Sowing the green economy’s seeds

Government's commitment to the green economy is demonstrated most visibly in its making R25-billion available over the next five years to spur on the transition to a green economy, as well as the prominence given to the sector in strategy documents such as the New Growth Path.

And while Parliament is taking the lead in setting policy and making the means available to achieve its objectives, responsibility for implementation falls on government departments and institutions.

The Industrial Development Corporation (IDC) plays a pivotal role in this setup as the state's development funding arm and has turned its considerable project finance know-how to addressing the unique challenges of this growing sector.

"This is an example of how we take an emerging industry and try and develop it and address the risks so that the banks can be more comfortable," says Rentia van Tonder, head of the IDC's Green Industries unit. "The IDC's intention is to be as successful in developing this sector as it was in developing the mining industry. Our main investments are resource-driven and the board would like to see the next wave in renewable energy and the green economy, because that fits so well with our overall mandate."

Government plans
Government has firmly pinned the green agenda to its mast, declaring in documents such as the Integrated Resource Plan and the New Growth Path that the country should be producing 42% of its electricity from renewable energy sources.

The potential for massive job creation is not lost on the IDC or government, with the Green Jobs Report last year estimating that as many as 98 000 new direct jobs could be created in the short term, growing to 462 000 in the long term.

"Today, we know that our old growth path, with its premise of plentiful but high carbon-emitting energy, comes at a big cost to the environment," President Jacob Zuma said at the World Economic Forum Green Partnership Dialogue where the R25-billion fund was announced. "We will now have to establish new kinds of production and find new ways to produce goods which will reduce both our economy's use of energy and emissions from energy production. This will require a profound and far-reaching change in our economy, one that will affect us all."

The emphasis of this fund, the strategy and the IDC's funding activities is on five key focus areas: renewable energy, energy efficiency, fuel-based green energy, emissions and pollution management, and bio-fuels. "The one thing we have to accept is that we're still a developing economy," says Van Tonder. "We have ample coal reserves and we need that to have sustainable electricity supply. However, government has acknowledged we have to have a strategy to develop renewable energy."

Economic value
There are also very real economic benefits associated with the shift to greener economies, with the UN Environment Programme (UNEP) estimating that investments in the green economy could realise a further growth in real GDP of over 2% by 2030 from 2012 levels.

The UNEP further recognises that the challenge for emerging and poorer nations will be greatest, requiring careful attention to the financial resources and structures needed to realise the shift. The UNEP's Green Economy Report proposes a $1.3-trillion (2% of world GDP) target for green investments.

The report suggests that active development strategies are needed to drive the transformation towards new dynamic green activities supported by investment-led strategies as well as industrial and technology policies. The South African government's initiatives incorporate these suggestions, including the proposal that the latter should involve not only manufacturing or industry but the entire range of economic activities.

"The major implication is that priority should be given to financing programmes that generate strong synergies with domestic efforts and avoid raising costs associated with the new strategy," the report warns.

These principles are all present in the South African approach, with the IDC providing support across the entire value chain for fixed assets and working capital, greenfields developments, expansions and rehabilitations, and projects of scale or with significant developmental impact.

This means that money is available for developers that want to establish renewable power generation projects, manufacturers and suppliers looking to create local production capacity, as well as for companies undertaking energy efficiency and own-power projects.

A significant portion of the IDC's funding to date has been directed at the renewable power generation sector, with R7.5-billion already approved for ventures that have received bid awards durings rounds one and two of the Renewable Energy Independent Power Producer programme. It has, in fact, committed more than this figure, but not all its projects and bids were successful in obtaining Independent Power Producer Agreements (IPPA).

This R7.5-billion has already helped the IDC and its project partners initiate 19 projects as a co-developer, dominated by wind (eight projects), photovoltaic solar (seven), concentrated solar thermal (three) and hydro (one).

"On generation, our strategy is to support technologies that may offer localisation opportunities, for example concentrated solar thermal power (CSP). These projects typically have a two- to three-year construction period for a 100MW project, which would have 2 000 to 2 500 people on site," says Van Tonder. "They are significant projects, especially if they have a [power] storage facility as well.

"These projects are expensive and one of our key drivers is to work with government to see how we can bring the price down. Currently, these projects have the highest-bidding tariffs under the programme, at around R2.50 per kWh. CSP could be developed as a baseload energy, where photovoltaic and wind [power] typically can't be.

"Strategically it makes sense for our country, and we have the best irradiation in the Northern Cape, specifically for CSP – it's one of the best sites in the world for CSP."

In addition to the job creation advantages, CSP projects promote the inclusion of more local content, such as steel and fabrication services. Van Tonder says the threshold for localisation, which is already set at 45% for photovoltaic solar projects, has been increased through the subsequent producer agreement bidding rounds.

Demand for localisation
"It's a fine balance. At the moment what we're doing is driving demand on the back of certain criteria for localisation," she says.

The IDC has already supported a number of panel manufacturers that would otherwise be unable to compete with the international manufacturers that already enjoy significant economies of scale. Other areas in which interest has been shown by foreign companies include establishing blade and turbine manufacturing plants.

"At the moment these investments are based on the opportunity in South Africa as a result of the government programme, but the long-term strategy is to establish a hub in South Africa that can achieve economies of scale by expanding into the rest of Africa."

On the issue of jobs and the opportunities presented by the green economy, Van Tonder has a more sober view on the tens of thousands of new jobs that are expected to be created over the next ten or so years.

"Where you are going to create jobs in the green economy is on the resource side," she says. "So if you plant an energy crop that you need to harvest manually – that is where you are going to create a lot of jobs, and potentially on the manufacturing side, but not necessarily on the generation side."

The IDC does, however, promote skills transfer in projects involving global players and sees opportunities for local engineering and construction companies, as well as operating and maintenance companies, to benefit from the involvement of international firms.

"We are trying to put a lot of pressure on international companies to partner with local companies and try to promote skills transfer and development so the local companies can participate in subsequent rounds," says Van Tonder. "In some of the higher level positions we have said we need to ensure there is skills transfer. I think that, going forward, we need a more industry-wide approach to ensure it actually happens."

The one area in which the IDC holds a great advantage over traditional lenders is that it provides 100% funding for local communities so that they can own a stake in the larger projects.

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