SA green energy hit by doubt

Loss of power: Renewable energy companies have been prevented from doing more in South Africa because the state’s procurement programme, worth about R60-billion a year, has stalled. (Photo: David Harrison)

Loss of power: Renewable energy companies have been prevented from doing more in South Africa because the state’s procurement programme, worth about R60-billion a year, has stalled. (Photo: David Harrison)

South Africa’s renewable energy programme is a victim of its own success.

After two years of stalling and silence, the government wants to renegotiate the terms of winning bids. The national energy regulator (Nersa) has been slow to help the clean energy sector. And now organised labour is demanding that no more renewable energy should come on line (See “Cosatu adds to renewable energy woes”).

As a result, the future of the green energy industry is trapped in limbo and investment is being withdrawn or directed elsewhere.

Last year SMA Solar closed shop in South Africa and other solar equipment manufacturers are rumoured to soon follow.

In May, the DCD Group sold its majority share in the R500-million DCD Wind Towers, in the Coega industrial zone outside Port Elizabeth.

Additionally, investments worth billions of rands didn’t materialise because the Renewable Energy Independent Power Producers Procurement Programme (REI4P) stalled. For example, Windlab Africa, a global renewables company, developed two facilities in South Africa but, as is the case for other renewable energy developers, it has been prevented from doing more.

Overall a total of R60-billion in investment annually has been put on hold. In 2016, more than 80% of foreign direct investment came from the renewables sector, according to Windlab. Because of the impasse, Windlab said it has been forced to invest elsewhere in Africa and now has projects in the pipeline in Tanzania, Mozambique, Zambia, Ethiopia and Kenya.

LM Wind Power, a wind blade manufacturer, was scouting for sites in South Africa. Instead, the company opened one of its new blade plants in Turkey in July this year.

It is not clear what the industry faces following the recent announcement by the new energy minister, Mmamoloko Kubayi, that independent power projects, the preferred bidders for rounds 3.5 and 4 of the REI4P, could resume. This follows talks between the departments of energy and public enterprises and Eskom, which had refused to sign new power purchase agreements.

But the department of energy announced the independent power producers (IPPs) will have to drop their prices to below 77c per kilowatt-hour (kWh). Eskom has said this is the price at which it can absorb the cost of the renewables. So any projects for more than that will have to be renegotiated, and those whose costs are much higher could be dead in the water.

Chris Ahlfeldt of Blue Horizon Energy Consulting Services writes: “The price cap is lower than what many projects bid at a couple of years ago, and may be an unbankable level for some. In particular, the CSP [concentrated solar power] (100MW), small hydro (5MW) and biomass (25MW) projects included in this determination will have the most difficulty if held to the same price cap.”

He added that the price cap also doesn’t account for the effects the squeeze on project costs will have on the other benefits of the projects, such as local content, job creation and socioeconomic development of local communities — all these are now at risk of being cut.

Webber Wentzel’s legal advice to the South African Renewable Energy Council in November last year was that the preferred bidders have a right to approach a court to enforce the conclusion of the power purchase agreements, and that they have a reasonable prospect of success.

A renewables industry insider said: “If I were one of these IPPs, especially the concentrated solar power guys, I would sue.”

But Davin Chown, the chairperson of the South African Photovoltaic Industry Association (Sapvia), said a potentially protracted legal case was not thought to be in the industry’s best interest, although it is an option.

He thought the minister’s announcement, after years of silence, is a positive development. “There’s been this blockage for two years now causing huge problems for people and organisations and having a massive impact on the market. From that point of view, if government is committing to do something we say ‘that’s a good first step’. Whether what they have done is the right thing is another matter completely … The options [seemed to be] to do nothing, or do something completely unsuited.”

Chown said the industry wants to understand how the government arrived at the 77c/kWh as the maximum price. There was concern that the government had until now only been informed by Eskom’s view, “which we believe is flawed and incorrect”.

The department of energy said the impasse had been broken with the help of a technical team when the departments and Eskom met, and it expected Eskom to honour this.

“Eskom, as part of the technical team, was part of the discussions and agreements and we do not foresee any challenge in implementing what was agreed by all consulted in the meeting,” said Nomvula Khalo, of the department of energy.

