound at Whole Foods (a leading retail chain), its beef counterpart retails for about US$5. Similarly, Beyond Meat’s, Beyond Sausage retails for US$10.30 a pound, charging a premium of about 70% over a comparable pork sausage. Higher price points are off-putting for a big chunk of consumers, who may otherwise be willing to change eating habits owing to health or environmental reasons. While currently, the prices differ greatly, it is expected that the price difference will reduce in the long run (or be wiped off completely). Understanding price to be a big limiting factor, companies such as Beyond Meat are researching and investing into alternative plant protein sources that would lower the cost.

Price is also currently a considerable barrier for consumers. Plant-based meat substitutes are more expensive when compared with animal meat. While the Beyond Burger sells for about US$12 a pound at Whole Foods (a leading retail chain), its beef counterpart retails for about US$5.

However, one of the biggest roadblocks faced by the vegan food producers in making them mainstream is the backlash from the meat industry, which has in some cases resulted in labeling regulations that are damaging for the growth of the plant-based food sector.

In 2017, the EU banned the use of the term ‘milk’ and other dairy products, such as ‘cheese’, ‘yogurt’, etc., for plant-based alternatives (however, traditional versions such as almond or coconut milk and peanut butter are excluded from the ban).

In April 2018, France banned meat names for plant-based alternatives, such as vegetable ‘steak’, soy ‘sausage’, and ‘bacon-flavored strips’. Similarly, in May 2019, the European Parliament’s agriculture committee proposed a ban on the use of meat-related terminology on their labels and product description for vegetarian or vegan products. This includes terms such as ‘steak’, ‘sausage’, and ‘burger’. The proposal will be voted upon by the Members of the European Parliament in autumn 2019 and if passed, will be a big setback to the vegan industry as they would be required to remove the word burger from any product that does not contain meat.

In the USA, a Dairy Pride Act, which requires FDA to stop all plant-based dairy alternatives from being labeled as ‘milk’, was reintroduced in Congress in March 2019 (after being squashed earlier in 2017). While the chances of the bill being passed remain slim, if passed, it could seriously dampen growth in the vegan dairy market in the USA. Most of these legal actions are likely to have stemmed from strong meat and dairy lobbies that are directly impacted by the growth witnessed in the vegan market.

EOS Perspective

There is no doubt that the plant-based food market is growing exponentially and the food industry is taking notice. Meat producers and animal-based dairy companies are currently at a fork, where they may face some level of cannibalization of sales (especially in case of dairy) when they introduce vegan alternatives to their portfolio. The cases of Kodak and Apple are important examples when discussing the prospects of cannibalization of sales. While Kodak failed to innovate at the time of camera digitalization due to a fear of cannibalizing sales of its then popular camera films, Apple has made this one of its strength by innovating and launching new products that have (to an extent) cannibalized its own sales (IPhone for IPods and IPad for Mac).

While most players in the food industry have been quick to understand the potential of plant-based food market and have started to invest in this segment, several others still remain resistant to change. This may cost them dearly. Moreover, evaluating the future prospects of this industry, it may be prudent for meat producers to be focusing more on their plant-based food section than their long existing meat business. In a first of its kind case, in May 2019, Vivera Foodgroup, a leading European meat company sold off its meat business retailed under the brand name, Enkco, to Netherland-based Van Loon Group so that it could solely focus on its vegan food line.

However, while plant-based foods seem to be the future now, things may stir up again when clean meat (also known as lab-grown meat) goes mainstream. Currently, a lot of industry players (such as Tyson Foods) and business tycoons (such as Bill Gates) have begun investing in companies that are researching and developing lab-grown meat. It is expected to become a reality very soon, however, it may still take some years for lab-grown meat to match the prices and volume of farmed animal meat as well as obtain the required regulatory approval. While clean meat will definitely upset sales of farmed meat, it may also have a considerable impact on the plant-based food market as several consumers (who turned to vegan options due to animal cruelty and environmental reasons), may switch to clean meat instead of vegan alternatives. Thus vegan companies must stay ahead of the curve in terms of pricing as well flavors and product range to not only thrive but also survive in the coming times.

by EOS Intelligence EOS Intelligence No Comments

China EV Policies: Is It A Bumpy Road Ahead for EV Players?

