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South Africa

South Africa

Moves to reduce tariff could cut profit and deter investors

SOUTH AFRICA: The risks for investors involved in building a wind industry from scratch are huge, so moves to reduce the feed-in tariff rate are unhelpful.

South Africa's burgeoning wind market suffered a major setback at the end of March after the energy regulator proposed reducing the feed-in tariff rate.

Over the past year, the country has attracted interest from major manufacturers - with both Vestas and Suzlon opening offices there. Goldwind joined the fray in mid-March, with the company's Africa director Daniel Kuryolo saying he expected a "wind rush" in the country.

But reductions of up to 25% in the renewable energy feed-in tariffs (REFITs) have now been proposed by the National Energy Regulator of South Africa (Nersa).

Rates for wind projects could be cut from the $0.181/kWh announced in 2009 to $0.135/kWh in 2011, $0.136/kWh in 2012 and $0.137/kWh in 2013, sparking outrage from some of the developers. Nersa says the new tariffs are based on the prevailing cost of finance and inflation figures.

The country's currency, the Rand, exchanged at ten units to the US dollar in 2009 when the REFITs were first issued, compared with 7.40 units to the dollar today.

Wind developers and other energy stakeholders have until the end of April to make written submissions on the tariff review, ahead of a public hearing slated for May 5. Nersa aims to approve the new rates on May 26.

Some wind developers in South Africa view the plan as a setback to the recent interest from investors in the market.

"We are now in the dark as to how this affects the procurement process," says Mark Tanton, chairman of the South African Wind Energy Association.

Director of wind developer G7 Renewable Energy, Kilian Hagemann, notes that implementing new technology for the first time on a large scale in a new country includes significant risks for investors.

"An attractive up-front profit margin is required in order to make the investment worthwhile, and the revised tariff will impinge on that significantly."

Goldwind, Vestas and Suzlon were unavailable for comment on the proposals.

The move by Nersa was published barely days after the country's cabinet approved South Africa's energy generation programme, the Integrated Resource Plan 2010. This anticipates that renewable energy will contribute 17.8GW to South Africa's energy mix by 2019. Proposals include a phased increase in wind energy generation from 200MW this year to 4.5GW by 2019 (see chart).

Also in March, the cabinet approved a bill to establish the country's first independent electricity transmitter to take over transmission functions from state utility Eskom. The body - to be known as the Independent System and Market Operator - should attract more independent power producers, which so far have played a peripheral role in South Africa's renewable-energy generation. The government also hopes it will eliminate conflicts of interest between the buyer and seller of electricity. The bill will now go forward to parliament for debate.

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