Wind Industry Offers Ideas to Improve South African Wind Policy

Wind industry offers ideas to improve South African wind policy

The fundamentals are good for the new South African wind market. Renewable energy policy is sincerely focused on encouraging development. But industry insiders suggest there are some areas where policy could be better designed for maximum growth of a nascent domestic wind industry.

For more information about The Wind Energy Summit, South Africa, please visit our website www.windenergyupdate.com/south-africa

In association with: Wind Energy Summit • 16th-17th April 2015, Cape Town, South Africa

By Susan Kraemer

www.windenergyupdate.com/south-africa • 2


Produced in association with: The Wind Energy Summit, 16th-17th April 2015, Cape Town, South Africa

Wind industry offers ideas to improve South African wind policySouth Africa’s surprisingly sleek implementation of good renewable policy, in a country historically powered over 90 percent by coal, has come about through an unusual involvement of all stakeholders, according to Davin Chown, former Director of Corporate Affairs, Corporate and Business Development at Mainstream Renewable Energy and now Director of Genesis Eco-Energy. The global firm has 238 MW of wind operating and another 360 MW awarded under Round 3 of South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPP).

Chown ascribes the success of the program to an unusual degree of cooperation among all the stakeholders.

“We have a structure which operates in South Africa called NEDLAC, the National Economic Development and Labour Council,” he explains. “Through NEDLAC, involving all the key social partners of government, industry, trade unions, civil society; that forum is used to negotiate all the major agreements that end up creating a shift in economic direction in South Africa.”

Perhaps because virtually all the stakeholders were involved, South Africa’s developing renewable energy market policy has been well designed to reward professionalism. It holds great promise for wind industry developers and suppliers.

“There’s a willingness to overcome the challenges that the sector faces from all stakeholders, and government departments are very open to dialogue,” says Siemens Head of Middle East and Africa, Tom Pedersen. “Overall, it has been an overwhelmingly positive experience for us to meet the ‘can do’ attitude of South Africans.”

But there are issues and challenges, in part due to the nation’s historic reliance on coal. South Africa’s electric grid grew based on central coal fired power stations, with dependence on one state company, Eskom, to provide electricity. Initially cheap, coal supplies are now of increasingly poor quality, and according to Chown “the days of cheap power are gone.”

Estimates of prices from Eskom's new coal power stations are as high as .97 Rand (USD 8 cents per kWh). In recent years, South Africa has had demand-driven blackouts that have been increasing in severity and frequency. Now the cost of unserved energy has been estimated to be as high as 75 rand (USD 60 cents) per kilowatt-hour.

So Eskom is in trouble. Yet this is the sole state-owned entity that must be able to upgrade the grid.

Weak link in funding the necessary transmission upgrades“Eskom has severe financial problems, but the REIPPPP relies on them to make deep connection upgrades to the Transmission System to connect successful bidders under the Programme,” explains Vestas Sales Manager James White, who has been handling turbine supply and EPC turnkey sales in the African region region, beginning as Vestas first employee there, seven years ago. His is an insider’s deep understanding of the issues.

“These transmission upgrades, to date, have not been incorporated in the Cost Estimate

Tom Pederson, Siemens

James White, Vestas




Letters issued by Eskom at Bid and in the eventual Budget Quote signed by the IPP and Eskom at financial close,” he explains. “This means that this portion is unfunded and currently Eskom does not have the financial capacity to carry these costs.”

White stresses that these deep connection upgrades are not due to any flaw in renewable generating technologies but rather because of the geographic relationships between the coal-fired power stations and load centres where Eskom historically built its transmission.

“These long transmission corridors require strengthening if they are to accept generation from more distributed generation sources in the Western and Eastern Cape. The question of the funding gap for Eskom is a key stumbling block and one of the largest drivers of the REIPPP delays,” he says.

Eskom’s troubles create a weak link as transmission upgrades are needed as generation moves from regions of coal to regions of wind or solar.

Grid issues biggest problemThe biggest concerns among developers is grid readiness and uncertainties and delays on the bidding rounds with REIPPP. Siemens supplied turbines for the largest wind farms in South Africa, the 100 MW Sere wind farm and the 138 MW Jeffrey’s Bay wind farm.

“The wind potential is huge, but grid access in South Africa will prove to be a stumbling block in the near future, especially in the windy areas,” Siemens MEA Head points out. “The grid was never designed for decentralised power production and will require major investment in order to be able to absorb larger amounts of energy decentrally and transport this to consumption centres.”

