During the NEDLAC discussions that preceded the signing of the Green Economy Accord, it was abundantly clear that the last-mentioned is very important to both Government and Labour. Two procurement rounds have now closed and preferred bidders have been announced for these. At present the tentative graph lines represented by these events are being extrapolated by policy makers in order to see whether we are “on our way” to the promised land – “promised” signifying the projections that were “sold” to policy makers by various people and entities in the last few years.
There was a hearing at Parliament on 7 June 2012 by the Parliamentary Portfolio Committee on Energy to assess the success and lessons learnt of Rounds 1 and 2. From the Department of Energy’s perspective it is clear that they are not certain that are headed to the promised land and that they think some reassessment is required. At a subsequent SAWEA/IDC workshop on localisation on 14 June 2012, some disappointment was expressed by the DTI also. Moreover, it appears that the wind industry has not been successful as yet in communicating its eagerness to assist Government and build a robust South African Industry with high levels of local content.
The most pressing challenge at present is that the Project Financiers (banks) will usually require South African-made technology to prove a track record over a period of 24 – 48 months before they conclude that the technology is proven and agree to advance loans to projects that want to use this technology. If the building of a demonstration plant is added, one is looking at a 3 – 5 year period before South African technology in the wind sector can be project financed.
From present trends it seems unlikely that political belief that we are “on our way” will last for another 5 years unless increasingly higher local content can be demonstrated.
Solutions to this seem to the following:
- Find a way to finance South African technology quicker.
If we accept for the moment that commercial banks cannot be expected to take risk, this means either creating a different financing structure or doing all equity deals where bank loans are not required.
A different funding structure could be backed by, for instance, an institution like IDC because IDC’s mandate is not only strictly commercial. IDC as a development institution could say “we’ll take risk on SA technology”. This could be for an entire project for a portion of a project that uses SA technology while the remainder of the project uses “proven” technology.
All equity deals mean that the entire amount of anything up to ZAR 2 billion must be paid by the shareholders of the entity building the wind farm. These investors would probably require a higher return for the risk they take on “unproven” technology. The “leverage” that projects get from bank loans would also disappear, further increasing the electricity cost to the consumer. In the third place, the total funding available in the country for renewable energy would not go as far if no bank loans were used and we would be able to build less than half for the same money. Lastly, such a structure would take the smaller players out of the market entirely.
- Manage expectations
Theoretically, an effort could be made to manage the expectations that Government has of renewable energy: explain that this is going to take 3 – 5 years. My own impression is that such a strategy on its own cannot succeed and that success has to be achieved in a far shorter period.
Communication and expectation management will be essential, but real progress on localisation and job creation will need to be demonstrated as soon as possible while our goodwill and willingness to assist as the wind industry needs to be communicated immediately.
In terms of substantial success, it appears that the design of innovative funding structures is now a critical component of ensuring the continued political support for the wind sector in South Africa.