SA is in good stead in clean energy race
Country is promising example of growing market for renewable energy investment
SOUTH Africa’s energy generation capacity will need to grow by more than 40 000 megawatts over the next 20 years, double the current installed capacity. The government’s Integrated Resource Plan published in May 2011 set a target that 42 percent of this new power generation should come from renewable energy. Public-private partnerships can play an integral role in achieving this and alleviating the current energy constraints.
According to estimates, renewable energy will make up more than 20 percent of the country’s total generation capacity by 2030, compared with the 5 percent it currently accounts for. Investing in renewable energy is, therefore, considered a growing asset theme in domestic capital markets and offers investors opportunities to access a pool of assets not normally available to them, such as new solar and wind projects.
Research released by the Pew Charitable Trusts confirms the emergence of new markets as renewable capacity grows in the global clean energy sector. Phyllis Cuttino, the director of Pew’s clean energy programme, said South Africa’s commitment to developing wind, solar and other clean energy technologies, was a promising example of the expanding market for clean energy investments.
The investment required to implement the Department of Energy’s (DoE) Renewable Energy Independent Power Producer Procurement (REIPPP) programme is substantial. During round one of the programme, 28 preferred bid tenders totalling almost R50 billion in total investment were awarded to independent power producers. Debt and equity finance for the projects has been largely secured from local banks and the institutional market.
REIPPP projects are backed by a power purchase agreement (PPA) with Eskom that guarantees payment of an agreed tariff for power generated, on a “take or pay” basis for at least 20 years. This means that irrespective of power demand by the grid, if the power is generated by the renewable project, Eskom will pay the tariff for each kilowatt of energy produced. The tariff is agreed upon at the time of the awarding of the preferred bid and is indexed to the rate of inflation bid by the sponsor over the duration of the contract with Eskom.
The DoE has also contracted with the project companies in order to offer recourse for project investors in the event that Eskom fails to meet its obligations under the PPA. This government backstop of the PPA has earned the REIPPP programme significant credibility with international investors.
The growth of investment in renewable energy is driven by the argument that these technologies are growing more cost competitive with fossil fuel options. The International Renewable Energy Agency, which promotes the accelerated adoption and sustainable use of all forms of renewable energy, states that the levelised cost of electricity is declining, especially for solar photovoltaics, concentrated solar power and wind power.
While electricity supplied by renewable energy projects is initially more expensive than traditional thermal power, it will not be a significant contributor to consumers’ increasing energy costs. The so-called grid-parity – the price at which tariffs for coal- and renewable-generated energy intersect – is not that far off. The existing coal-fired plants were constructed in the 1970s with an intended lifespan of 30 to 40 years. Given the increasing maintenance and upgrade requirements to extend their lifespan and the cost of building new coal-fired plants at Medupi and Kusile, the tariff paid by Eskom for wind power will achieve grid parity by 2015 and solar power by 2019.
Renewable energy projects generally also have a shorter construction timetable than thermal projects and can, therefore, start supplying power to the grid within 12 to 24 months. This coupled with a low carbon footprint, is a win-win investment.
The banks have committed debt finance to the projects that were awarded preferred bids under the REIPPP programme to date. In some cases, the banks have syndicated the debt to specific players in the financial market whose funds are structured to seek long-term returns and tangible social and development impacts.
The REIPPP programme places a ESKOM’S announcement that Siemens would supply 46 new wind turbines to add to those already creaking and groaning in the Western Cape, indicates that South Africa has learned nothing from the sobering lessons of Europeans and Americans, when they embraced this technology.
Neither, it seems, has the World Bank, the African Development Bank, Agence France (who should know better) nor the Clean Technology Fund (no surprises there).
One supposes that these mainly offshore and hard currency funders couldn’t resist the lure of interest payments on the massive R2.4 billion needed to complete the project.
The World Bank’s interest, if it’s paid in US dollars, will surely mount as the rand continues to slip against the US currency. The same goes for the other offshore funders. Standby taxpayers, when the R2.4bn turns out to be an underestimate.
It is all very exciting for those who believe that the world is being poisoned by carbon dioxide (allegedly causing world temperatures to rise) but who ignore the fact that the theory is far from being a consensus among climatologists. Politicians, of course, embrace it, seeing an opportunity to raise taxes.