The heavy industrial region of Atlantis has been designated a Special Economic Zone (SEZ) for manufacturing renewable energy parts such as turbines. Mike Mulcahy, Atlantis SEZ Project Executive with Greencape, is more sanguine about solving grid issues.

“There are a few technical issues around grid connections - but solutions exist to all of these problems,” he maintains. The question of who pays for new infrastructure, and how much, is under consideration by the National Energy Regulator of SA (NERSA) which is working on pricing ‘wheeling’ when electricity is generated in one geographic location and sold at another. One idea is for developers to contribute, but the method for calculating the charge is not yet clear.

“As grid parity is reached in the next round or two in South Africa, there are some interesting legislative challenges that arise, particularly around independent power and wheeling,” he explains.

“Electrons cannot be ring-fenced - they will flow to the load centre. What happens when the IPP is generating, but there is insufficient capacity in the network to provide the off-taker with their equivalent power? This will provide a significant challenge for the grid operator.”

One solution under consideration is for municipalities to be allowed to buy power directly from an IPP as - or when - the price reaches some form of Eskom parity. But it is still very unclear as to the mechanisms for this sort of PPA. There is also uncertainty around the credit-worthiness of the municipalities signing 20-year agreements.

Uncertainties and delays serve to reduce investor confidence.

Mike Mulcahy, Atlantis SEZ




In addition to uncertainty about how the transmission upgrades will be funded, there also is a sense of uncertainty about the actual wind allocations in future bidding rounds. And as a result, such uncertainty it becomes difficult to foster investor confidence

Although not set in stone, IRP2010 drafts have suggested revising wind allocations downward. The IRP2010 and its subsequent draft revision provide the only published document that speaks to the long term vision of the Government. This document is then key to long term investor confidence but currently it is in flux between the IRP2010 and the draft. This shakes investor confidence.

And there have been constant delays in the REIPPP by the Department of Energy, National Treasury, and Eskom. This can snowball to create financing problems by driving down investor confidence, threatening the future of wind energy in South Africa and of IPPs in general. White sees this as “the umbrella under which all stumbling blocks fall under. In the short term the constant delays make managing project costs and internal expectations impossible. Investor returns are eroded as delay moves time along. This creates short term investor uncertainty..”

“It is no secret that investors like certainty and predictability,” White continues . “While the REIPPPP has been a fantastic programme to facilitate the roll out of large scale RE IPPs; a key stumbling block is the constant delays in announcements of bid dates, bid results and PPA signatures for each bidding round. The approvals required by DOE and Treasury under legislation such as the Public Finance Management Act create constant delays and uncertainty.”

Improve incentives for local content and current technologyFor global OEMs like Vestas and Siemens, there are risks in developing a manufacturing base in one isolated and nascent wind market like South Africa. The South African market needs to be larger than the current 500 - 600 megawatts of wind a year, in order to unlock investment in local manufacturing of parts and components.

“The potential for local manufacturing is there, but the market is simply not large enough to justify investment,” explains Pedersen.

One way to mitigate this ‘small pond” problem would be for South African government to allow exports for Local Content producers under the RFP for the REIPPPP. Then supplying projects outside of South Africa as well could help amortise the investment in factories within the country. Vestas was the turbine supplier for the 43 MW Coega, the 3 MW Klipheuwel, the 67 MW Hopefield and the 62 MW Grassridge wind farms in South Africa.

“Currently the Local Content structure only focuses on the domestic market; whereas any wind energy factory investment must be considered on a multi-market demand view, in order to mitigate the risk of individual market fluctuations,” explains White. “There is an ongoing discussion with the Department of Trade and Industry to create and Export Credit under RFP to allow OEMs to use their export activities to credit back into the REIPPPP and therefore create a further incentive to manufacture locally.”

However, regulators seem to be going in another direction; focusing on defining the number of megawatts that it would take within South Africa to justify a blade factory, and are considering increasing the local content rule from 40% to 60%. But, under the current structure a threshold of 60% is unlikely to be achievable, because with no Export Credits allowed, such a high percent of local content would be difficult to achieve while maintaining the professionalism the industry - and it’s financing! - requires While the quality issue is of course relevant; In lieu of export the market cannot localize factories for WTG components as the business case is too risky for OEMs to employ capital into fixed assets based on an IRP in flux and unknown production estimates based on one market.




Another glitch in the REIPPP process has the unfortunate effect of setting in stone the use of outdated technology, which is often more expensive than current technology in a rapidly evolving industry like wind. Because the market exerts a strong pressure on energy prices, the ability to take advantage of new technology on the market is key to competitive pricing. The REIPPP inadvertently prevents this kind of flexible response.

