IN DEPTH: Greener Rainbow nation

In defiance of its critics and its own self-defeating impulses, South Africa has instituted one of the world’s most successful renewables initiatives of recent years.

Three bidding rounds since 2011 have seen nearly 4GW of wind and solar awarded; the first wave of major projects are nearing completion across the country; and the appetite for renewables remains strong — the recent third bidding round was oversubscribed by more than 400%.

There is much for South Africa to boast about. Yet all this hard-won momentum is far more vulnerable than President Jacob Zuma’s government seems to realise.

There is no question that South Africa has become a renewables market of global significance — an amazing achievement for an energy-starved country of 52 million people that began the year with perhaps 10MW of wind and 40MW of solar in place. Indeed, many of the world’s premier renewables developers, equipment suppliers and EPC players have set up swish offices in Johannesburg and Cape Town, and are hiring staff.

Yet South Africa’s renewables sector is entering a critical new phase. To date, the government has largely been able to coast on lessons learned elsewhere — and it has done a bang-up job. But the huge success of renewables means the government must quickly begin making some tough decisions — and ones that will rattle powerful political interests. Cowardly decisions now could set the country’s nascent renewables programme sector back by years, with consequences for the whole of sub-Saharan Africa.

“We now have a very conducive policy environment for renewables in South Africa,” says Mark Pickering, boss of major renewables investor Globeleq South Africa.

“In a sense, things can probably only get worse from where we are right now.”

Local content

Of the many threats facing renewables in South Africa today, the one that seems to inspire the most anxiety is the government’s demand for an ever-greater share of local content. The local-content threshold for wind farms went from 25% in the first and second rounds, to 40% in the third round. For PV it climbed from 35% in the first round to 45% in the third.

There is little question that these thresholds will continue rising, unless they are replaced by some other equally stringent mechanism, such as import tariffs.

To date, much of the local content put into projects has come from construction and “balance of plant” contracts — components such as overhead lines, transformers and substations. But this is not good enough for government.

Developers have so far managed to comfortably exceed the thresholds set for round three, but they are already bumping up against the limits of what they can reasonably procure in South Africa, given the country’s dearth of bankable renewables manufacturers.

Government’s response to their quandary is blunt: local factories must be built. Yet there is agreement in wind and solar that the South African market is simply not big enough to warrant many major factories, especially with significant global overcapacity in both sectors.

So far, the biggest win for South Africa’s wind supply chain has been the 300m-rand ($30m) tower plant being built near Port Elizabeth by DCD, a local engineering firm that has aggressively lobbied the government for stiffer domestic-content rules.

Set back a few months by “strike season”, DCD anticipates making its first deliveries in early 2014, says managing director Rob King.

Eliot Titman, director for Africa at Chinese turbine maker Goldwind, says there’s “probably room for one more tower factory” in South Africa at the current market size.

After that, the next logical step is blades, and the government will have been very pleased to hear Danish blade maker LM Wind confirm this autumn that it is scouting sites between Cape Town and Port Elizabeth for a possible factory.

Beyond blades, however, the scope for further localisation looks bleak, potentially setting the wind sector and government on a collision course.

As currently envisaged, South Africa’s renewables programme would make about 400MW of both wind and solar capacity available each year to developers.

The trouble with a 400MW wind market is it’s “neither fish nor fowl — it’s not small, but it’s not big enough to support a manufacturing industry”, says Global Wind Energy Council secretary-general Steve Sawyer.

Tom Pedersen, Siemens Wind Power’s head of sales for the Middle East and Africa, agrees. “There’s no example of a healthy [wind] manufacturing industry in a country with less than 1GW a year,” he says.

On the PV side, it is a bit easier to localise the supply chain while maintaining competitive prices, leading some in the wind business to fret about a “solar bias” in government.

During the third bidding round, completed in November, PV developers pledged to spend an average 54% of their project costs locally, up from 29% in the first round.

Several major inverter suppliers — including global leaders SMA and ABB — are building factories in South Africa, while items such as mounting racks and tracking systems are increasingly easy to procure locally.

There are already a handful of module-assembly plants in the country owned by foreign players such as SunPower, and South Africa recently got its first locally owned module-assembly plant in the shape of ARTsolar’s 75MW facility near Durban.

Nevertheless, in the absence of an upstream PV supply chain, “there is a level which you’re going to have trouble getting above”, warns Raymond Carlsen, chief executive of Norway-based Scatec Solar, one of the most successful PV developers in South Africa. “I think we’re getting close to that level now.”

A little long-term guidance from government on the local-content issue would go a long way. But Pretoria — perhaps out of fear that it will sell South Africa’s potential supply-chain short — seems unwilling to allay industry concerns and continues to talk a tough game.

Ironically, many in the industry believe South Africa boasts huge potential to become a wind and solar export hub for sub-Saharan Africa and beyond, if given time to blossom.

The danger of moving too fast on local content, industry sources say, is that either the cost or the quality of projects being built will be compromised — with potentially disastrous consequences in a country still mapping its energy future.

