South Africa aims to add 17.8GW of renewable capacity by 2030 to restructure its electricity mix away from coal. Of this, 8.4GW will be wind power, up from just 10MW today. The government estimates this renewables roll-out could add around $660 million each year to the country's electricity bill up to 2044 unless it finds some way to offset the incremental costs.
While funding for the first procurement phase, including 1.85GW of wind, is largely mapped out, the government has been looking at how to finance its longer-term goal while keeping electricity affordable.
Bringing costs down
The result is the creation of the South African Renewables Initiative (Sari). This combines concessionary loans, sovereign guarantees, climate-change funding and other financial instruments to bring down the cost of capital and, therefore, the domestic contribution required. Together, these measures can reduce the cost of capital "very significantly", said sustainability consultant Simon Zadek, who led the international team that helped develop Sari.
One new instrument is "pay-for-performance grants", in which contributions from governments supporting carbon-reduction initiatives would help pay a portion of the incremental costs. In other words, they pay for the green electricity produced rather than the wind farm itself.
This is the first time the international community has used the model in support of renewables, Zadek explained. Sari is also innovative in that it involves a number of different partners, including conservation organisation WWF South Africa, foreign governments and finance institutions, and also bridges three of the government's key policy objectives: energy, public financing and industrial development.
Sari aims to create up to 37,000 jobs over the next 18 years, more if the targets are increased. This is important from a political point of view, pointed out Monty Howard, an economist at the European Investment Bank (EIB), one of Sari's founding partners.
The government needs to sell the higher electricity costs to the public because it won't be able to close the gap with concessional finance and grants, he said. "It must show other benefits that are equally important to the economy," he said. Foremost among these is establishing a green industrial sector.
But there are risks. If a local-content requirement is set too high too quickly, for example, it would lock in the market for a few privileged local suppliers who hike up prices, Howard notes. In the long run this could lead to higher costs. The key is to optimise the flows of money into the country, he argued.
While the Sari model is best suited to larger, more sophisticated markets, it can also be used in smaller markets with weaker industrial development, Zadek claimed. Someone still has to make the towers, prepare the ground, and build and maintain the plant, and small countries can also green their exports, he noted.
Britain, Germany, Denmark, Switzerland, Norway and the EIB are supporting Sari. The partners are working to develop financial mechanisms, attract new members and secure funding.