Tei Junsei

Professor ShuWen Li
Writing 120
November 26, 2016
Examination of the Investment in Solar Energy in South Africa
Scenario
Currently, I am working as a consulting analyst intern in McKinsey & Company.
While I am getting professionalized with the process of analyzing investing
opportunity, I am assigned as a consulting analyst for the investing side to analyze the
profitability of investing 5 million dollars in a solar energy supplier company,
Sustainable Power Solutions (SPS) in South Africa. And in this examination, my
consulting manager will be my audience.
Initiative from my clients
Recently, as the suffix solar popping out frequently in the market conference,
the search for sustainable energy has mainly settled down on solar energy. As
promising as it seems, two major characteristics renewable and clean have meet
the markets demand perfectly. And while these sort of high-technology is developing
in an ever being speed, there are some region in developing countries still have
difficulties in getting electricity. While this phenomenon seems like a worldwide
energy and economic problem, my client sees it as a huge investing opportunity.
In this examination, I am going to evaluate the profitability of investing SPS in
South Africa. And I have divided this examination in two parts. Firstly, my approach
will be the profitability of implementing solar energy in South Africa. In other words,
why my clients should invest in solar energy in South Africa instead of investing in
developed countries like United States or Japan. Secondly, my focus will be put on the

profitability of solar energy itself. I will be discussing current and potential features of
solar energy that makes solar energy profitable. In conclusion, these two critical
analyzes will hopefully help my clients to understand that the investment to SPS in
South Africa lies a huge potential of being profitable.
How South Africa can provide a place for solar energy?
Investing is much like gambling. People all expect to get financial returns. The
only difference is all investment is based on careful observation on the specific
country, company, market and CEO you are investing, while gambling is based on
sense and speculation. And, in this part, I will be examining why my client should
choose South Africa as the country to invest solar energy. With examining papers
written about the solar energy in South Africa, there are mainly three reasons that
make South Africa a profitable country to invest in solar energy, including the
renewable energy market in South Africa, the sunshine availability in South Africa,
and the implementation of Renewable Energy (RE) polices in South Africa.
The Rise of Renewable Energy Market in South Africa
South Africas electricity sector has always been bound up with the countries
abundant coal resources and cheap labor for the generation of cheap electricity for
minerals-based, export-oriented industry. (Lucy Baker 2015) But according to the
Carbon Disclosure Project, South Africa actually is the largest greenhouse gas emitter
within the Africa continent. Meanwhile, the countrys Energy Intensive Users Group
(EIUG), whose 36 members include some of the worlds largest resource and mining
conglomerates that also hold a monopoly over the countrys coal production,
consumes around 44 percent of the countrys electricity and is guilty of emitting
amounts of greenhouse gases. (Lucy Baker 2014) But while facing the decreasing
amount of coal and the worldwide global warming pressure, South Africa is looking

for a solution to power their economy into future.

Unfortunately as for now, coal is still the king in South Africa, and meeting 86%
of the needs in South Africa. According to the Department of Energy in South Africa,
however, solar energy has taken the second place in the renewable energy market in
South Africa, only having 11.2 billion dollars investment less than wind energy.
Therefore, under the circumstances of looking for a substitute for coal, solar energy
stands out as one of the strong representatives of renewable energy in South Africa.
The sunshine availability in South Africa
As we know that solar energy is generated from sunlight, the availability of
sunlight is thereby the major restriction of maximizing the output of solar energy. And
sunshine availability is totally based on the geographical location, where the zone of
subtropical highs actually destines the high availability of sunshine in South Africa.
According to the Department of Energy in South Africa, data has revealed that most
areas in South Africa average more than 2 500 hours of sunshine per year, and
average solar-radiation levels range between 4.5 and 6.5kWh/m2 in one day. (DE
2015) The southern African region, and in fact the whole of Africa, has sunshine all
year round. The annual 24-hour global solar radiation average is about 220 W/m2 for
South Africa, compared with about 150 W/m2 for parts of the USA, and about 100
W/m2 for Europe and the United Kingdom. This makes South Africa one of the
strongest competitor for solar energy around the world. In other words, high intensity
and availability of sunshine is actually making South Africa one the most profitable
country to do solar energy.
The implementations of renewable energy policies in South Africa
As what I have mentioned before, South Africa, which has always been heavily
dependent on coal, is looking at ways to diversify or even replace its power-

generating capacity. Unsurprisingly, the government of South Africa has already

planed to provide sufficient and various incentives to attract investors for the
renewable energy-based industries to develop, grow and to be sustainable in the longterm (Sren Scholvin 2014). But, initial efforts were not successful due to
uncompetitive tariffs and regulatory environment, which were blocking investors out.
Recently, improvements in the tariff regime and provision of incentives, however,
have yielded significant results.
Back to my clients case, SPS, as a local solar energy company, is actually
qualified for various incentives intended to promote green technology, such as carbon
emissions incentives, energy efficiency incentives, environmental incentives and
special economic zones. To be more specific, the following is a part of the section
production of renewable energy and fuels allowance within Energy Efficiency
Incentive:

Section 12B provides for an accelerated capital allowance for machinery, plant implements,
utensil or articles, owned by the taxpayer which was brought into use for the first time by the
taxpayer for purpose of its trade. This section applies where the assets are used for purposes such
as the generation of electricity from wind, sunlight, gravitational water forces of not more than 30
megawatts or biomass. The allowance is calculated as 50 percent of the cost and construction of
the assets for the taxpayer in the first year, 30 percent in the second year, and 20 percent in the
third year. The allowance also applies to all improvements (other than repairs) and supporting
structures that would form part of the machinery, plant, implement, utensil or article.