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Over the past several years, the Chinese government has been taking steps towards promoting green energy projects and building eco-friendly New Energy Vehicles (NEVs). Since 2008-2009, investments in green sector projects in China have witnessed tremendous growth, which is pushing development of the Chinese NEV industry. As China is slowly shifting focus from fossil fuel vehicles to electric vehicles, its involvement in developing technologies such as green energy and NEVs has equipped the country to compete at global level with western giants such as the USA, Germany, France, etc. While currently China is the largest producer of NEVs globally, it is still debatable whether in the future it will be able to sustain this growth to stay competitive and lead the global EV industry.

China has always aimed to become one of the global leaders in automobile industry similarly to its neighbors, Japan and South Korea, but for the longest time it was not able to produce vehicles that would be globally competitive in terms of quality and safety. In 2009, the Beijing government introduced Automotive Industry Readjustment and Revitalization Plan to strengthen China’s position in the global automotive market. The key objectives of the plan were to support domestic auto manufacturers, commercially as well as technologically, and allocate more resources to environmental friendly vehicles’ research and promotion. The government started promoting electric cars to tackle the environmental threats that China was facing. Electric and hybrid cars were relatively new concepts in 2009-2010, but this did not dissuade China and it started building strategies to increase production of such vehicles to compete and lead in the NEV market.

Since 2010, the Chinese government has been providing incentives, in various forms, for the NEV sector. For instance, the government introduced direct subsidies for NEV manufacturers, deductions for local authorities opting for green cars, and tax waivers and free registration incentives for consumers purchasing electric cars. These incentives accelerated the growth of NEV industry, which sold around 507,000 units in 2016 as compared with 480 units in 2009. Currently, the top ten global EV manufacturers are all Chinese producers. China aims to sell around two million electric cars annually and introduce a fleet of five million electric cars on the country’s roads by 2020. China’s goal, in terms of NEV sales, is quite ambitious but also necessary, as the country aims to limit its carbon emission rate by 2030 and curtail air pollution.

With the Chinese government shifting its focus on promoting green energy and green vehicles, changes have been made in various policies laid down for the auto sector. For instance, the 13th Five Year Plan, introduced in 2016, promotes adoption of NEVs. Government is also considering to ban gasoline and diesel vehicles, indicating that in near future, automakers may have to redesign their production and shift to green vehicle manufacturing.

In June 2017, the Chinese government made it compulsory for automakers selling more than or equal to 30,000 cars annually to increase share of EVs in their total auto sales. China’s Ministry of Industry and Information Technology (MIIT) introduced the carbon credit trading program, which mandates manufacturers to earn carbon credit score on their automobile production and sales. The policy is aimed to encourage production of various types of zero and low-emission vehicles. Effective 2019, manufacturers will be required to earn EV credits equivalent to 10% of sales, which would eventually rise to 12% in 2020. The credit score will be calculated on the basis of electrification level of the cars produced, indicating that fully electric cars will earn more credits than plug-in hybrid cars. Manufacturers not complying with these quotas will either have to buy credits or pay penalties. A credit score equivalent to 12% of sales will be equal to about 4-5% of EV sales, which could lead to the production of more than a million green energy vehicles in China in 2020. Certainly, this policy will be beneficial to the domestic EV manufacturers, who have massive EV production, as their income from credit sales will increase.

In January 2017, the Chinese government introduced another change in EV policy to subsequently phase out the tax benefits on purchase of EVs by 2021. The announcement has resulted in slight decline in consumer demand for EVs in China.

Further, the government has mandated the foreign players to form a 50-50 joint venture (JV) with domestic firms to operate in China. Consequently, the foreign players are forced to share their intellectual property and technology with local Chinese automakers. Some of the countries perceive this move as intellectual property theft by China. In the future, the Chinese government is likely to relax the JV terms and increase the foreign player’s percentage share in a JV.

China's Emergence in EV Market

 

EOS Perspective

Currently, China holds a bright spot in the global electric vehicle industry. Fuel-run vehicles are expected to lose their dominant position in a couple of decades if the EV industry continues to grow at the anticipated rates. Being the largest market for NEVs globally, China is likely to play a major role in this progress. But to continue leading the EV market, foremost requisite is to solve issues such as the price to performance ratio of batteries, and lack of sufficient charging stations and EV infrastructure in China.