“South Africa maintains very stringent requirements to certification, even for projects which are several years away.,” says Pedersen. “We would like authorities to soften this, as it goes against the interest of the government, the developers and the supply chain, to lock projects into yesterday’s technology, even with construction 3-4 years away.”

Avoiding disenchantmentIndustry insiders believe there could be the potential for expectations to be dashed, leading to disappointments to develop within the communities where the projects are developed, endangering the push to develop wind energy.

“As an industry, there needs to be cognisance of the systematic risk that is introduced by each project only focusing on short-term optimisation,” says Mulcahy. “In other words, the program is placed at risk when individual developers stretch the interpretation of the rules. While each stretch alone is not enough to introduce systematic risk - the combination could. This is particularly around community relations, community participation and expectations.”

Part of the wind farm bid requirements include meeting set Economic Development and Socio-Economic Development targets. In some cases the community - in theory - owns as much as 40% of the wind farm - a significant amount of money. Effectively the community is 'given' a share of the project. However, in actuality the financing means that the debt is repaid from dividends - although the community will see some dividend amount over the 15 year life.

But the community will only 'own' that share, with rights, once it’s been paid for, or the debt used to buy the shares has been paid back. In these very rural and impoverished areas, this can lead to misunderstandings about what ownership really entails.

Similarly, promises of jobs pose a potential pitfall. There are commitments to create so many jobs in construction, operation and maintenance for communities within 50 kilometres of the sites. But there is less than open communication on how they have been awarded. If these jobs don’t materialise, or if corruption is suspected, communities could turn against future wind development.

“In absence of this open dialogue, growing frustrations are inevitable which will result either the public sector abandoning the REIPPPP or investors looking elsewhere,” says White.

“On one hand the government would like to see generation capacity added to the grid and positive social economic benefits from the private sector’s investment into the power sector; whereas the private sector desires to make a profit,” he adds.

“This does not mean the two groups are necessarily at odds and this has been clearly demonstrated by the significant economic development commitments made by bidders under the REIPPPP. Successful communication between both stakeholder groups will allow each group’s constraints to be visible thereby creating a more effective RFP and ability for the private sector to make return while still delivering on the public sector’s desired socio-economic expectations.”




Keeping investors happy“Investors require certainty and predictability,” says White. “A long term stable regulatory-enabling environment delivers private investment in the power sector. It is only the public sector that can provide this long term direction so it should be the DOE, National Treasury, Eskom, DTI and NERSA’s key focus to foster this long term certainty. The Integrated Resource Plan and its final acceptance by Parliament (whichever draft becomes applicable) is key to this certainty.”

A wind project takes about two years to get to bid submission in South Africa, which includes getting site permits and spending a year on wind measurement. Costs range from R10m - R50m for this process.

And yet short and medium term uncertainty is inevitable in the African power sector investment. Patience is a virtue. White’s advice to potential private investors is: “Make sure you bring patience and understanding to the table; as without that you will not survive.”

Taking policy lessons learned to the wider African continent“As returns are driven down under the REIPPPP and delays are becoming more significant, investors are increasingly expanding their horizons to include African markets,” he says. “In my view Nairobi, Kenya and Lagos, Nigeria will be the next wind energy hubs in sub-Saharan Africa.”

Perhaps this policy “bug” will turn out to be a “feature”. “Lessons learned under an African framework can be taken to these countries with effective cooperation between African governments rather than Western advisors trying to make things happen as they do in Europe or America which often gets lost in translation,” White suggests. While Africa’s coasts are still served by the European hub, the South African wind industry is ideally placed to invest into this broader market of the sub-Saharan African continent.

“Project development, financing and construction are skills that have been well developed in South Africa over the last few rounds,” Mulcahy agrees.

But it all hinges on South African development first. “Kenya and Ethiopia are developing themselves into regional hubs, but the potential is still relatively small due to the limited grid systems,” says Pedersen. “South Africa will - for a couple of years - have a window of opportunity to establish itself as the leading wind country in Sub-Saharan Africa.”

But he cautions that bottlenecks like transmission impediments must be removed, and waiting too long will run the risk of the window closing. But certainly, policy developed in South Africa could supply a model in the design of the procurement system for projects in neighbouring countries. The REIPPPP has been broadly acknowledged as a successful procurement model, and this model could be duplicated throughout the sub-Saharan community.

