‘South Africa’s energy landscape is undergoing a significant transformation as independent power producers (IPPs) and offtakers seek new ways to access reliable and affordable electricity. As this quest intensifies, a pivotal player has emerged: the energy aggregator,’ writes Amith Singh, Head of Energy Finance at Nedbank.

Mining, a cornerstone of South Africa’s economy, is undergoing an energy revolution driven by the need for energy security, tariff certainty and decarbonisation. Energy aggregators are the key players behind this evolution.

Aggregators are entities that bridge the gap between electricity generators and consumers. They buy electricity from multiple IPPs and sell it to various offtakers, including mining companies, industrial users, municipalities, and even Eskom. Their modus operandi involves using the existing transmission and distribution grid to ‘wheel’ power from generation points to consumption sites, all while paying a wheeling fee to the grid operator. By combining the demand of multiple consumers into a single large volume, aggregators can negotiate better tariffs and terms with the renewable energy generators.

Since aggregators typically work with commercial and industrial consumers, their model also makes sense for mining and industrial companies with a multitude of sites. Negotiating bilateral deals for each mine with IPPs is time-consuming, and aggregators can help them to scale much faster. This model may also provide some flexibility in tenor of the power purchase agreement (PPA).

The percentage of renewable electricity that mines can achieve will be much higher if they use an aggregator to mix and match different projects to supply their energy. It’s hard to imagine the energy sector progressing without aggregators optimising distribution and enhancing market efficiency and accessibility.

The Electricity Regulation Amendment Bill, currently before the National Assembly, aims to create a competitive electricity market and points the way to a distributed model with multiple buyers and methods of generation.

However, in South Africa, our energy mix still has the highest carbon intensity in the world since Eskom electricity is produced primarily through coal-fired generation. Expert calculations suggest the least-cost development plan for a reliable and affordable electricity supply in South Africa involves a massive overbuild of solar, lots of wind and storage capacity, and natural gas as a form of peaking or mid-merit power.

It is in this landscape that aggregators will be a fundamental part of a liberalised energy market, not only for large consumers such as mines and industrial users, but for everyone. The change is already well underway. South African’s energy crisis coincided with the global climate crisis, forcing major industrial and mining complexes to make net-zero commitments. The result is accelerating procurement of new capacity on a scale that is consistent with the growth of renewable energy projects around the world.

Most of the utility-scale projects with an aggregator model are at various stages of implementation with an expected capacity of more than 10 GW. The Energy Council of South Africa estimates that the connection of new utility wind and solar projects will continue to scale up.

The stakes are high as mining accounts for about 8% of GDP and 40% of foreign currency inflows. And while decarbonisation is necessary for the planet, it is also existential because customers in the mining industry expect mines to do it.

Beyond mining, decarbonised electricity is vital for anyone in the exporting business, and part of a big global corporation or raising finance internationally. Most of the mining companies are aiming to become carbon-neutral by 2030, and some by 2050.

For now, and probably for quite a while, a renewable energy supply will also deliver savings. But it might be a challenge for some companies to sign 15-year or 20-year power PPAs because of the unwanted effects on their financial results and balance sheets. One of the benefits introcuced by the aggregator model is the flexibility in respect of the PPA/offtake agreement tenor as the aggregators will have portfolios of offtakers among which they can reallocate the power in case some of the short PPAs/offtake agreements are not renewed.

In this market, IPPs will focus on providing long-term sustainable generation opportunities to aggregators or traders as alternatives to Eskom or bilateral deals with large offtakers. For now, this is a fledgling market that is growing substantially, and we will see more projects closing in the near future.

As the market matures, aggregators will become more efficient in offering flexibility to offtakers in mining and elsewhere. They will be able to financially derisk projects, physically derisk them through demand and supply diversification, and provide system stability to utilities and customers.

With multiple sites, technologies and geographies, full ecosystem optimisation becomes possible. The excess energy that is often present in a bilateral PPA is reduced and costs fall.

It’s foreseeable that a fully fledged trading and aggregation market will go forward as it will provide offer energy users with affordable power while at the same time assisting them to meet their decorbaisation commitments.

In most of the renewables projects that Nedbank finances, there is some element of grid construction, and the private sector has been able to do it efficiently and use the funding of the total project costs to provide it. We know the Energy Council and the National Energy Crisis Committee (Necom) are in discussions with Eskom about privatisation models for grid construction, and we hope the private sector can play a role in the new National Transmission Company (NTCSA) and also in the implementation of the plans outlined in the Eskom Transmission Development Plan.

It will also be important to understand the NTCSA’s costs because the sustainability of the grid is what makes aggregation work. We have to enable transmission and distribution to ensure we have supply certainty over long periods and more capacity to solve the massive grid issue. We must also remember that a significant portion of ‘last mile’ infrastructure belongs to municipalities, where the risk is large.

The wider risks lie around the novelty of this system. Aggregators are new in the market, and it will take a little time before they work efficiently. Investors faced with these intermediary entities will have to make sure they can be trusted and are well managed. And there is an element of risk in the regulatory framework that is covering issues such as the wheeling system, wheeling rules, and access to the grid. If regulations change disruptively, it will be seen as a risk by investors.

The Necom working groups and Eskom are working hard on the new market rules and, while nothing has been finalised as yet, there is clarity on the objectives.

We have the benefit of learning from other countries that have already liberalised their energy markets (i.e. European countries), and we can use their markets as our reference point in our journey to reberalise the South African electricity market.

For now, companies that can offer balance sheet guarantees are driving these projects, but ultimately the benefits that aggregators offer will be felt by every South African.

As Nedbank CIB, the lead financier in the energy space, we fully support the aggregator model and are already leading financing projects on the aggregator model.