In near-term, undoubtedly, China will remain a huge market for NEVs with foreign players aiming to be a part of it. It is yet to be seen what changes the Chinese government makes in JV terms for foreign players, but they will surely face a stiff competition from the well-settled domestic EV manufacturers. Selling in the competitive environment of China will surely affect their profits, but the main concern for them will be sharing their intellectual property with Chinese OEMs. Another challenge for all players would be to understand whether consumer demand for EVs will continue to thrive after the price increase related to the gradual withdrawal of subsidies and tax benefits. China has strategically kept NEV prices low to increase popularity and awareness of EVs amongst consumers. However, the government does not plan to sustain the low-priced regime, with the recent policy changes and subsidy phase outs likely to gradually increase EV prices in China, which might impact demand for EVs (it is likely to still remain high as compared with demand in other countries). The government plans to focus more on research and innovation to supply EVs at lower prices without any subsidies as well as to build robust infrastructure to support growth of the industry.

China also plans to export EVs to other major markets such as the USA, Norway, the UK, Germany, and Korea. With the current low quality and performance of domestically manufactured EVs, local Chinese players are not getting many buyers in these countries. But forging JVs with foreign players to produce EVs at lower rates and better quality may improve the export figures in future.

China has definitely raised the bar for other countries with its aggressive EV policies launched in 2017, which are future-centric and focused on ushering in a revolution in the auto industry by promoting EV vehicles over the traditional diesel/gasoline-based vehicles. In the future, NEV manufacturers in China are likely to focus on building economical and efficient vehicles, and with foreign players bringing in their latest EV manufacturing technologies, the future drive looks smooth for Chinese NEVs.

by EOS Intelligence EOS Intelligence No Comments

China’s Green Energy Revolution

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China is widely criticized as the world’s largest emitter of carbon dioxide and other greenhouse gases. Less noticed, however, has been the fact that the country is also building the world’s largest renewable energy system. China plays a significant role in the development of green energy technologies and has over the years become the world’s biggest generator and investor of renewable energy. As China heads towards becoming the global leader in renewable energy systems, we pause to take a look at the major drivers behind this development and its implications on China as well as on the rest of the world.

Reducing CO2 emissions has become one of the top priorities and the Chinese government has set its eyes on developing sustainable energy solutions for its growing energy needs. To support this objective, China has set forth aggressive policies and targets by rolling out pilot projects to support the country’s pollution reduction initiatives and those which reflect the strategic importance of renewable energy in country’s future growth.

Why has China suddenly become so environmental conscious and investing billions on renewable energy?

  1. Air and water pollution levels have become critical, causing tangible human and environmental damage, which lead Chinese authorities to rethink on the excessive use of fossil fuels. Considering current and potential future environmental hazards of burning fossil fuels, China decided to decrease the use of coal and is actively seeking for greener energy solutions. While serious concerns about climate change and global warming are key drivers towards expanding the use of renewable energy for any country, for China, the motives are well beyond abating climate change; they are creating energy self-sufficiency and fostering industrial development.

  2. China is witnessing a dramatic depletion of its natural gas and coal resources and has become a net importer of these resources. China’s increased dependency on imported natural gas, coal and oil to meet its growing energy demands bring along some major energy security concerns. The current political volatility in Russia, the Middle-East and Africa pose serious challenges not only for China, but, for other countries as well to secure their energy supplies for the future. Not to mention the risks associated with energy transport routes.

Taking into account these geo-political risks and in order to achieve a secure, efficient and greener energy system, China started its journey towards developing an alternative energy system. A new system that reduces pollution, limits its dependency on foreign coal, natural gas and oil was envisioned.

China’s Ambitious Renewable Energy Plans

According to RENI21’s 2014 Global report, in 2013, China had 378 gigawatts (GW) of electric power generation capacity based on renewable sources, far ahead of USA (172 GW). The nation generated over 1,000 terawatt hours of electricity from water, wind and solar sources in 2013, which is nearly the combined power generation of France and Germany.

The country has now set its eyes on leading the global renewable energy revolution with very ambitious 2020 renewable energy development targets.

China’s Renewable Energy Development Targets













In May 2015, we published an article on the solar power boom in China, in which we presented the revised, higher solar power generation targets.

To achieve the 2020 renewable energy targets, China has adopted a two-fold strategy.

