Mail&Guardian Online

By Lynley Donnelly

April 20th, 2012

Billions of rands of investment are flowing into South Africa as a result of the government’s plans to move towards renewable energy. The rush is a boon to South Africa’s nascent renewables market and major companies from across the globe are partnering in the first round of the independent power producer procurement programme for renewable energy. 

But the test, according to experts, will be in how the market develops once projects begin delivering power in an environment in which complicated ownership structures are becoming a key feature of the companies emerging as the forerunners.

In December, the 28 preferred bidders in the state’s independent power producer procurement programme were announced and the second round of bidding closed in March. The first 1 451 megawatts allocated out of a total 3 725MW were divided across wind, solar photovoltaic and concentrated solar power. By June 19 the first-round bidders will be expected to complete financial closure on their projects and begin construction (see “The Players”).

Gareth Blanckenberg, energy and power systems research analyst at consultancy Frost & Sullivan, said although the ownership of the bidding companies was complicated because of the structure of the various consortiums, many large international renewables players linked to these projects were becoming active in South Africa.

The ownership structures were complicated for two reasons, he said. Firstly, the local-content requirements had resulted in many larger international companies partnering with local companies and communities. Secondly, the cost of investing in renewables was expensive and required a lot of equity.

Considering that renewable energy is a fledgling industry, the scale of investment, at this stage estimated to be at least R50-billion, is highly significant, according to Greg Nott, director at Werksmans Attorneys. “We are seeing immediate growth in a very short period of time,” he said, and the entire scope of the country’s economy would be affected by this development, from grassroots and community levels upwards.

The procurement process had attracted the interest of international groups, finance houses, manufacturers and development finance institutions. Renewables development had “many moving parts” across a range of sectors in the economy and as such invited careful scrutiny, Nott said. A test of our emerging renewables sector would be to see how these new companies operated, given the complex nature of their structures.

“The fundamentals of good business practice, such as creating good cash flows and maintaining good governance and operating performance will have to remain a focus.”

Nott said there was a great deal of interest in establishing manufacturing capacity in South Africa, particularly from China in terms of solar photovoltaic power. This was in addition to interest from companies in Scandinavian countries and the European Union, which had a longer history in renewable energy and manufacturing.

But there was substantially bigger interest from more traditional partners in the realm of engineering, procurement and construction, Nott said. In addition, companies were seeking to “root themselves here” ahead of expected future growth and to take advantage of opportunities in the rest of Africa. The potential for local manufacturing was in large part thanks to government requirements for local procurement and economic development.

Among the challenges to maintaining the growth of the renewables sector locally was to ensure that the market was not treated in isolation from economic developments around the globe, said Nott. “We can’t see ourselves as an island.”

Because a number of investors hailed from Europe, which is beset by a sovereign debt crisis, threats of ratings downgrades for countries in the EU would have an impact on any investors from these countries, said Nott. Another key challenge was the government’s capacity to regulate the industry and develop and adapt policy to ensure it could function.

This assertion was echoed by Michael Bean of professional services firm Step Strategic Venturing. He said the industry was still highly regulated, which made it difficult for smaller companies to enter the market as more than merely service providers to larger firms. It was critical that regulatory practices and processes were managed properly and operated smoothly, particularly because more independent power producers were expected to come on stream.

Just as important was how the country’s grid coped with a more diverse set of power suppliers, which were expected to increase dramatically in the coming years to meet South Africa’s energy shortage. The entrance of independent power producers into the market meant improved technologies were needed both to allow and account for the power that would be flowing back into the grid from a more widely distributed set of power generators, Bean said.

Money still guesswork
The amount of money that will be spent to establish green power in South Africa has been estimated at a possible R120-billion, as reported by the Mail & Guardian in February.

The Integrated Resource Plan 2010 allocates about 17 800MW to renewable energy in the next 20 years.

Frost & Sullivan’s Gareth Blanckenberg said it was difficult to quantify just how much money would be invested in renewables. The plan was still subject to review and the prices of renewable technologies would decrease in coming years. Simultaneously, fossil fuels such as coal might become subject to carbon taxes in a bid to mitigate climate change.

Blanckenberg cited research done by consultancy firm Black & Veatch for the United States-based National Renewable Energy Laboratory, which priced the installation of utility-scale onshore wind at $1 980/kW and at $2 830/kW for photovoltaic power solar for installations of more than 10MW. The numbers did allow for a 25% uncertainty rate.

But, based on these numbers, a very rough estimate brought the allocations for wind and solar photovoltaic power alone to investments of $133-billion and $190-billion respectively.

However, the manufacturing and installation costs of these technologies are declining all the time. According to Jochen Magerfleisch, chief operating officer of Juwi Renewable Energies, the cost of solar installations has dropped by 50% over the past year. “In the last three years we have seen a dramatic decrease in the cost of renewables.”

This is in part thanks to the increase in production and economies of scale as demand for green energy increases.

Magerfleisch said South Africa’s local-content requirements were sensible, but the global supply for items such as solar modules was twice the demand — a factor the country had to bear in mind when making decisions about establishing manufacturing capacity locally. — Lynley Donnelly

The players
Licence hearings held by the National Energy Regulator of South Africa in March shed some light on South Africa’s green boomers and the trend towards a range of ownership consortiums was clearly evident.

The largest of the projects is the 135MW Cookhouse wind farm being developed by African Clean Energy Developments, 50% of which is held by African Infrastructure Investment Managers, a joint venture split equally between Macquarie Africa and Old Mutual Investment Group South Africa.

The other 50% is held by African Power Corporation, a Mauritius-registered company incorporated for the sole purpose of its investment in the consortium.

Apart from financing supplied by Nedbank, Standard Bank and the Industrial Development Corporation (IDC), key partners include Indian-based wind turbine manufacturer Suzlon, listed on the National Stock Exchange of India and the Bombay Stock Exchange.

But African Infrastructure Investment Managers is also a partner in the Hopefield wind farm being developed by Umoyo Energy in the Western Cape. The project is among the top 10 bidders in the first round and promises a R1.5-billion investment. According to its presentation, Umoyo’s shareholders consist of funds managed by African Infrastructure Investment Managers, including the Kagiso Infrastructure Empowerment Fund and the Infrastructural Developments Environmental Assets Fund, a Nedbank investment arm, as well as grassroots entities such as a company owned by the Hopefield wind farm local community.

The second-largest project is the Jeffreys Bay wind farm being developed by South African Mainstream Renewable Power. The company is a joint venture between the local arm of Mainstream Renewable Energy and home-grown Genesis Eco Energy.

Mainstream is a well-known Ireland-based renewable energy development company. Its South Africa arm is also involved in two of the other preferred bids, both for solar photovoltaic power installations in De Aar and Kimberley in the Northern Cape.

The third-largest of the bids is the 100MW concentrated solar plant being developed by the KaXu Solar One Consortium in Pofadder. Spain-based renewables company Abengoa Solar owns 51% of the company, according to its presentation, the IDC owns 29% and the remaining 20% is owned by a community trust.

Between the KaXu project and a second one — the 50MW Khi Solar One project in Upington — Abengoa will be committing R10-billion in investment.

Other preferred bidders include the 28MW Soutpan Solar Park being developed by Erika Energy in the Waterberg in Limpopo. The holding company’s shareholders are Astronergy Solar Korea, a subsidiary of China-based Chint, and the United States-listed Monsanto Electronic Materials Company.