BUSINESS MAVERICK 168 ANALYSIS

Renewable energy: REIPing the whirlwind

By Tim Cohen 25 October 2020

(Image: Rawpixel)

One of the most complex issues in economic development is the extent to which a government should intervene in the free market. Politicians are typically under pressure to be seen to be ‘doing something’ to generate jobs or achieve other political goals. The result is often a mess that results in unintended consequences. But the demand for local manufacture to create jobs is a siren call politicians can’t resist.

First published in Daily Maverick 168

The ANC’s economic policy has been fiercely suspicious of the market, with successive ministers of trade and industry supporting legislation that interferes in the free market to boost BEE and local manufacture. The incumbent minister, Ebrahim Patel, is a staunch proponent of market intervention. So how has this worked out?

There is one specific area where we can clearly see the effects of intervention: the Renewable Energy Independent Power Producer Procurement Programme (REI4P). It has generally been regarded as a success, and there have been five bid windows since 2011 that have together generated 6,300MW of electricity across 92 projects. The total invested in the effort was about R80-billion.

Coal-fired disaster

Then in 2014, after management changes at Eskom, the windows were suddenly shut because the utility argued this electricity was costing more than coal-generated power. South Africa turned away from renewables and put its faith in the behemoth Medupi and Kusile coal projects. And we all know how that has turned out. There are now renewed efforts to get the REI4P back on track.

The Department of Energy’s revised Integrated Resource Plan, released last year, provides for sizeable increases in renewable energy. It envisages that by 2030, of the anticipated total new capacity of about 30,000MW, close to 70% will come from wind and solar photovoltaic panels.

But what are we to make of the claim that this electricity is more expensive than coal-generated power? It’s commonly assumed that this is because renewable energy is more expensive to produce. This might have been true at some point, but the international experience is that prices have come down dramatically. Could there be some other reason local renewable energy is so expensive?

The European Union (EU) commissioned research into this and other questions from two researchers, Lauralyn Kaziboni and Matthew Stern, who are part of DNA Economics, a private economic consulting firm based in Pretoria.

How it looks from the outside

About half the investment into the fifth round of the REI4P came from EU companies, which is the reason for the interest. The EU, which itself has no local content requirements, is careful to say it supports what it considers legitimate localisation policies in South Africa based on “sound economic rationale that also contributes to generating real transformation”.

The two researchers asked companies involved in the REI4P what the effect was of local procurement and BEE policies. Their findings are eye-popping: the cost increases range from 10% to 40%. The average is about 30%.

Kaziboni and Stern do not come out entirely opposed to local content procurement, because their research did find some benefits. But they do say that, “to expect foreign firms to invest in developing local capacity, sourcing most of their inputs and skills from South Africa, and to then also transfer a significant amount of equity to a domestic partner, is a big ask”.

“While South Africa boasts a relatively well-diversified manufacturing sector, there are few companies capable of producing the required volume of goods at global standards, and the high concentration of producers in most industrial sectors limits capacity and price competition. This has raised production costs for EU manufacturers and the final prices of the goods and services that they offer in South Africa,” they conclude.

Finally, we have an answer as to why Eskom started refusing to buy renewable energy. It was at least partly because a whole bunch of additional requirements made the process more expensive. This is important because in the next rounds of REI4P, these requirements will expand, pushing costs up even further.

Kaziboni and Stern recommend that the local content designation process “should be limited to those products where the economic benefits of localisation clearly exceed the costs”.

To do that, in the REI4P, local content requirements should be limited to components that can be reasonably and competitively manufactured in SA, they suggest.

That seems pretty obvious, and it seems obvious too that the government should bring local content requirements for the successive rounds down. But is it obvious to the politicians? DM/BM

Article corrected to reflect the researchers from DNA Dynamics are not associated with the Wits Business School and that EU companies were investors in around half of REI4P round five, not the whole program. Apologies for the errors.