“Obviously we don’t think we’re going to get to 100% [local content],” muses Ntombifuthi Ntuli, director for renewable-energy industries at the Department of Trade and Industry. But, she adds, the government views all the orders that went to foreign factories in rounds one and two as “missed opportunities”.

The local supply chain “really needs to move fast”, she says.

Community contributions

Another significant problem is the mounting tension between some projects and local communities.

A key plank of South Africa’s renewables programme is that all projects must contribute generously to socioeconomic development in the country, which suffers from horrific economic disparity.

Developers are happy to do this. Garth Greyling, site manager for Siemens at the first-round Jeffreys Bay wind project, under construction in the Eastern Cape, describes the elation of a 70-year-old local man hired as a technician when he learned he would be sent abroad for the first time in his life for training.

“It’s the most wonderful thing in the world to be giving people a good job in an industry which is expanding rapidly here,” Greyling says. “The sense of pride and achievement you see on some of these local faces is incredible.”

But developers cannot make a sustainable contribution if they are immediately bled dry by rapacious community leaders, warns Zirk Botha, German developer Juwi’s manager for economic development and land acquisition in South Africa.

Botha describes instances of municipal managers demanding that developers finance unrelated local infrastructure, or begin making payments before projects are generating revenue. “We’ve seen community leaders threatening to initiate strikes because we’re not creating bogus jobs for their sons and daughters.”

Lack of long-term policy

Finally, there is the government’s continued dithering when it comes to cementing a long-term energy policy. This is a common enough problem around the world, but is of particular concern in a developing country with a stuttering economy and chronic energy crises, where capital is already worryingly expensive.

The closest thing South Africa has to an energy strategy is 2010’s Integrated Resource Plan (IRP), which, very positively, called for nearly 18GW of new renewables capacity by 2030.

The 2010 IRP remains the basis for most assumptions about South Africa’s future renewables market, but it is considered a “living” document, and significant changes are to be expected in the years ahead.

The Department of Energy, led since the summer by Ben Martins, has promised to update the IRP every two years “at the very least” to keep industry abreast of its thinking. Yet in a frustratingly familiar story, no update was published in 2012, and one is not expected until late 2014 at the earliest.

The government has signalled it will carry out at least two more renewables bidding rounds, with fourth-round bids due next summer. Most industry sources expect the bidding process to continue from there in more or less its current form, but that is far from certain in a country where coal, nuclear and shale gas are all very much still on the menu.

Patience is a virtue

Fortunately, South Africa’s renewables sector has many powerful factors working in its favour.

The country has a strong — if strike-prone — industrial base, and its grid is in reasonably good nick.

South Africa’s rather late arrival at the renewables party continues to pay dividends — an intriguing twist for many other countries contemplating wind and solar programmes.

While the majority of existing renewables markets developed steadily over years and decades, South Africa’s was created from scratch — giving the government an unprecedented ability to learn from other countries’ programmes and take advantage of the dazzling technological advances made in wind and solar over the past few years.

One common gripe about South Africa’s renewables programme is the extreme rigour of the bidding process, which, combined with the government’s lack of experience in the sector, has led to repeated, painful delays.

“The process is worse than bidding for a big subsea oil and gas project in Brazil,” says Carlsen, a former executive at Aker Subsea. On a per-megawatt basis, bidding costs “are probably the highest in the world”, claims Pedersen.

The upside of such thoroughness, however, is that the projects moving through South Africa’s pipeline are extremely solid — technologically, logistically and financially.

That’s an important contrast to other emerging markets such as India, whose National Solar Mission has seen many projects collapse due to incompetent or insolvent developers.

Developers very much like the regularly recurring nature of South Africa’s bidding process (assuming the delays are consigned to the past), because it shifts the market mentality from winner-take-all to bid-when-ready. In theory, there is always another bidding round just around the corner.

And 400MW of steady, predictable annual wind demand represents a welcome change from places such as Europe, where the market fluctuates wildly, notes Phylip Leferink, Vestas’ country manager for South Africa.

“You really have to tip your hat to the government,” says Johan Cilliers, First Solar’s business development director for sub-Saharan Africa, and a former vice-president at Suzlon.

It took a long time to get things moving, but in the past two years “they’ve gone — really quickly — from nothing to having one of the best processes worldwide”, Cilliers says.

Spectacular rise

With 2,500km of coastline blinking out into the gusty Indian and Atlantic Oceans, and a third of the country covered by the Great Karoo semi-desert region, the argument for wind and solar power in South Africa was never difficult to make.

And while there are still many clouds on the horizon, the progress of South Africa’s renewables programme over the past two years has been nothing short of spectacular.

Industry sources in both wind and solar believe that while 400MW a year is enough to maintain momentum, the market — left to its own devices — will rapidly grow far beyond that.

In that case, there is a strong possibility that South Africa will become a beachhead and manufacturing hub for renewables across sub-Saharan Africa.

The conflicting impulses of the government continue to pose a threat to the sector.

But with wind and solar close to competing with coal on cost alone, and far faster to build, renewables have simply become too practical a solution for the blackout-threatened country to ignore — now or ever again.

The pathway forward remains littered with obstacles — largely of South Africa’s own making — but it has never been clearer. The world is watching.