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South Africa

South Africa

Policy discord puts wind rush on hold

SOUTH AFRICA: Major industry players have been flocking to South Africa, anticipating a wind boom that could see installed capacity rise from 200MW to 4.5GW in the next eight years. But with the country's feed-in tariff facing cuts, many projects are stalling.

A meteorlogical mast is erected at Koiingnaas in the Northern Cape
A meteorlogical mast is erected at Koiingnaas in the Northern Cape

South Africa had been hailed as a likely location for the next global wind rush, with large industry players investing 4-5 million rand ($592,000-740,000) ahead of the commencement of the country's Renewable Energy Feed-In Tariff (REFIT). But the mood of optimism has now changed to frustration as REFIT has been delayed while government departments argue amongst themselves behind closed doors.

The industry has been flocking to the country in recent months. Vestas, Suzlon and Goldwind have opened offices there, while other companies such as Nordex and Siemens have sales representatives visiting from their European headquarters.

South Africa has some of the best wind resource on the continent. The South African Wind Energy Association (SAWEA) estimates that it has a potential wind capacity of 30GW. The country suffers from a massive power-generation gap – its GDP has grown by 79% since 1994, while its power capacity is trailing behind with growth of only 16.7%.

The Integrated Resource Plan 2010, approved in April, anticipates that renewable energy will contribute 17.8GW to South Africa's energy mix by 2019. Wind-energy generation is projected to increase from 200MW this year to 4.5GW by 2019.
This growth was to have been aided by the $0.181/kWh REFIT, which was unveiled in 2009. It was due to begin in March, but in April the National Energy Regulator of South Africa (Nersa) proposed cutting the rate by as much as 25% to $0.135/kWh in 2011, $0.136/kWh in 2012 and $0.137/kWh in 2013. It blamed the change on the falling value of the rand against the dollar.

Financial anxieties

The new rates were expected to be confirmed at the end of May. But Nersa again stalled and set a new date for mid-June. Since then, the industry has been left in the dark. Rumours have abounded that the REFIT is to be abandoned altogether and replaced with a competitive-bidding process. The instability is a concern for industry.

Eimear Cahalin, chief accounting officer at Mainstream Renewable Power, says that the uncertainty is worrying from a financial perspective as the company has hired a team in South Africa, but it still does not know if its presence is viable.

"We were delighted with the REFIT rate, but all of a sudden the government says it thinks it's too generous and it is not sure where it is going," she says. "We've been in an absolute state of stalemate for the past nine months."

"There are three things that this industry needs — stability, stability, stability," says Tom Krojgaard Pederson, head of technical sales at Siemens.

"There is lots of development in the pipeline, but nothing coming out the other end," he says. "Siemens wants to see this happen in South Africa. We believe the time is right now. If the government makes a long-term commitment, industry will make a long-term commitment."

Programme legality questioned

The Department of Energy and the National Treasury have stated they believe the REFIT programme is unlawful because it does not comply with legislation that requires public entities to engage in competitive procurement of goods and services. They have also questioned Nersa's authority to set the tariff rates upfront. This is despite numerous statements by government departments about the REFIT, most recently in a parliamentary speech given by Dipuo Peters, the energy minister, during the debate on the 2011 budget at the end of May.

"We have finally arrived at a point where we are ready to procure the first clean-energy projects. We hope to conclude at least 1,000MW of renewable-energy transactions by December this year, in time for showcasing, as we host COP 17 [United Nations annual climate-change convention] in Durban," she said.

The programme will contribute substantially to South African President Jacob Zuma's vision on job creation, she added. SAWEA and two solar-industry associations sought a legal opinion on the REFIT and any potential competitive-tender process.This found that the REFIT programme is legal as long as the upfront rates issued by Nersa are regarded as guidelines only and can be amended once a wind farm's licence is approved.

It also stated that the Department of Energy and Nersa needed to agree on the form of the procurement process. Nersa is believed to still favour the REFIT model. Nersa's original REFIT guidelines state that this has been "shown to provide an excellent opportunity for South Africa to increase the deployment of renewable energy in the country and contribute towards the sustained growth of the sector in the country".

SAWEA argues that this means that any procurement process launched other than REFIT would be illegal unless approved by the regulator. It points to the irony of this situation: a perceived legal problem with REFIT is being used to justify a process that would definitely be illegal unless approved by Nersa.

The renewable-energy associations claim that policy makers have refused to engage with them on these issues and say that this is in complete contrast to the initial REFIT process run by Nersa that was inclusive and consultative.
Neither Nersa nor the Department of Energy responded to requests for information from Windpower Monthly.

Staying optimistic

Chanda Kapande, general manager at Wind Prospect, a South African renewable-energy firm, says that most of the developers his company is working with are continuing with their projects and can at least see the positive in the delay — it will give them a couple more months of wind data under their belt. Banks are also continuing with due diligence, she reports. Wind Prospect is working on 20 wind-resource assessments and four due-diligence processes.

"Everybody still believes that something is going to happen, but most think it will be more difficult if there is no REFIT," she says. If the REFIT is replaced by a competitive-procurement process, Kapande predicts that smaller players will have to sell out to larger ones. "You need quite a lot of experience to go through the bidding process."

Frank Spencer, CEO of consultants Emergent Energy, agrees. Some smaller developers have already started selling projects to bigger players because they have been developing at risk on the back of a promising REFIT rate. Salaries and interest on loans they have taken out to finance initial work on projects have cost them a lot of money, he says.

He predicts that some players could take the government to court over the changes to a process that had been talked about for two years. "What started as a good-looking feed-in tariff has got bittier and bittier over time and that has not been good for the industry in South Africa," says Spencer.

The country's energy policy will come under the spotlight when the next international climate-change talks are held in Durban in November. Spencer says: "Certain people in government want this sorted out by the time we have the climate talks. I think South Africa will have mud on its face at those talks because of this process.

"Perhaps there should have been a lot more consultation between Nersa, the National Treasury and [state-owned electrical utility] Eskom at the start of the process and perhaps a lot of this could have been ironed out at the start, but the reality is that is not how the process has unfolded."

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