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All Comments 4

  • While localisation requirements do increase costs, at least until local manufacture has achieved scale, what is important is what tariff goes into the Power Purchase Agreements. If those tariffs are lower than Eskom’s or coal-powered generation then what it costs the IPP is their business risk. What will affect Eskom will be grid upgrades that might be needed to accommodate the renewable energy and possibly energy storage to accommodate the RE intermittency.

  • Not quite true. At this stage Solar Power in particular can be compared to the computer industry 20 to 30 years ago. Whenever you purchase, it was just too early. The technology is advancing rapidly. Hence the European manufacturers are not building long term installations. They are building plants with an expected lifespan of around 5 years. As a local manufacturer we have been astounded at the poor quality of some of the products which have passed through us for repair, at times even before being installed. Local manufacturers quality standards are in general significantly higher than what is currently being installed, which contributes to the higher cost. Local manufacturers are also forced to purchase raw materials, such as steel on which there is tariff protection, which further disadvantages local suppliers.

    Transformers as an example are a designated product which means that government and SOE’s are required to purchase locally. In reality though large numbers of transformers have been imported for solar farms to the disadvantage of local industry.

    The bottom line is that Government needs to set clear guidelines, then they need to communicate them effectively, and finally those rules have to be enforced. At this stage Government does none of the three successfully and then add to the confusion they keep changing the regulations.

  • To Peter (Atkins) … it’s not just transmission upgrades and storage but also the cost of running existing plants intermittently or building new plants better able to cope (gas?) .

    Alternatively, we could require the IPPs to propose their own despatchable solutions – i.e. solar plus storage or gas generators. At that point we will see that renewables are indeed far more expensive than the cost of the solar panel or wind generator but at least that cost (and the associated risk) would be carried by the private provider and not the public consumer, which is the current arrangement.

    • Thank you Tim Cohen for what is a welcome presentation but somewhat subject to the reality as pointed out clearly by Mike above. Once again I find the simplicity of non-understanding coming out of Tim’s article. He states “REIP generated 6,300MW of electricity across 92 projects.” You do not “generate MW” which is a capital cost Nameplate POWER RATING needing to despatch that power capability for some time to register ENERGY in MWh. Far too many people relate MW renewable ratings to those of Fossil and Nuclear which, because of their high load factors, (80 to 90%) are 3 times more effective energy dispatchers than renewables (20 to 30% ), which is what counts.. Then he later says “total new capacity of about 30,000MW, close to 70% will come from wind and solar photovoltaic panels.” …. now using the correct term “Capacity”, or installed capability “when the wind blows hard enough, but not too hard and they have to close down, thereby DRAWING energy from the grid to feather their blades and point the nacelles into the stron wind to avoid losing the wind turbine completely. (dreadful pics of burning or completely flattened turbines.)
      The true costs of “spinning reserve” (worse costly reality 0f significant storage) to handle non-dispatchable (nature condition controlled) and provide continuous energy supply increases the quoted “LCOE “costs” substantially as witnessed and seen from the data worldwide by countries who have learned the hard way.
      One never hears these days about factors such as “wind channelling” where in a large aligned array the back turbines receive only a fraction of the incident wind energy and the product of power rating times the number of turbines over predicts total power rating quite significantly. Why is there never any costing of decontamination of poisonous elements (magnetic rare earths?) and deconstruction implications where ten times more steel and concrete than used in an equivalent production nuclear station, has to be disposed of. This, let alone 200 meter blades which are already providing costs not considered by the proponents of renewables? Please familiarise yourself with full economic reckoning before stating that the costs of renewables are lower than either fossil fuels or, even more so, non bird-killing and non CO2 emitting nuclear energy as often postulated. I have just touched the surface of this energy debacle where I do defend the deployment of renewables in appropriate situations, usually isolated or far from the main grid provision needing expensive transmission line extra heavy installation to handle the variability of renewable supplies.

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