Wind Industry Offers Ideas to Improve South African Wind Policy

Wind industry offers
ideas to improve South
African wind policy
The fundamentals are good for the new South African wind market.
Renewable energy policy is sincerely focused on encouraging development.
But industry insiders suggest there are some areas where policy could be
better designed for maximum growth of a nascent domestic wind industry.
For more information about The Wind Energy Summit, South Africa,
please visit our website www.windenergyupdate.com/south-africa
In association with: Wind Energy Summit • 16th-17th April 2015, CapeTown, South Africa
By Susan Kraemer

www.windenergyupdate.com/south-africa • 2
Wind industry offers ideas to improve South African wind policy
Produced in association with: The Wind Energy Summit, 16th-17th April 2015, CapeTown, South Africa
Wind industry offers ideas to
improve South African wind policy
South Africa’s surprisingly sleek implementation of good renewable policy, in a country historically powered over
90 percent by coal, has come about through an unusual involvement of all stakeholders, according to Davin
Chown, former Director of Corporate Affairs, Corporate and Business Development at Mainstream Renewable
Energy and now Director of Genesis Eco-Energy. The global firm has 238 MW of wind operating and another 360
MW awarded under Round 3 of South Africa’s Renewable Energy Independent Power Producer Procurement
Programme (REIPPP).
Chown ascribes the success of the program to an unusual degree of cooperation among all the stakeholders.
“We have a structure which operates in South Africa called NEDLAC, the National Economic Development and
Labour Council,”he explains.“Through NEDLAC, involving all the key social partners of government, industry,
trade unions, civil society; that forum is used to negotiate all the major agreements that end up creating a shift in
economic direction in South Africa.”
Perhaps because virtually all the stakeholders were involved, South Africa’s developing renewable energy market
policy has been well designed to reward professionalism. It holds great promise for wind industry developers
and suppliers.
“There’s a willingness to overcome the challenges that the sector faces from all
stakeholders, and government departments are very open to dialogue,”says Siemens Head
of Middle East and Africa, Tom Pedersen.“Overall, it has been an overwhelmingly positive
experience for us to meet the‘can do’attitude of South Africans.”
But there are issues and challenges, in part due to the nation’s historic reliance on
coal. South Africa’s electric grid grew based on central coal fired power stations, with
dependence on one state company, Eskom, to provide electricity. Initially cheap, coal
supplies are now of increasingly poor quality, and according to Chown“the days of cheap power are gone.”
Estimates of prices from Eskom's new coal power stations are as high as .97 Rand (USD 8 cents per kWh). In
recent years, South Africa has had demand-driven blackouts that have been increasing in severity and frequency.
Now the cost of unserved energy has been estimated to be as high as 75 rand (USD 60 cents) per kilowatt-hour.
So Eskom is in trouble. Yet this is the sole state-owned entity that must be able to upgrade the grid.
Weak link in funding the necessary transmission upgrades
“Eskom has severe financial problems, but the REIPPPP relies on them to make deep
connection upgrades to the Transmission System to connect successful bidders under
the Programme,”explains Vestas Sales Manager James White, who has been handling
turbine supply and EPC turnkey sales in the African region region, beginning as Vestas first
employee there, seven years ago. His is an insider’s deep understanding of the issues.
“These transmission upgrades, to date, have not been incorporated in the Cost Estimate
Tom Pederson, Siemens
James White, Vestas

