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South Africa

South Africa

Plans for growth and jobs in South Africa become reality

SOUTH AFRICA: A robust bidding process and strict local content requirements have made the South African government's renewable-energy programme a success, laying the foundations for a domestic wind sector. But as local-content targets increase, so do the challenges,reports Jan Dodd.

From just 10MW of installed wind capacity at present, by the end of the year South Africa should have over 600MW turning as the first round of projects awarded under the renewable energy independent power producer procurement programme (REIPPP) come online. A further 563MW awarded in the second round are under construction, with another 787MW in the pipeline from the third bidding round. The robust bidding process has been widely hailed as a success, driving down prices and kickstarting a local industry through an increasingly stringent local content requirement (see chart, below). As the local content target increases, however, the industry is facing some difficult decisions.

local content

To stimulate local production, job creation and socio-economic benefits, the government included thresholds and targets in the REIPPP bidding process. For wind, the minimum local content requirement (LCR) was 25% in the first two bidding rounds, covering construction but not project development, finance and operations and maintenance. The rates then rose sharply to a threshold of 40% and a target of 65% in round three, and the government has indicated that they will continue to increase in future rounds, although it has yet to give figures for the fourth round, due this summer.

Success in local strategy

The strategy has been an undoubted success. Local content promised by bidders increased from an average of 21.7% in round one to 46.9% in round three, and job creation from 4,200 to more than 11,000, according to the Department of Energy. The developers are also engaged in various black-empowerment initiatives and socio-economic development programmes to ensure local communities benefit.

The REIPPP appears to be very well thought through, reaching out further than many other LCR schemes, says Jan-Christoph Kuntze, energy policy adviser at GIZ, an international development aid agency owned by the German government. The use of a tender process means the South African government can see how firms are responding to the requirements and adjust them, which is more difficult with a feed-in tariff, he adds.

The first projects have found it relatively easy to reach the 25%, and some the 40% threshold, mainly by locally sourcing the balance of plant - all the elements of a wind farm apart from the turbines. MetroWind's 27MW round-one Van Stadens project, for example, has already achieved a local content of 46%, says Ian Curry, managing director of developer Basil Read Energy, which co-owns the project. Its sister company Basil Read Matomo was awarded the engineering, procurement and construction (EPC) contract for Van Stadens. Other local companies entering the sector include Group Five, Murray & Roberts, Conco and Actom Power Systems, variously offering civil and electrical work or complete EPC services, while local affiliates of global players such as ALE and Sarens provide transport and crane facilities.

"The REIPPP has certainly increased the scope in such complementary industries," notes Oscar van Rooy, general manager at local service provider Wind Prospect Africa. And in areas where companies lack local expertise, such as transporting blades, they are working with global enterprises, upgrading their skills and equipment.

Creative sourcing

The challenge really comes as the LCR threshold rises over 40% and the target hits 65%, requiring increasingly innovative sourcing strategies and at least some elements of the turbines to be made locally, the industry warns. In response, South African manufacturing and engineering company DCD group will start producing steel towers under licence at its new factory in Port Elizabeth in February, destined for round two projects.

Concrete towers could also be made locally, potentially cutting costs and creating more jobs, notes Santie Gouws, managing director of consultancy Concrete Growth. As a first step, Acciona plans to make the towers for its round-two 138MW Gouda project onsite using imported moulds. A number of construction companies are also investigating manufacturing their own, locally designed towers, although these would have to be certified by an independent body such as DNV GL or TUV to meet the Department of Energy's qualification criteria, a process that could take up to two years.

Although more technically advanced, blades are the next obvious target for local manufacture. DCD, which could expand its operations to include blades, says it is in negotiations with turbine manufacturers from round-three projects, while blade maker LM Wind Power is exploring the possibility of setting up a factory. Others fear that the market is simply not big enough. "Current market figures indicate that market size cannot carry local manufacturing of core components such as blades and nacelles," says Van Rooy.

Before taking such major investment decisions the industry needs clarity on the local content requirement in future bidding rounds and the size of the market. In the latest update of its integrated resource plan, currently under public consultation, the government proposes cutting its 2030 wind target from 9.2GW to 4.36GW in response to the economic downturn. But it has said that it will continue the procurement programme, with additional rounds of 1GW of wind annually up to the target. While some observers are confident the update is provisional and the target will not be cut, uncertainty does not help. Even at 9.2GW, the market may not be sufficient to attract European turbine makers to set up shop, although China's Guodian is said to be considering local assembly, eyeing on the broader African market.

Meanwhile, if the local content need increases too fast, before the industry has time to establish, there is a danger that quality and cost could be compromised. South Africa needs to build local know-how that matches the capacities and not force development if the local industry is not capable of sustaining it, Van Rooy says.

Otherwise the industry could be caught between sourcing more goods and services locally, which might be more expensive, and trying to keep bids low in what is a very competitive market. Some already believe that prices bid in round three - which averaged ZAR 737/MWh (EUR 51), compared with ZAR 1,143 (EUR 79) in the first round - are not sustainable, particularly given the continued slide in the value of the rand.

On the other hand, the government will want to maintain the momentum as it also faces a hard balancing act, struggling against 25% unemployment and trying to ensure disadvantaged communities share in the economic development.

Awarded... Contracts from South Africa's first three bidding rounds

 

SOUTH AFRICA'S ELECTRICITY MIX GROWING SHARE FOR RENEWABLES

Almost 90% of South Africa's electricity is generated from coal, with nuclear and hydro providing 5% each and renewables just 1%. To solve its power deficit, the government has an ambitious investment programme. This includes two coal-fired power stations of 4.8GW each, currently under construction, alongside a higher share of renewables.

By 2030, wind energy should provide 9% of the country's electricity, although this figure may change if the updated integrated resource plan is adopted (see main feature).

South Africa has excellent wind resources, mainly concentrated along the coastal regions, which have good access and reasonable grid connections. Twelve of the 22 projects awarded to date are in Eastern Cape province, followed by six in Northern and four in Western Cape provinces.

Port Elizabeth, in the Eastern Cape, is becoming a wind-industry hub, with a deep-water port at Ngqura and the Coega industrial zone, site of DCD's tower factory. The only other port large enough to handle imported turbines, blades and towers is Saldanha, which serves projects in Western and Northern Cape provinces.

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