In addition to these various profitable incentives, South Africa also have RE

polices stated that producers who invest in renewable energy are incentivized by
tariffs, which cover the cost of generation plus an attractive return (DE 2013: 13).
Moreover, the Department of Trade and Industry (TDI) has even proposed a potential

grant, Manufacturing Competiveness Enhancement Programme (MCEP), which can

benefit SPS by expanding and upgrading their facilities, with maximum grant
typically limited to 30 percent of qualified expenditure, capped at 30 million.
But, these fast development of RE polices have unavoidably resulted in some
vague in polices. For instance, there is no precise requirement for receiving reduced
rate of tax referred to the Special Economic Zones (SEZ). In other words, some
requirements for some polices is not yet been determined by the legislature, which in
fact make these polices of no use.
However, according to the Renewables Global Status Report, after revisions and
implementations of RE polices, South Africa had made a stunning leap. South Africa
then boosted its investment in renewable energy from a few hundred million dollars to
US$5.7 billion, which makes South Africa now among the top ten producers of
renewable energy (the other countries on this list include China, Japan, Germany and
Brazil). And South Africa is currently rated as the 12th most profitable investment
destination for renewable energy. This follows an aggressive campaign to promote the
RE industry. (Theresa Mayo 2014) To date, the profitability of RE polices in South
Africa has kept attracting investors all around the world.
Why Solar Energy is Profitable?
Not only in South Africa, the search for sustainable clean energy has always been
the focus around the world. Concerned citizens have always been asking, what if we
are run out of fossil fuel in few decades; what if global warming becomes worse
enough to affect our lives? Now, the founder of SolarCity, Elon Musk, the founder of
Dividend Solar, Steve Michella, and the biggest solar field individual investor Bill
Gates will answer, what if we use solar energy as primary energy source? Though
many investors fully endorse the conclusion about potential benefits solar energy

might bring us, they dismiss investing opportunities for solar energy companies and
believe that solar energy is far from our generation. But perhaps, solar energy is
exactly what the investors should be focused on. And in the following I will continue
my examination of the profitability of solar energy by discussing about the basic
features of solar energy.
Basic Features of Solar Energy
As the most favored sustainable energy in our world, solar energy neither have
the side effects like the current used fossil fuels and oils to cause ozone depletion, nor
will not run out in at least 5 billions years. Ideally, sun can even provide us enough
energy in an hour to sustain for all inhabitants on earth for 365 days to do whatever
they want. More specifically, in addition to predominating the generation of heat and
light, solar energy can also fly our planes, drive our cars, and desalinate our water.
When investors analyze by doing a one-to-one comparison with the resources we
normally deplete to fulfill these roles, they find the promising future for solar energy
even more compelling. For instance, the concerned scientists in World Energy
Council once calculated that the energy acquired from all of the world's reserves of
coal, oil, and natural gas can be matched by just 20 days' supply of sunshine. To
summarize, there is mainly two features that are now making solar energy stand out in
the energy market, renewability and productivity.
Renewability. The South African Department of Minerals and Energy (DME 2003:
iii-iv) defines renewable energy as energy that is derived from natural processes that
are replenished constantly. And there are many profitable advantages and
disadvantages regard to this feature.
First of all, renewability of solar energy means we are not going to run out of it as
long as sun rises up as usual. However, other sources of energy like coal, oil and gas
are limited to certain amount, and we will run out of it someday. Therefore, renewable

energy like solar energy seems to be the best substitution for the current limited
resource like coal. And even more, renewability of solar energy can ensure the
reliability of energy supply once we mature the technology since we are never going
to deplete the sun.
Secondly, as the most recognized feature of renewability, environmental
friendly makes solar energy extremely profitable. In other word, solar energy can
decrease the quantity of air pollution, which is achieved by reduction of the air
emissions due to the substitution of electricity and conventional fuels. And the most
important effects of air pollutants on the human and natural environment are their
impact on public health, on agriculture, on buildings and historical monuments and on
forests and ecosystems. Overall, it should be relatively simple to measure the value of
environmental friendly energy when it comes to irretrievable effects, like human
health and ecosystems. Theoretically, if there are two identical goods and one of them
has a green mark said environmental friendly, consumers decision of buying the
green product shows the profitability of renewability.
However, a report on IEEE Spectrum written by Dustin Mulvaney might cast
doubt by asking Is solar energy actually green as what we think it is? He said that
actually producing the photovoltaic panels (equipment to convert sunlight into other
form of energy) involves emission of greenhouse gases. The fact is creating
photovoltaic panels involves a process of turning metallurgical-grade silicon into a
purer form called poly-silicon creates the very toxic compound silicon
tetrachloride. Most manufacturers recycle this waste to make more poly-silicon. But
the reprocessing equipment can cost tens of millions of dollars. So some operations
have just thrown away the by-product. If exposed to water and thats hard to prevent if
its casually dumped, the silicon tetrachloride releases hydrochloric acid, acidifying
the soil and emitting harmful fumes. Few countries at the time had stringent rules

