Why South Africa needs trade partners to scale green energy

South Africa is making progress in its green energy transition. While coal still dominates the country’s energy mix, growth in renewables and renewable infrastructure — particularly in the private sector — has been exponential. In 2023, the country imported more than R17.5 billion worth of solar equipment, or about $964 million worth, according to data compiled by economic research institution Trade and Industrial Policy Strategies. This equates to approximately 5 000 megawatts (MW) of solar capacity and is about four times more than it bought in 2022. 

More growth should be expected. According to the US’ International Trade Administration, the share of non-hydro renewable energy in South Africa’s energy mix is expected to almost double from 9.3% in 2023 to 17% by 2032. This is essentially on track with the South African government’s target of expanding the renewable base to 50% of the nation’s total production by 2050. 

But even that kind of growth may not be enough for South Africa to achieve its climate commitments, which include reaching net zero carbon dioxide equivalent emissions by 2050. To get there, estimates suggest that South Africa will need to invest US$500 billion, or 4.4% of its gross domestic product annually through 2050. Achieving that will require sound trade partnerships, particularly with countries and trade organisations such as the World Trade Organisation.  

Private sector leading the way 

Before digging into what those trade partnerships might look like, it’s worth taking a deeper dive into the forces driving the growth of green energy in South Africa. While a desire for clean and sustainable energy plays a role, a powerful force behind the demand for solar energy has been the well-publicised, frequent and lengthy strategic blackouts caused by shortfalls in South Africa’s power supply.

As domestic and business users have sought to side-step, or at least mitigate, the power outages that have plagued the country since 2008, they’ve increasingly turned to rooftop solar solutions. According to local energy expert Anton Eberhard, the country’s installed rooftop solar capacity experienced a remarkable 349% increase between March 2022 and June 2023. 

To its credit, the national government has helped encourage this growth with a R9 billion tax relief programme.  But that subsidy unfortunately came to an end with the current fiscal year’s budget. Meanwhile, the city of Cape Town has paid out more than R25 million since it started buying excess solar power from businesses and domestic users. 

The sudden increase in rooftop solar energy supply has led to a significant decline in electricity sales by Eskom. During the six months leading up to September 2023, the power utility reported a significant 5.9% decrease in electricity sales. To offset the drop, the utility is trying to bring in revenue by leasing land to independent power producers (IPPs). 

The importance of trade partnerships 

The good news for the nation is that South Africa has far more renewable potential than it’s tapping. Solar photovoltaic power is a particularly enticing alternative, with most areas in the country receiving more than 2 500 hours of sunshine annually. The country also has promising wind resources. 

But South Africa cannot reach this potential on its own. It has limited renewable manufacturing and assembly capacity and is heavily reliant on imports of renewable-power building materials such as batteries, solar photovoltaics and other infrastructure. As such, while it will be important for South Africa to build up its generating capacity on those fronts, trade deals will also be critical. 

In June 2023, the country inked a deal with Denmark and the Netherlands to raise US$1 billion to kickstart the country’s green hydrogen sector, which will be heavily reliant on renewable power. The partnership will underwrite renewable energy initiatives in the country and has identified South Africa as a key area for the production of green hydrogen energy. Green hydrogen is widely seen as crucial to producing clean fuels for many industries as well as turning steel production green.

The partnership aims to utilise the country’s existing renewable energy primary resources, such as South Africa’s abundant bodies of water to be successful. In recent years, the US, Germany, and the European Union have also committed to supporting South Africa’s energy transition. 

But to ensure that businesses, households, and the public sector continue to adopt renewable energy, the market needs to be as competitive as possible. This will require the strengthening of existing trade partnerships with countries and the development of new partnerships with countries with strong manufacturing capabilities, such as China — the biggest global producer of solar panels. According to a report by the UN’s Sustainable Energy for All Foundation, the African Climate Foundation, Bloomberg Philanthropies, and others, China’s renewable energy manufacturers could play a critical role in facilitating Africa’s growth into a leading global manufacturing hub for renewables. 

Trade agreements rewards and risks

One way of ensuring that competitiveness for South Africa is to bake renewable energy into its biggest trade partnerships. By shifting the focus from aid-style investments to trade agreements, the country can reap the benefits of a more open renewable market. These benefits include job creation, greater energy security, and faster advancement toward the country’s decarbonisation goals. There are other benefits to trade partnerships, too. These include technology transfer, market access, and an enhanced ability to attract international investment. 

In the most successful instances, trade partnerships can go beyond infrastructure investment and into the energy supply itself. In Europe, for example, Denmark exports offshore wind power to the Netherlands, and Norway sends hydropower to Germany.  

That said, it’s important to remember that trade partnerships come with challenges. Before they’re set up, such issues as intellectual property transfer, regulatory differences, and competition need to be dealt with. The last thing South Africa would want would be for a trade deal resulting in damage to a thriving local industry. 

Ensuring the soundness of a trade deal requires careful negotiation, diplomacy, and domestic policy adjustments. But it also requires governments to build up a strong understanding of the strengths, weaknesses, and dynamics of local industries.   

Turning potential into reality 

There is no doubt that South Africa has some of the best potential for renewable energy on the planet. As the past couple of years have shown, it also has a growing appetite for green energy. But if that potential and appetite are to result in a reality where South Africa is one of the leading producers and consumers of renewable energy, it must strategically pursue the kind of trade partnerships that support its goals.

It is critical for the South African government to evaluate existing trade deals with partners and explore ways to strengthen them by incorporating some support for or expanded capacity in renewable energy. One of the government’s top priorities must become the active pursuit of new trade agreements that align with its green energy objectives.

Sandra Villars is a financial services partner of management consultancy Oliver Wyman.