South Africa’s solar industry to suffer as rand slumps to record low
The rand’s slide to a record low against the dollar prompted by the coronavirus pandemic and the loss of the country’s last investment grade rating at Moody’s risks setting the country’s solar power industry back years.
The solar power market is dollar-denominated, so the rand’s decline means that panels cost more. “South Africa is one of the hardest hit globally,” since the start of the coronavirus pandemic, says Gero Farruggio, senior vice president and product manager for renewables at Rystad Energy.
Rystad analysis shows that global forecast growth in newly commissioned solar and wind projects will be wiped out for 2020 and cut by a further 10% next year as the US dollar rises across the board versus emerging markets currencies. Projects in the procurement phase could face capital cost increases of up to 36% as emerging market currencies weaken, it says.
- Global financing for solar and wind projects was already looking difficult because of the cost of debt in emerging markets, he says. In the light of coronavirus, any renewable project that was scheduled to close this year is now likely to be delayed.
- The effect of the virus will be felt even more from 2021, according to Rystad. Reduced capital expenditure and strengthening of the US dollar will cut commissioned projects by at least 10% versus 2020.
The one possible silver lining is that a shortfall in demand in China for solar panels could lead to lower global prices. But this is unlikely to be sufficient to provide much relief in South Africa, Farruggio says. The outlook for wind projects may be slightly more favourable as some turbines are priced in euros, he says.
International solar panel markets that are priced in dollars mean that projects will remain “at the mercy of exchange rates,” he says. “The currency moves can still get a lot worse.”
That throws the onus onto emerging market countries to develop domestic production of solar panels and so avoid dollar pricing.
- Farruggio points to India as an example of a country that is now trying to do so.
- The country’s budget in February imposed a 20% customs duty on solar cells and modules to protect local suppliers against cheap imports.
South Africa, with an average of 2,500 hours a year of sunshine, should be an ideal location for solar power – especially as businesses and households are desperate for an alternative to the unreliable electric supply from state utility Eskom.
In early February, South Africa said that the mining industry will be allowed to generate electricity for its own use. The government also pledged to set up a power generation company outside Eskom.
If solar is to be part of the equation, then investment is urgently needed.
- “Governments need to invest in their grids to allow renewables to emerge stronger in the post-Covid world,” Farruggio says.
- “Part of government stimulus spending needs to go here.”
The Bottom Line
Post-Covid South Africa will be even further from embracing solar power unless the government acts to stimulate local production.