Barclays has a different view. Bhavtik C. Vallabhjee sees South Africa being the only viable African market of scale going forward, citing a Baker McKenzie survey in 2013 which found that 80% of Renewable Energy activity in SSA would be in SA over the next 5 years. But he also believes that developers that do venture forth in Africa will be well served by the expertise that they have developed by working within the South African renewable energy markets, and that this bodes well for their success on the rest of the continent.

“As the South Africa government has committed to renewables playing a significant part Bhavtik Vallabhjee, Barclays




Wind Energy Summit (16th–17th April) takes places in the Southern Sun Cape Sun Hotel, Cape Town, South Africa.

For more information visit: www.windenergyupdate.com/south-africaor contact James Anderson:t. +44 (0)207 375 7182e. [email protected]

in the generation mix over the next twenty years. With its good Independent Power Producer framework, well structured programme, Government backstop for the Offtaker, and streamlined process with standardized bankable documentation, I believe that South Africa will continue to remain the dominant country for wind and other renewables in the foreseeable future in Sub-Saharan Africa,” says Vallabhjee.

Challenges notwithstandingGiven the underlying challenge of developing a robust renewable market in a historically coal-based economy like South Africa’s, it is remarkable that its REIPPP renewable policy is as good as it is. This success has been achieved through a world class procurement programme from the DOE that has managed to break two paradigms of introducing IPPs and RE at the same time all in a developing nation. This is nothing short of brilliant. However there are still several underlying problems; namely one of over-dependence on one state-owned electric utility, which is suffering financially and yet must simultaneously be able to fund the grid upgrades that must be made to allow for a switch from dependence on a fossil fuel to a grid powered by clean energy.

Regulators also have their hands full in keeping developers and their investors happy, while fulfilling the the social benefit expectations of local communities.

The rollout has not been without problems, such as uncertainties and delays, that discourage investment. The policy design is in need of some tweaking, to better align incentives with desired outcomes. For example, by encouraging local manufacturing by allowing exports and allowing bidders to substitute current technology if necessary.

South Africa successfully established its REIPPP, which was developed by open communication among all stakeholders. Key to its long term survival is an open dialogue between both public and private stakeholders to ensure the successful facilitation of each group’s desired goals from the industry.

Given the robust beginnings, there is every reason to believe, that with similarly open exchange of ideas on best practices, South Africa will become a solid wind market. The next step is an open dialogue to ensure all parties continue to improve this programme and deliver on the aspirations of all stakeholders in the long term.



Come and listen to 2015’s most qualified wind energy experts speak about how to implement the financial and legislative changes which will continue to drive industry success into the future.

This year we have over 120+ senior level utilities, developers and manufacturers which are expected to attend this 2 day multi-faceted event and learn how to successfully develop profitable and sustainable wind power in sub-Saharan Africa.

This year’s conference will cover;

1: Government Updates Affecting the Wind Industry Explore grid capacity, future funding and grid compliance so you know

when to start selling energy creating profits. Gain invaluable access to key decisions makers in the South African government who will ultimately dictate the direction of wind energy moving into the decade

2: How to flourish in an increasingly competitive climate Understand how to thrive in the emerging wind energy market in

tougher economic conditions by gaining critical insights into market projections moving into 2015

3: The Prospects Beyond 2016 for Wind Look at long term visions from the key decision makers involved in

South African wind and get the inside track into the next lucrative wind hub in sub-Saharan Africa.

4: Risk mitigation Understand how you can reduce risk by employing ground breaking

new strategies created and executed by those that have developed and procured successful projects across the world. Seek clarification how and what economic forecasts will affect the wind industry

5: Lessons Learned From Key international players Hear industry leadings perspectives on international wind

development from Europe and Canada highlighting the common challenges faced there and how the industry can avoid them. Learn key lessons from some of the largest utilities in the world through access to the first large scale utility panel in the continent

6: Local Procurement and Supply Chain Learn how to utilise the domestic supply chain to your advantage,

manage policy and ensure projects are favourable in government from those that are actively involved today. Listen to expert suggestions on how to drive the local industrialisation process in South Africa.

South Africa’s leading wind energy summit is back in Cape Town for its second year!

I thoroughly enjoyed the smaller but focused networking opportunities that WESSA presentedKilian Hagemann

The event was amazing. It was an eye opener and very informative. It brought about a different perspective on Wind energy that was not really known to allMuhammad Essop Department of Environmental Affairs

Wind Energy Summit 16th–17th April, Southern Sun Cape Sun Hotel, Cape Town, South Africa.

Engineering

Wind Industry Offers Ideas to Improve South African Wind Policy