Letters issued by Eskom at Bid and in the eventual Budget Quote signed by the IPP and Eskom at financial close,”
he explains.“This means that this portion is unfunded and currently Eskom does not have the financial capacity
to carry these costs.”
White stresses that these deep connection upgrades are not due to any flaw in renewable generating
technologies but rather because of the geographic relationships between the coal-fired power stations and load
centres where Eskom historically built its transmission.
“These long transmission corridors require strengthening if they are to accept generation from more distributed
generation sources in the Western and Eastern Cape. The question of the funding gap for Eskom is a key
stumbling block and one of the largest drivers of the REIPPP delays,”he says.
Eskom’s troubles create a weak link as transmission upgrades are needed as generation moves from regions of
coal to regions of wind or solar.
Grid issues biggest problem
The biggest concerns among developers is grid readiness and uncertainties and delays on the bidding rounds
with REIPPP. Siemens supplied turbines for the largest wind farms in South Africa, the 100 MW Sere wind farm
and the 138 MW Jeffrey’s Bay wind farm.
“The wind potential is huge, but grid access in South Africa will prove to be a stumbling block in the near future,
especially in the windy areas,”Siemens MEA Head points out.“The grid was never designed
for decentralised power production and will require major investment in order to be able
to absorb larger amounts of energy decentrally and transport this to consumption centres.”
The heavy industrial region of Atlantis has been designated a Special Economic Zone (SEZ)
for manufacturing renewable energy parts such as turbines. Mike Mulcahy, Atlantis SEZ
Project Executive with Greencape, is more sanguine about solving grid issues.
“There are a few technical issues around grid connections - but solutions exist to all of
these problems,”he maintains. The question of who pays for new infrastructure, and how
much, is under consideration by the National Energy Regulator of SA (NERSA) which is working on pricing
‘wheeling’when electricity is generated in one geographic location and sold at another. One idea is for
developers to contribute, but the method for calculating the charge is not yet clear.
“As grid parity is reached in the next round or two in South Africa, there are some interesting legislative
challenges that arise, particularly around independent power and wheeling,”he explains.
“Electrons cannot be ring-fenced - they will flow to the load centre. What happens when the IPP is generating,
but there is insufficient capacity in the network to provide the off-taker with their equivalent power? This will
provide a significant challenge for the grid operator.”
One solution under consideration is for municipalities to be allowed to buy power directly from an IPP as - or
when - the price reaches some form of Eskom parity. But it is still very unclear as to the mechanisms for this sort
of PPA. There is also uncertainty around the credit-worthiness of the municipalities signing 20-year agreements.
Uncertainties and delays serve to reduce investor confidence.
Mike Mulcahy, Atlantis SEZ

In addition to uncertainty about how the transmission upgrades will be funded, there also is a sense of
uncertainty about the actual wind allocations in future bidding rounds. And as a result, such uncertainty it
becomes difficult to foster investor confidence
Although not set in stone, IRP2010 drafts have suggested revising wind allocations downward. The IRP2010 and
its subsequent draft revision provide the only published document that speaks to the long term vision of the
Government. This document is then key to long term investor confidence but currently it is in flux between the
IRP2010 and the draft. This shakes investor confidence.
And there have been constant delays in the REIPPP by the Department of Energy, National Treasury, and Eskom.
This can snowball to create financing problems by driving down investor confidence, threatening the future of
wind energy in South Africa and of IPPs in general. White sees this as“the umbrella under which all stumbling
blocks fall under. In the short term the constant delays make managing project costs and internal expectations
impossible. Investor returns are eroded as delay moves time along. This creates short term investor uncertainty..”
“It is no secret that investors like certainty and predictability,”White continues .“While the REIPPPP has been a
fantastic programme to facilitate the roll out of large scale RE IPPs; a key stumbling block is the constant delays
in announcements of bid dates, bid results and PPA signatures for each bidding round. The approvals required
by DOE and Treasury under legislation such as the Public Finance Management Act create constant delays and
uncertainty.”
Improve incentives for local content and current technology
For global OEMs like Vestas and Siemens, there are risks in developing a manufacturing base in one isolated and
nascent wind market like South Africa. The South African market needs to be larger than the current 500 - 600
megawatts of wind a year, in order to unlock investment in local manufacturing of parts and components.
“The potential for local manufacturing is there, but the market is simply not large enough to justify investment,”
explains Pedersen.
One way to mitigate this‘small pond”problem would be for South African government to allow exports for Local
Content producers under the RFP for the REIPPPP. Then supplying projects outside of South Africa as well could
help amortise the investment in factories within the country. Vestas was the turbine supplier for the 43 MW
Coega, the 3 MW Klipheuwel, the 67 MW Hopefield and the 62 MW Grassridge wind farms in South Africa.
“Currently the Local Content structure only focuses on the domestic market; whereas any wind energy factory
investment must be considered on a multi-market demand view, in order to mitigate the risk of individual
market fluctuations,”explains White.“There is an ongoing discussion with the Department of Trade and Industry
to create and Export Credit under RFP to allow OEMs to use their export activities to credit back into the REIPPPP
and therefore create a further incentive to manufacture locally.”
However, regulators seem to be going in another direction; focusing on defining the number of megawatts that
it would take within South Africa to justify a blade factory, and are considering increasing the local content rule
from 40% to 60%. But, under the current structure a threshold of 60% is unlikely to be achievable, because with
no Export Credits allowed, such a high percent of local content would be difficult to achieve while maintaining
the professionalism the industry - and it’s financing! - requires While the quality issue is of course relevant; In lieu
of export the market cannot localize factories for WTG components as the business case is too risky for OEMs to
employ capital into fixed assets based on an IRP in flux and unknown production estimates based on one market.