  1. Rapidly expand renewable energy capabilities to generate greener and sustainable energy.

    It has significantly expanded its manufacturing capabilities in wind turbines and solar panels to produce renewable electricity. As per data from The Asia-Pacific Journal, China spent a total of US$56.3 billion on water, wind, solar and other renewable projects in 2013. Further, China added 94 GW of new capacity, of which 55.3 GW came from renewable sources (59%), and just 36.5 GW (or 39%) from thermal sources. This highlights a major shift in energy generation mix as well as China’s commitment towards cleaner energy technologies.

  2. Reduce carbon footprint.

    The government has banned sale and import of coal with more than 40% ash and 3% sulphur. Government’s Five year plans have stringent targets on reducing coal consumption as well as CO2 emissions. It is expected that environmental and import reforms will become more stringent along with greater restrictions, which would help accelerate China’s migration to a green economy.

The government has also announced a range of financial support services, subsidies, incentives and procurement programs for green energy production and consumption. Solar PV and automotive industries are good examples.

  1. By supporting domestic production and providing export incentives, China has become the global leader in solar panels. Over the last few years, the government has also financed small-scale decentralized energy projects, deployed and used by households and small businesses, in order to make them self-sufficient in their energy needs

  2. China has also positioned itself as the leading manufacturer of electric vehicles globally. According to Bloomberg, China is mandating that electric cars make up at least 30% of government vehicle purchases by 2016. To achieve this target, the government has started investing on essential infrastructure and providing tax incentives for purchasing of electric vehicles.


China has laid the foundations for a future where renewable energy will play a vital role. The advancements in technology and changes in policies will further enhance the country’s renewable energy landscape and will drive affordable, secure and greener energy. How the Asian giant achieves to balance between its economic, industrial, regulatory and environmental goals with sustainable renewable energy investments will, however, only become clear in the next few years.

by EOS Intelligence EOS Intelligence No Comments

South Africa: Clearing the Air with Renewable Energy

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South African ailing energy sector seems to have found a new lease of life in clean energy. In 2012, South Africa witnessed investment of $5.5 billion in new renewable energy projects, leaving behind some well-known usual suspects such as Brazil, France, and Spain. With the local government looking at renewable energy as a long-term answer to the country’s energy problems, we evaluate the scope for private sector involvement in developing South Africa’s energy infrastructure.

In March 2013, Eskom, the national electricity provider in South Africa, warned about the possibility of power outages during the coming winter season. As soon as the news spread, millions of South Africans were left reflecting on the energy crisis of 2008, which brought the mining and industry sectors, and thereby, the economy, to a halt.

Increasing winter demand and planned electricity network maintenance are putting pressure on the power system. In May this year, long before the peak winter season, South African power system capacity exceeded demand by just 0.17% (let’s just point out that the recommended reserve margin for a power system is 10-15%). With consumption expected to increase further during winter (June and July), Eskom will be forced to look at extreme measures to prevent scenarios similar to those of 2008. Some of such measures include power buy-backs from large consumers, and triggering of ‘interruption clauses’ included in contracts, through which Eskom can cut supply to consumers in case of tight supply situations, in return for discounts.

While these measures could help deal with the short-term spike in demand this year, the South African government is looking for alternatives to achieve long term sustainability of the country’s energy sector. Investment in clean energy (particularly renewable technologies such as wind and solar) is one of the possible solutions contributing to solving the country’s energy supply problem. While achieving energy sustainability, clean energy investments will also help South Africa adhere to its commitment to achieve a 42% cut in carbon emissions between 2011 and 2025, by reducing dependence on coal for power generation. Furthermore, renewable energy projects can come online on a shorter horizon compared with coal and nuclear power plants.

Let’s focus on clean energy

According to a 2013 report published by Bloomberg New Energy Finance, South Africa stood 9th in the world with US$5.5 billion worth of new clean energy investments in 2012 (a whopping 20,563% growth over 2011). Majority of this investment (US$4.3 billion) has gone into developing solar photovoltaic (PV) technology based power plants, with the remaining being spread across wind, concentrated solar plants, landfill, biomass and biogas, and hydro-projects.

