Policy vacuum throttles green power
November 18, 2008
By INGI SALGADO
It was a challenge for renewable energy company Phieco to secure $14.5 million (R148 million) for a proposed 10 megawatt wind farm, but three co-financiers have come to the party with debt and equity funding. The company now faces an even tougher hurdle.
The City of Cape Town will not sign a power purchase agreement for electricity generated near the city, citing the absence of legislation to compel it to buy green power, says Phieco director James Lech.
His frustration is shared across South Africa's renewable energy sector, which has been stymied by a legislative and regulatory vacuum.
It is the primary impediment to developing a local renewable energy sector, when green technologies are taking off globally in expectation of a crackdown on emissions of greenhouse gases.
The policy vacuum comes in spite of a target set in 2003 by the department of minerals and energy that 10 000 gigawatt-hours be derived from renewable energy sources by 2013. This is about 4 percent of projected electricity use.
"We have wasted five years," says Yaw Afrane-Okese, who is responsible for renewable energy projects at the Development Bank of Southern Africa. "How are we going to achieve that target in the next five years? Lack of a longer-term ambitious target usually does not stimulate investment sufficiently."
It is not that funding is not available for renewable energy. Local financial development institutions are starting to filter money through to the sector, although private sector banks are more cautious in the absence of enabling policy.
The Public Finance Management Act requires municipalities to select the cheapest options, or to justify the choice of alternatives. But there is no legislation to facilitate the adoption of green power, which is more expensive than conventional electricity, the price of which is based on the historical cost of building coal-fired power stations.
Of particular concern is the absence of a feed-in tariff to top up the price paid to producers of renewable energy, by Eskom or direct buyers such as municipalities.
Feed-in tariffs in Germany and Spain, for example, have enabled rapid deployment of renewable technologies at lower costs.
Such policies have paved the way for the globe's 254 percent annual growth in investment in solar power since 2004, as well as the tenfold growth notched up by clean technology venture capital last year.
If the government does not move forward on renewable energy, South African firms could face penalties due to green protectionism, says Peet du Plooy, a trade and investment adviser at WWF South Africa. The country's reliance on coal for electricity makes it one of the world's worst per capita emitters - bad news for exporters should green tariffs be imposed by trading partners.
South Africa could miss out on job-creating industrial development. For example, Phieco is considering taking its wind farms to neighbouring countries if no local municipalities will sign on. The company has plans to set up a manufacturing base in the region.
Some MPs from across party lines are so concerned that they unveiled a private members' bill on feed-in tariffs late last month.
The group's convenor, Inkatha Freedom Party MP Ruth Rabinowitz, says the bill aims to integrate the approach to renewable energy and provide guidelines for the National Energy Regulator of SA (Nersa) to set a feed-in tariff.
Nersa member Tembane Bukula says the regulator will finalise a feed-in tariff by the end of February.
Rabinowitz labels Nersa's solution "haphazard" and says it is unclear when it will be implemented.
In terms of Nersa's draft policy, a 15-year feed-in tariff for four technologies - concentrating solar, landfill gas, small hydro and wind power - will amount to between 50c and 80c a kilowatt-hour, decreasing at different rates for each technology.
Tariff degression is intended to encourage swift uptake, but it is critical to get both the price and duration of the tariff right. If the incentives are inadequate, investors will not be enticed to the sector.
Rabinowitz says the private members' bill proposes tariffs of between two and five times the "standard" price of electricity, which she puts at 37c a kilowatt-hour.
Christopher Clarke, the executive director of Inspired Evolution Investment Management, which has established a R1 billion fund for clean technology projects in South Africa, will not comment on whether Nersa's draft tariff range is adequate, although he points out that the first units of solar concentrating power in South Africa will cost north of R1 a kilowatt-hour.
Clarke believes Nersa should engage an independent expert body to conduct an analysis ahead of determining tariff structures. This would give greater credibility.
Clarke, whose fund will announce its first investment soon, has encountered huge divergence in price projections for similar projects.
"We believe that project developers are not really on top of the renewable energy space," he says, adding that Inspired Evolution often sends business plans straight back to the developers.
Rabinowitz says it was difficult to get a "congruent response" on costs from the renewable energy industry while researching the bill.
The fact that the sector did not "speak with one voice" has caused her to stop blaming finance minister Trevor Manuel for saying he was not convinced of the economic case for large-scale renewable energy projects in South Africa.
She nevertheless hopes the bill will be "a wake-up call to ministers who should be driving the renewables programme".
Afrane-Okese believes resistance to developing renewable energy is caused by perceptions that it will raise the cost of electricity, which would harm the poor.
Electricity prices are going to rise substantially, he says, to compensate for market failures that result in consumers paying far less for power than the generation cost.
"We definitely have to open our minds to alternatives," he says. "There will be greater pressure on South Africa to reduce emissions of greenhouse gases after the next round of global commitments are negotiated next year."
WWF South Africa has called for a renewable energy target of 15 percent of electricity by 2020.
A study commissioned by the environmental group from University of Cape Town researchers found that a 15 percent target of solar and wind power would raise electricity prices 15 percent.
But if this was combined with an energy efficiency plan and carbon financing, electricity prices in 2020 would be 18 percent below those from coal-fired power.
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