Another glitch in the REIPPP process has the unfortunate effect of setting in stone the use of outdated technology, which
is often more expensive than current technology in a rapidly evolving industry like wind. Because the market exerts a
strong pressure on energy prices, the ability to take advantage of new technology on the market is key to competitive
pricing.The REIPPP inadvertently prevents this kind of flexible response.
“South Africa maintains very stringent requirements to certification, even for projects which are several years
away.,”says Pedersen.“We would like authorities to soften this, as it goes against the interest of the government,
the developers and the supply chain, to lock projects into yesterday’s technology, even with construction 3-4
years away.”
Avoiding disenchantment
Industry insiders believe there could be the potential for expectations to be dashed, leading to disappointments
to develop within the communities where the projects are developed, endangering the push to develop wind
energy.
“As an industry, there needs to be cognisance of the systematic risk that is introduced by each project only focusing
on short-term optimisation,”says Mulcahy.“In other words, the program is placed at risk when individual developers
stretch the interpretation of the rules. While each stretch alone is not enough to introduce systematic risk - the
combination could. This is particularly around community relations, community participation and expectations.”
Part of the wind farm bid requirements include meeting set Economic Development and Socio-Economic
Development targets. In some cases the community - in theory - owns as much as 40% of the wind farm - a
significant amount of money. Effectively the community is 'given' a share of the project. However, in actuality
the financing means that the debt is repaid from dividends - although the community will see some dividend
amount over the 15 year life.
But the community will only 'own' that share, with rights, once it’s been paid for, or the debt used to buy the
shares has been paid back. In these very rural and impoverished areas, this can lead to misunderstandings about
what ownership really entails.
Similarly, promises of jobs pose a potential pitfall. There are commitments to create so many jobs in construction,
operation and maintenance for communities within 50 kilometres of the sites. But there is less than open
communication on how they have been awarded. If these jobs don’t materialise, or if corruption is suspected,
communities could turn against future wind development.
“In absence of this open dialogue, growing frustrations are inevitable which will result either the public sector
abandoning the REIPPPP or investors looking elsewhere,”says White.
“On one hand the government would like to see generation capacity added to the grid and positive social
economic benefits from the private sector’s investment into the power sector; whereas the private sector desires
to make a profit,”he adds.
“This does not mean the two groups are necessarily at odds and this has been clearly demonstrated by
the significant economic development commitments made by bidders under the REIPPPP. Successful
communication between both stakeholder groups will allow each group’s constraints to be visible thereby
creating a more effective RFP and ability for the private sector to make return while still delivering on the public
sector’s desired socio-economic expectations.”

Keeping investors happy
“Investors require certainty and predictability,”says White.“A long term stable regulatory-enabling environment
delivers private investment in the power sector. It is only the public sector that can provide this long term
direction so it should be the DOE, National Treasury, Eskom, DTI and NERSA’s key focus to foster this long term
certainty. The Integrated Resource Plan and its final acceptance by Parliament (whichever draft becomes
applicable) is key to this certainty.”
A wind project takes about two years to get to bid submission in South Africa, which includes getting site permits
and spending a year on wind measurement. Costs range from R10m - R50m for this process.
And yet short and medium term uncertainty is inevitable in the African power sector investment. Patience is a
virtue. White’s advice to potential private investors is:“Make sure you bring patience and understanding to the
table; as without that you will not survive.”
Taking policy lessons learned to the wider African continent
“As returns are driven down under the REIPPPP and delays are becoming more significant, investors are
increasingly expanding their horizons to include African markets,”he says.“In my view Nairobi, Kenya and Lagos,
Nigeria will be the next wind energy hubs in sub-Saharan Africa.”
Perhaps this policy“bug”will turn out to be a“feature”.“Lessons learned under an African framework can be taken
to these countries with effective cooperation between African governments rather than Western advisors trying
to make things happen as they do in Europe or America which often gets lost in translation,”White suggests. While
Africa’s coasts are still served by the European hub, the South African wind industry is ideally placed to invest into
this broader market of the sub-Saharan African continent.
“Project development, financing and construction are skills that have been well developed in South Africa over
the last few rounds,”Mulcahy agrees.
But it all hinges on South African development first.“Kenya and Ethiopia are developing themselves into regional
hubs, but the potential is still relatively small due to the limited grid systems,”says Pedersen.“South Africa will
- for a couple of years - have a window of opportunity to establish itself as the leading wind country in Sub-
Saharan Africa.”
But he cautions that bottlenecks like transmission impediments must be removed, and waiting too long will
run the risk of the window closing. But certainly, policy developed in South Africa could supply a model in
the design of the procurement system for projects in neighbouring countries. The REIPPPP has been broadly
acknowledged as a successful procurement model, and this model could be duplicated throughout the sub-
Saharan community.
Barclays has a different view. Bhavtik C. Vallabhjee sees South Africa being the only viable
African market of scale going forward, citing a Baker McKenzie survey in 2013 which found
that 80% of Renewable Energy activity in SSA would be in SA over the next 5 years. But
he also believes that developers that do venture forth in Africa will be well served by the
expertise that they have developed by working within the South African renewable energy
markets, and that this bodes well for their success on the rest of the continent.
“As the South Africa government has committed to renewables playing a significant part BhavtikVallabhjee,Barclays