covering the storage and disposal of silicon tetrachloride waste, and China was no
exception, as some Washington Post reporters discovered.
The papers investigation, published in 2008, profiled a Chinese poly-silicon
facility owned by Luoyang Zhonggui High-Technology Co., located near the Yellow
River in the countrys Henan province. This facility supplied poly-silicon to Suntech
Power Holdings, at the time the worlds largest solar-cell manufacturer, as well as to
several other high-profile photovoltaic companies. The reporters found that the
company was dumping silicon tetrachloride waste on neighboring fields instead of
investing in equipment that could reprocess it, rendering those fields useless for
growing crops and inflaming the eyes and throats of nearby residents. And the article
suggested that the company was not alone in this practice. (Dustin Mulvaney 2014)
After the revelation of this incident, the stock price of solar energy has dropped
significantly. Since if the most profitable feature of solar energy is a lie, how can solar
energy be profitable anymore. However, thankfully, researchers at the National
Renewable Energy Laboratory in Golden, Colo. has found ways to make poly-silicon
with ethanol instead of chlorine-based chemicals, thereby avoiding the creation of
silicon tetrachloride altogether. As we can also seen from this incident, how profitable
a simple word green can be in the real world market.
Finally, there are also some disadvantages of renewable energy. As for the solar
energy, while it is almost impossible in South Africa where my client is investing to,
however, but if the weather becomes unpredictable and keeps cloudy for a month,
solar energy then becomes unreliable. In a sense, solar energy is actually largely
depends on the sunshine availability, and thereby we are not able to control the energy
supply. In other words, facing the increasing energy demand in the upcoming future,
we will either have to implement more photovoltaic panel, or increase the energy
converting efficiency. Although the renewability of the solar energy has some

disadvantages, the renewability is actually what makes solar energy valuable and
profitable after all.
Productivity. Space is a very important factor to ensure the productivity of solar
energy. Since only more photovoltaic panels installation can result in more energy
produced. A recent study done by the Rockefeller University in New York indicates
that it would require PV cell to cover an area of 150,000 square kilometers for solar
energy to meet current U.S. electricity needs for just one year. Actually, for now, in
South Africa, it seems not to be a big deal to find a space to meet South Africas
electricity needs. Since the small and often overcast United Kingdom could even meet
two-thirds of its electricity needs with solar panelson roof of existing buildings,
negating the need to find space for solar plants.
However, there is a challenge faced by the productivity of solar energy, power
generation and storage. As easy as it might seem, the more we generate and store, the
more profitable solar energy can become. Normally, photovoltaic(PV) cells (solar
panels) can only work efficiently when the sun is shining. As what I have mentioned
above, the suitability for mass-scale photovoltaic plants varies in different countries
and locations. But when SPS has the better chance of absorbing sunshine than
companies in United States or Europe, storing solar power into a battery as much as
possible then becomes a major concern. The solar battery, however, is in no way
similar to the electrical battery except for the name. It not only has lower efficiency,
but also has more expensive material fee
As for the price, some might doubt if its higher price will reduce its availability
especially for majority of low-income citizens in South Africa. Others might doubt if
the continually low efficiency of solar energy will be qualified for good alternative for
the king of resource coal in South Africa. Thankfully, recently a new material known
as perovskite answers these doubts and within just a few years it has started rivaling
the efficiency of traditional photovoltaic solar cells, which currently maxes out at

roughly 20 percent. (Meera Senthilingam 2014) By responding to this new discovery,

Michael Graetzel, the Director of the Laboratory of Photonics and Interfaces, showed
great enthusiasm about the cheaper price and higher efficiency by claiming, This is
all being examined now. Im optimistic and sure this can be tackled. Its an exciting
time. Well, perovskite solar cell may or may not be the future for solar energy, but it
is irrefutable that scientists will keep searching for the most efficient, affordable, and
usable form of solar energy. As the result, the search will only become more
competitive. In other word, solar energy is already on the track to rise not only in
South Africas renewable energy market, but also in the world renewable energy
market.
CONCLUSION
As what I have discussed in the above, my result is investing in solar energy in
South Africa is a deal with huge profits potential. From all the aspects I have
considered and analyzed, I will suggest my clients to do this 5 millions investment to
the Sustainable Power Solutions (SPS) in South Africa.
REFERENCE
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Think. IEEE Spectrum. Retrieved from http://spectrum.ieee.org
Godwell Nhamo (2013) Green economy readiness in South Africa: A focus on the
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10.1080/18186874.2013.834628
H. Scheer(2000) Solar energy's economic and social benefits, Solar Energy Materials
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Josh Clark(2016, Feb 23) The Future of Renewable Energy, Featuring Bill Gates.
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