Green euphoria aside, consider the record of wind farms elsewhere in the world.
In Denmark, wind farms generate 9 percent of electricity demand only when the wind blows, which is not strong emphasis on social and economic development. All projects will be creating a significant number of new jobs during the construction and operations cycles, local communities have shareholding in the projects and will benefit from enterprise development and socio-economic development spend from top line revenue, and with each new round of projects awarded under the REIPPP always when the Danish grid needs it. (Our west coast and east coast may be windy but even in Port Elizabeth the wind doesn’t always blow, and autumn in the Cape is usually calm).
In California, abandoned wind turbines litter the landscape. More than 14 000 wind turbines are junk. Yet, we can hardly wait to emulate such disasters.
In Hawaii the 27-year-old Kamaoa Wind Farm has 100 rusting turbines, abandoned because they are not profitable.
In Britain, Prime Minister David Cameron said: “Wind farms (are) over-subsidised and wasteful of public money.”
Donald Trump, a man who can smell a profit opportunity at 100 metres, told the Scottish Parliament: “Your pristine countryside and coastlines will forever be destroyed and Scotland will go broke (if you build them).”
Seeing as wind turbines are a programme, an increasing amount of the project capital expenditure will be manufactured locally.
While local procurement will compel equipment suppliers to establish manufacturing operations in South Africa – which may increase capital expenditure costs – there also will be a demand for local electrical engineers, civil works contractors and a host of subsidiary “green” idea, let’s turn to what these 150m tall monsters do to birds and bats. They kill them: In large numbers.
Half a million birds are sliced and diced every year in the US. Bats too, in equally large numbers. We are supposed not to care because green scientists have calculated that more birds commit suicide against buildings. That’s all right then.
Meanwhile, the bandwagon rolls on.
Good for contractors and funders as wind farms may be, and applauded by environmentalists, as they are, they have hardly any impact on the carbon dioxide emissions the greens are always banging on about. They seem not to have considered the batteries needed to store the electricity when the wind blows or the carbon footprint of each wind turbines’ steel, concrete and copper – a carbon footprint the size of a Yeti’s, as others have noticed. companies in the supply chain.
The renewable energy market internationally is facing challenges such as adverse government policy changes, pressure on utilities and reluctance on the part of banks to offer long-tenor loans, leading to increasing competition among developers to bid for projects under the South African REIPPP programme. This has encouraged a compression
The carefully-nurtured perception that this is all hi-tech, innovative technology, is bunkum. Wind power is not new. The Dutch drove their empire with windmills hundreds of years ago. Ours are only different because they are huge, use a lot of steel and concrete, are not pretty, and drive domestic animals mad. They prevent restful sleep for any human unfortunate to live nearby.
Indeed, it is more than strange that we are determined to build these inefficient, uneconomic monsters, when everywhere else countries are waking up to the stupidity of the whole idea. When the first private wind generator operating company begs for subsidies, maybe, just maybe, the penny will drop here.
Wind farms are a boondoggle. It’s as simple as that. Some people will get rich for a while and the taxpayers will take yet another hit. Those involved will lose their jobs when the turbines prove to be a mistake, of the tariffs awarded to preferred bidders in round two and the trend is expected to continue in further rounds, resulting in downward pressure on internal rates of return for projects, lower developer premiums and thinner margins for contractors and equipment suppliers.
Given the limited capacity of the local capital market, this pressure has not yet translated into any but the politicians and bureaucrats who are pushing for this, will not.
Wind farms will not save the planet. They will not, except in a very small way, and not for long, make electricity when we need it. As long as the batteries last. Yes, we do need more electricity but there are better and cheaper ways of getting it.
A trickle of corporations in South Africa has seen the light. They are installing their own electricity generators – and of the type the Greens should be cheering on.
The much-maligned Anglo Platinum, for example, is planning to use waste heat to drive a turbine that will provide an annual 20 gigawatts. It will not kill birds and will not emit carbon dioxide.
One last thing.”The Western Cape wind farm project is to be called Sere”. It’s apparently the Nama word for “Cool Breeze”.
How sweet, but doesn’t make it less of a mistake. significant reduction in yields earned on debt finance invested in projects to date. According to the Pew Charitable Trusts report, “Who is winning the clean energy race? – 2012 edition”, clean-energy investment in South Africa, however, will remain strong in the coming years.
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