Wind Energy Summit (16th–17th April) takes places in
the Southern Sun Cape Sun Hotel, Cape Town, South Africa.
For more information visit:
www.windenergyupdate.com/south-africa
or contact James Anderson:
t. +44 (0)207 375 7182
e. james@windenergyupdate.com
in the generation mix over the next twenty years. With its good Independent Power Producer framework, well
structured programme, Government backstop for the Offtaker, and streamlined process with standardized
bankable documentation, I believe that South Africa will continue to remain the dominant country for wind and
other renewables in the foreseeable future in Sub-Saharan Africa,”says Vallabhjee.
Challenges notwithstanding
Given the underlying challenge of developing a robust renewable market in a historically coal-based economy
like South Africa’s, it is remarkable that its REIPPP renewable policy is as good as it is. This success has been
achieved through a world class procurement programme from the DOE that has managed to break two
paradigms of introducing IPPs and RE at the same time all in a developing nation. This is nothing short of
brilliant. However there are still several underlying problems; namely one of over-dependence on one state-
owned electric utility, which is suffering financially and yet must simultaneously be able to fund the grid
upgrades that must be made to allow for a switch from dependence on a fossil fuel to a grid powered by clean
energy.
Regulators also have their hands full in keeping developers and their investors happy, while fulfilling the the
social benefit expectations of local communities.
The rollout has not been without problems, such as uncertainties and delays, that discourage investment. The
policy design is in need of some tweaking, to better align incentives with desired outcomes. For example, by
encouraging local manufacturing by allowing exports and allowing bidders to substitute current technology if
necessary.
South Africa successfully established its REIPPP, which was developed by open communication among all
stakeholders. Key to its long term survival is an open dialogue between both public and private stakeholders to
ensure the successful facilitation of each group’s desired goals from the industry.
Given the robust beginnings, there is every reason to believe, that with similarly open exchange of ideas on best
practices, South Africa will become a solid wind market. The next step is an open dialogue to ensure all parties
continue to improve this programme and deliver on the aspirations of all stakeholders in the long term.

Come and listen to 2015’s most qualified wind energy experts speak
about how to implement the financial and legislative changes which will
continue to drive industry success into the future.
This year we have over 120+ senior level utilities, developers and
manufacturers which are expected to attend this 2 day multi-faceted
event and learn how to successfully develop profitable and sustainable
wind power in sub-Saharan Africa.
This year’s conference will cover;
1: Government Updates Affecting the Wind Industry
Explore grid capacity, future funding and grid compliance so you know
when to start selling energy creating profits. Gain invaluable access
to key decisions makers in the South African government who will
ultimately dictate the direction of wind energy moving into the decade
2: How to flourish in an increasingly competitive climate
Understand how to thrive in the emerging wind energy market in
tougher economic conditions by gaining critical insights into market
projections moving into 2015
3: The Prospects Beyond 2016 for Wind
Look at long term visions from the key decision makers involved in
South African wind and get the inside track into the next lucrative
wind hub in sub-Saharan Africa.
4: Risk mitigation
Understand how you can reduce risk by employing ground breaking
new strategies created and executed by those that have developed
and procured successful projects across the world. Seek clarification
how and what economic forecasts will affect the wind industry
5: Lessons Learned From Key international players
Hear industry leadings perspectives on international wind
development from Europe and Canada highlighting the common
challenges faced there and how the industry can avoid them. Learn
key lessons from some of the largest utilities in the world through
access to the first large scale utility panel in the continent
6: Local Procurement and Supply Chain
Learn how to utilise the domestic supply chain to your advantage,
manage policy and ensure projects are favourable in government from
those that are actively involved today. Listen to expert suggestions on
how to drive the local industrialisation process in South Africa.
South Africa’s leading wind energy summit
is back in CapeTown for its second year!
I thoroughly
enjoyed the
smaller but focused
networking
opportunities that
WESSA presented
Kilian Hagemann
The event was
amazing. It was
an eye opener and
very informative.
It brought about
a different
perspective on
Wind energy that
was not really
known to all
Muhammad Essop
Department of
Environmental Affairs
Wind Energy Summit 16th–17th April, Southern Sun Cape Sun Hotel, Cape Town, South Africa.

Wind Industry Offers Ideas to Improve South African Wind Policy

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