Chown said: “This baby step at least gets everyone around the table and we have to start to talk about it.”

But Mark Pickering, the chairperson of the South African Wind Energy Association (Sawea), said the proposed renegotiation of these contracts was clearly so illegal it was hard to take it seriously. “On the face of it, the minister’s position is untenable, and illegal, which means it’s not actually real.”

Eskom has divided the IPP community, he said, explaining that some wanted to continue discussions, and others wanted to rush off to the courts and challenge the minister.

Asked why IPPs had not made any moves in two years, Pickering said: “In a word, it’s hope … they thought something would have happened.”

But the IPPs are frustrated because they have been wanting to discuss the announcement with the minister since it was made two weeks ago, but she has not been available.

The department said that the IPP office has been mandated to negotiate with the IPPs based on the maximum price of 77c/kWh, and said the minister would talk to the IPPs.

But Pickering said: “Quite a lot of developers have a mixture of projects. There are about 47 projects [on the line] but, when you get down to it, there are only 15 controlling interests behind all of those.”

So the developers could seek to finalise some of the projects and consider going to court over the rest.

But the industry insider did not think the renewables developers would go to court. “For a lot of big companies, it’s probably not worth it to sue. They would have burnt a few million but, in the broader scheme of things, they would probably just move on and go elsewhere.”

In a statement this week, Sapvia said the IPPs would consider the legal, financial and credit-risk implications for their projects and, once they had evaluated their positions and made a decision on whether they are willing to proceed under the new conditions, the association would support them.

Ahlfeldt said: “These recent price renegotiations, hiring and firing of multiple energy ministers and multi-year delays damage government credibility and ultimately increase risks for future investment.”

Eskom did not respond to questions.



Cosatu adds to renewable energy woes

Cosatu has called for Eskom not to sign any new renewable energy agreements following the premature closure and phasing out of some coal mines, which the trade union federation estimates will result in 6 000 jobs lost.

Cosatu has submitted a section 77 notice to the National Economic Development and Labour Council. If the parties cannot come to agreement in this forum, the federation could initiate a protest against the renewables programme.

“The federation agrees that the economy should reduce its reliance on fossil fuels and increase the use of energy from water, sunlight and wind,” it said in a statement when it submitted the application. “However, the transition to [a] low carbon economy must be just and must address who owns and controls these sources of energy and how local production and jobs will be created.”

Cosatu spokesperson Sizwe Pamla expressed concern that the department of energy appeared to be going ahead again with the renewables programme. But he said Cosatu would first focus on protests against corruption and state capture before deciding on how to proceed over renewables.

This week, the National Energy Regulator of South Africa is holding the first hearing of an investigation into the stalled renewables programme. Nersa said Eskom and the South African Wind Energy Association made submissions to it on Thursday last week.

It has been criticised because the inquiry has taken months to get going, and now the regulator says the hearings will be closed to the public. 



The state of SA’s independent power

To date, 112 projects have been successfully procured during the Renewable Energy Independent Power Producers Procurement Programme (REI4P) bid windows completed at the end of 2015. Of these, 54 have reached commercial operation date and have contributed 2.9GW to the national grid.

The average lead time of the operational IPPs under the REI4P has been 1.8 years and were within budget in 98% of cases.

Since 2012, the REI4P has attracted R201.8-billion in investment, 25% of which has been foreign direct investment and 75% domestic. The delayed projects have a value of R58-billion.

By the end of 2015, the tariff for utility-scale wind and solar photovoltaic energy was 62c per kilowatt-hour. Concentrated solar power was R3.09/kWh. The tariff for baseload coal IPPs in 2016 was R1.03/kWh. The new coal-fired power stations Medupi and Kusile final costs will depend on when they are completed but in 2016 they were R1.05/kWh and R1.16/kWh respectively.

South Africa is the largest wind-power producer in Africa, fifth in the world for concentrated power generation, and 10th for utility-scale solar power.  — SA Renewable Energy Council

Lisa Steyn

Lisa Steyn

Lisa Steyn is a business reporter at the Mail & Guardian. She holds a master's degree in journalism and media studies from Wits University. Her areas of interest range from energy and mining to financial services and telecommunication. When she is not poring over annual reports, Lisa can usually be found pottering about the kitchen. Read more from Lisa Steyn

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