The onset of clean energy investment projects in South Africa is correlated with the introduction of the Integrated Resource Plan (IRP) in 2010, as well as Department of Energy’s Renewable Energy Independent Power Producers Procurement (REIPPP) program in 2011. As a part of the 2010 IRP, South African government outlined its plans to increase electricity generation capacity by additional 18,500 MW by 2030. About 42% of this additional capacity is envisaged to be generated through renewable energy technologies.

Introduction of REIPPP program in 2011 facilitated private sector’s involvement in electricity generation. Through this program, the government plans to procure 3,725 MW of renewable energy from independent power producers by 2016. A significant focus has been laid on procuring power generated through onshore wind and solar PV technologies. The REIPPP program sets up a bidding system through which independent power producers can bid for power generation allocations. Electricity thus generated is purchased by Eskom on a 20-year Power Purchase Agreements (PPAs). The tariff for purchasing electricity is decided through a bidding process. Some independent producers cashed on the first mover advantage, and received tariffs as high as R2.6/KWh ($0.26/KWh) during the first phase of bidding in 2011 (more than Eskom’s electricity price). With increasing competition, these tariffs have fallen in the successive bidding rounds to as low as R0.89/KWh ($0.09/KWh).

Private sector holds the key

One possible mode of involvement is continued private sector participation in the REIPPP program, selling the generated electricity to Eskom at rates agreed in the PPAs. However, several independent power producers (IPPs) have raised concern about the attractiveness of such a system, where only a single buyer (Eskom) is present in the market.

IPPs feel that lack of certainty about feed-in-tariff structures and a single buyer model are likely to deter large scale investments from the private sector. In 2012, the South African Independent Power Producers Association put forward a proposal to set up an independent grid to challenge Eskom’s dominance of the transmission (grid) network.

In March 2013, the South African government passed the Independent System and Market Operator (ISMO) Bill, which will create an independent entity by 2014, to manage procurement of energy from Eskom’s power generation business and independent power producers. Establishing an independently operated power grid would encourage competition in the power generation sector while keeping a lid on prices.

Another possible form of investments could be in the shape of independent (off-grid) solar/wind power projects by large enterprises (particularly in mining sector) to meet part of their internal demand. Industries could reap several benefits from these independent projects. Benefits of a solar power project could include:

  • Several large energy consumers are required to operate diesel generators to meet the surplus demand from their operations. Even though the current cost of producing solar energy is higher than what is procured from Eskom, the cost is lower than that of electricity produced through diesel generators. In the short-term, solar energy projects could replace generators, as an additional input source of energy

  • The national energy regulator (NERSA) recently approved an annual 8% hike in electricity tariffs charged by Eskom till 2018. With price of solar PV panels expected to decline further, the cost of solar energy production could even be lower than Eskom’s prices 5-6 years down the line

  • Furthermore, solar power plants have an effective life of 25-30 years, greater than the typical 20 year PPAs offered by Eskom. Independent projects enable more efficient utilization of electricity generation capacity over a longer horizon, compared with the REIPPP program

Foreign investors also to step in

With the removal of subsidies on renewable power in several European countries, South Africa becomes an ideal investment location for both foreign renewable energy developers and infrastructure financing organizations.

Participation of foreign firms in the REIPPP program has increased in subsequent bidding phases. Working as a part of a consortia, several foreign developers, such as Abengoa (Spain), Gestamp Wind (Spain), SolarReserve (USA), and Chint Solar (China), have already won bids for setting up power projects, working in partnership with local developers and BBBEE partners.

International financial institutions, such as European Investment Bank and IFC (member of the World Bank Group) have also invested in several renewable energy projects being undertaken by international developers in South Africa. In 2012, European Investment Bank agreed to provide €50million ($64.9 million) for the Khi Solar One Project being undertaken by Abengoa.

So is the energy sector out of the woods?

With a power crunch looming, the mining and industry sector companies are left searching for options to keep their operations running, or risk large-scale shut-downs during the winter season. With the declining cost of setting up and generating renewable power, investment in renewable energy projects could be a sensible option to achieve sustainability of power supply, over both short and long-term.

Setting up of an independent transmission company will go a long way in reducing Eskom’s dominance over the electricity networks, urging more private sector participation in the REIPPP program. But, is this enough? Will there be further deregulation/liberalization of the renewable power generation sector to additionally boost competition in the market? The fate of private sector investments hinges on government’s willingness to risk its control over probably the most important utility system.

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