The birth pains of an industry

In the past decade, wind power has experienced an international boom with growth rates in excess of 20% per annum in markets such as the United States, Spain, Germany and the United Kingdom; and even developing nations such as India, with tens of thousands of wind turbines being erected. During the same period, South Africa was mostly sleeping, with a few dedicated individuals pursuing commercial wind farm opportunities and only seven large (more than 500 kilowatt) wind turbines being built in our country during the entire decade.

Dr Kilian Hagemann

Despite a Renewable Energy White Paper gazetted in 2003, with a target of 10 000 gigawatt-hours of renewable energy by 2013 (about 4% of electricity demand), very few, if any, serious plans were in the pipeline for wind farms.

In March 2009, this picture changed dramatically with the announcement of a renewable energy feed-in tariff (Refit) by the National Energy Regulator of South Africa (Nersa).

Over the last two decades, the feed-in tariff mechanism has proved to be the single biggest and most successful driver of wind energy growth, as it guarantees a fixed or escalating price to be paid for every unit of electricity generated by the wind farm to its operator, mostly for 10 to 20 years. This provides a level of cash flow certainty which, in turn, unlocks funding sources such as commercial banks and which, ultimately, spurs investment in the sector.

The other discerning characteristic of a feed-in tariff is that it is non-discriminatory and uncapped in nature; it is usually coupled with guaranteed grid access at favourable conditions and any company may apply for it, subject only to certain statutory requirements (e.g. environmental authorisation) having been obtained.

These very supportive concepts behind Refit were welcomed by an industry-to-be-borne, but there was even better news: at R1.25/kWh, the tariff for wind power was very generous and lucrative. It represented almost 40% more at the time than the €0.09/kWh that German wind farm operators receive in a mature market with very well-established and optimised supply chains.

The news spread fast; and in less than a year, dozens of companies were set up or repositioned to develop wind farms and capitalise on this incentive. Many of the largest and most well-respected European developers set up subsidiaries in the country to jostle for a piece of the action.

A virtual wind rush began. Hundreds of farms across the three Cape provinces, where most of the wind resources were believed to be concentrated, were signed up on long-term lease agreements, environmental consultants were swamped with requests to conduct environmental impact assessments, and tall wind measurement masts sprung up like mushrooms.

As of today, more than a hundred wind farm applications are sitting with institutions such as Eskom for grid connection, the Department of Environmental Affairs for environmental authorisation, the local municipalities for land-use authorisations, the South African Civil Aviation Authority for air traffic safety approval, etc. Most of these authorities are struggling with the number of applications they have received, together representing more than 10GW of wind capacity.

But where is this all heading? Will we soon see thousands of wind turbines spinning in the countryside? Perhaps not.

The 2009 Refit was simply too good to be true. The early warning signs were the draft Refit procurement criteria published by Nersa in February last year. They made it clear that independent power producers (IPPs) eligible for the Refit would be selected through a tender process.

There were further indications that the capacity allowed to come on stream would be limited. This already was a deviation from the classic feed-in tariff model, in that the process was no longer non-discriminatory and uncapped – it became a fixed price tender system instead of a true feed-in tariff.

Yet, the industry was unfazed and it then became a race as to who would first obtain crucial milestones such as environmental authorisation, funding certainty and other criteria, giving them a competitive advantage when this tender would be published.

Sadly, no final procurement criteria or, in fact, any follow-up publications were ever made by Nersa. Some industry members contend that the regulator overstepped its mandate in terms of the National Energy Regulator Act.

Then there was a brief time in mid-2010 when it appeared that Eskom would take over the procurement process for renewable energy. After all, its second Multi Year Price Determination (MYPD2), approved by Nersa in early 2010, allowed Eskom to use about R12 billion of the extra income from its 25% annual electricity tariff hikes to purchase renewable power from IPPs.

It was the Department of Energy (DoE), however, that finally asserted its role as the energy planner in terms of the Electricity Regulation Act to manage the procurement process: first finishing its Integrated Resource Plan (IRP2010) for electricity to determine how much renewable energy should be connected to the grid in the next 20 years.

IRP2010 was finalised in March 2011 with a modest wind power target of 3 500MW by 2020 and 8 400MW by 2030, representing 3% and 5% of electricity demand respectively. This, of course, is much lower than the projects in the pipeline today, probably by a factor of five to 10, so things were starting to get really tight.

The industry expected the Refit tender to be published shortly after publication of IRP2010. However, Nersa then surprised everyone by proposing to drop the tariffs by about 25% and cutting most of the annual inflation adjustments, resulting in real reductions of up to 50%. The industry objected strongly to this move, considering that it had structured all its investment plans on the old tariffs and no one had yet obtained a power purchase agreement for R1.25/kWh.

Final revised tariffs were supposed to be published by the end of May, and then by mid-June – but as of 22 July, there is still no word forthcoming from Nersa.

That is probably because the DoE and the National Treasury seem to have changed the direction even more dramatically. Seeing hundreds of projects in the pipeline and a hopelessly oversubscribed medium-term renewable energy target, they decided that bidders should now compete on price – killing off the little that remained of the beloved 2009 Refit.

Given that windier sites will generate more power for almost the same construction costs, this move would certainly maximise the amount of electricity that Eskom can buy for the ring-fenced MYPD2 R12bn for which consumers are ultimately paying.

This is good for ordinary South Africans, but potentially catastrophic for the industry, particularly for those projects with fairly low wind resources that were still commercially viable at the generous R1.25/kWh tariff. Those sites with strong winds, however, would actually gain an advantage under such a new scheme in the face of fierce and sometimes more advanced competition.

According to a senior counsel opinion obtained by the South African Wind Energy Association (SAWEA), any request for proposals (RFP) issued by the DoE under such a new price-bidding scheme, unofficially rebranded “Rebid”, would require Nersa’s approval.

It is unclear to what extent this has now happened and how Nersa would buy into a process that its original Refit was designed to avoid. Ultimately, the RFP should really be published soon – hopefully it would have been released by the time this article goes to print.

Some international observers rightly point out that these issues are not new – some of the most successful wind power markets in the world took as long, if not longer, to come off the ground. They are simply the usual birth pains of an industry.

With our world-class wind resources, South Africa is poised for sustained growth in a new up-and-coming market, which will ultimately create tens of thousands of jobs and attract substantial foreign direct investment, while reducing our dependence on fossil fuels and reducing our country’s excessive carbon footprint.

Dr Kilian Hagemann

Director

G7 Renewable Energies