South Africa

South Africa

Strong wind market born in South Africa -- Premium power purchase prices set for 20 years

South Africa's government has introduced a more generous than expected guaranteed purchase price for renewable energy, giving "the signal investors and developers have been waiting for," says David Chown of Irish wind developer Mainstream Renewable Power, which has long had its sights on the country. Under the new market framework, wind plant owners will be paid ZAR 1.25/kWh (EUR 0.105/kWh) for 20 years of operation, with the sum adjusted each year for inflation.

The rate and terms are a significant improvement on the government's earlier proposal for rates starting at ZAR 0.6548/kWh to run for 15 years, subsequently falling to ZAR 0.5784/kWh (EUR 0.0452/kWh) in 2013. Back in December, the wind industry said the proposal was not good enough to catalyse a market.

The revised pricing system "will create an enabling environment for achieving the government's 10,000 GWh renewable energy target by 2013 and sustaining growth beyond the target," says Thembani Bukula, with the office of the National Regulator of South Africa (NERSA), who announced the framework. Rates will be reviewed each year for the next five years after which they will be reviewed every three years. Any revision of rates will only apply to new projects.

Renewable energy producers are guaranteed access to the grid under the new policy, although full guidelines are yet to be produced. State utility Eskom will be obliged to buy all the electricity generated at the set rate in its new role as South Africa's Renewable Energy Purchasing Agency (REPA). It will be paying substantially more for wind power than the ZAR 0.22/kWh (EUR 0.019/kWh) it currently sells electricity to consumers for. But the average consumer's electricity bill will only increase by 6-10%, says NERSA.

Long, loud and legal

Some market observers fear the new rate is perhaps too high and could encourage development of less productive, marginal projects on low-wind sites. Mainstream's Chown, however, calls it a "bold step" by the government, which has been "foresightful and ensured that there is a cushion in the system so that when the [global economic] upturn comes we do not sit with stranded projects." He notes South Africa desperately needs more generation. The country lost billions in revenue last year when power shortages forced its mines to shut down. The World Wildlife Fund South Africa agrees with Chown and notes that its call for a "long, loud and legal" framework was acted upon.

One key area of concern remaining for potential market players is the role of Eskom, a generator as well as an electricity retailer, as the new renewables purchasing agency. The wind industry had called for the agency to be an independent body, warning of a conflict of interests within Eskom. Some also worry about Eskom's potential role in deciding which projects are granted planning permission, saying it has shown little support for private sector renewables development.

Chown is optimistic, confident REPA will be governed by "a clear set of rules" and that Eskom will see the agency as a positive mechanism that will help add new capacity without Eskom having to pay for it directly. "The proof of the pudding will be in the implementation and monitoring," he says. Going forward, the industry says a priority should be the development of a clear grid code for wind, setting out rules and guidelines to ensure independent power producers get access to the grid in a fair and equitable manner.

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