The failure of the R536-million DCD Wind Towers facility, established in the Coega Special Economic Zone in 2013, has become the poster child for the damage inflicted when South Africa’s political infighting and intrigue gave way to policy uncertainty and stalled implementation.
The investment made sense on several levels: it was aligned with the global energy transition; it created 140 manufacturing jobs in an economy desperate to re-industrialise; it was established to produce a key component for a sector whose growth was underpinned by the country’s official electricity policy; it served a market growing in confidence in light of the international acclaim being showered on the procurement model facilitating its expansion; the activity was supported by an industrial policy that sought to unlock green manufacturing; and it had the financial backing of the State-owned Industrial Development Corporation and the province-owned Coega Development Corporation.
What could go wrong?
Everything, as it turned out, with DCD lamenting in 2017 that it simply could not understand how it was possible for a State-owned entity to sabotage government policy, when government, as shareholder, was within its rights to insist that the policy be implemented. The State-owned entity in question was Eskom and the policy being flouted the decision to procure renewable energy from independent power producers (IPPs) in line with the Integrated Resource Plan (IRP).
In the event, the utility decided unilaterally in 2015 that it would no longer sign any new power purchase agreements (PPAs) with renewables IPPs. The official rationale for the move was that the coal fleet’s performance had recovered to a level whereby there was surplus generating capacity – a proposition that has since fallen flat, with load-shedding in 2020 more intense than it has ever been, owing to the volatile and unpredictable performance of the fleet. Unofficially, the decision appears to have been linked to a desire to ensure that a new nuclear build was not crowded out by low-cost wind and solar.
To add insult to injury, 2020 is also the year when the full contents of the 20 000 m3 DCD Wind Towers factory were auctioned off. Everything from overhead cranes and roller beds, to welding machines and office furniture were on the virtual auction block, which took place in the middle of South Africa’s Covid-19 lockdown in June. The business failure was so dramatic that it even caught the eye of international news outlet Bloomberg, which used it as a cautionary tale in its narration of South Africa’s current economic predicament.
Since September, however, there has been a definite and positive shift in the outlook for the wind sector, and the IPP industry more generally.
Mineral Resources and Energy Minister Gwede Mantashe has confirmed receipt of the National Energy Regulator of South Africa’s concurrence for a Section 34 Ministerial determination opening the way for the procurement of 11 813 MW. Within that figure is a 4 800 MW allocation for onshore wind, with the balance set aside for solar photovoltaic (2 000 MW), gas or diesel to power (3 000 MW), new coal (1 500 MW) and energy storage (513 MW).
The Department of Mineral Resources and Energy (DMRE) has also indicated that it is aiming to release bid documentation for the so-called fifth bid window (BW5) of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) in December, while the IPP Office, which performs the procurement function for government, has indicated that the request for proposals (RFP) will be released by no later than the end of January, but possibly in December.
Ahead of the Eskom-induced stalling of the REIPPPP, government’s IPP Office had overseen the procurement of 6422 MW of renewables capacity, which has either been built or is in the process of being built by 112 IPPs at a cost of R209.7-billion. The estimated, average portfolio cost for all technologies under the REIPPPP has dropped consistently in every bid period to a combined average of R0.96/kWh in BW4, having been as high as R2.91/kWh in BW1. The prices bid for onshore wind and solar PV under the ironically named ‘Expedited’ bid window, which was not only shrouded in uncertainty for years, but eventually cancelled outright, was famously R0.62/kWh.
Importantly, too, Eskom CEO Andre de Ruyter has welcomed the determination, saying that additional generation capacity of 5 000 MW is “urgently required, and will be an important contribution towards ending load-shedding”. Eskom, he adds, is looking forward to collaborating with the DMRE and the IPP Office to support implementation; an important statement, given what the utility’s previous hostility did to the programme.
Naturally, the immediate focus for those IPPs gearing up to participate in BW5 will be on the contents of the bid documentation. They will want to assess whether any major changes have been made to the evaluation criteria, especially the nonprice components, such as ownership, local content and socioeconomic development.
South African Renewable Energy Council chairperson Terence Govender has indicated that the industry is champing at the bit, having developed a pipeline of projects over the past five to ten years. He adds that this preparatory work will “ensure a positive response to the RFP that will meet all government requirements”.
IPP Office CEO Tshifhiwa Bernard Magoro says it is premature to share details of the possible changes that could be made in the BW5 bid documentation relative to previous rounds. Nevertheless, he confirms that increasing black participation in the full REIPPPP value chain, including ownership, as well as raising the level of local content, are key priorities for government.
The desire to stimulate industrialisation around the REIPPPP has also been articulated by Trade, Industry and Competition Minister Ebrahim Patel, who used his revised Budget Vote address to lawmakers in July to assert that the “tectonic shifts” towards greener industries will provide new opportunities for enterprise development and job creation. “Established industries, though critical in our economy, will not be able to create the millions of jobs required,” Patel said, while indicating that the Department of Trade, Industry and Competition (DTIC) is central to the drafting of a South African Renewable Energy Masterplan (SAREM).
Work on the SAREM is officially under way, with the first industry working group meeting having taken place on August 26. The SAREM is one of 14 industry-specific masterplans being developed under the DTIC’s national masterplan process and represents an opportunity to identify jobs and investment in the renewable-energy sector linked to the 2019 edition of the IRP, or IRP 2019.
A recent working paper written by the University of Cape Town’s Policy Research on International Services and Manufacturing argues that the early industrialisation gains made as a direct result of REIPPPP were substantially undermined by political economy dynamics. These, the authors show, resulted in a failure to ensure continuity and predictability of the auction process, which cascaded down the wind energy value chain constraining the initial, albeit modest, localisation progress.
During the most recent bid windows, a localisation threshold of 45% was set, with a target of 65%. Localisation does not automatically result in domestic industrialisation, however, as the formula used for calculating localisation allows an IPP to include that portion of the full tender price not included in the imported content.
The pressure to use the programme to unlock and accelerate economic empowerment, meanwhile, is also increasing.
Black ownership of 33% has been recorded over the previous bid windows. Nevertheless, there is a strong view that the ownership figure is overstated, as the equity was typically encumbered.
Consistent & Predictable
South African Wind Energy Association CEO Ntombifuthi Ntuli tells Engineering News & Mining Weekly that wind IPPs are looking forward to the resumption of “consistent and predictable” procurement in line with the IRP 2019.
Should yearly wind procurement proceed in line with the 1600-MW-a-year tempo outlined in the document, the domestic wind fleet will expand to 17 742 MW by 2030, a material scale-up from the current installed base of about 2 000 MW.
Ntuli is confident that the technology, which is relatively quick to deploy, will play a key role in helping to address the immediate deficit in a cost-effective manner, given the steep fall in onshore wind costs over the past decade. Together with solar PV, the two technologies are now the cheapest form of new power in South Africa, even after being complemented by flexible generators to smooth out variability.
Consistent and predictable procurement will also, Ntuli asserts, create the conditions required to support industrialisation, job creation and economic transformation.
“The yearly wind allocation of 1 600 MW represents a ‘sweet spot’ for attracting manufacturing investment and reversing the disinvestment that took place after Eskom refused to sign new PPAs,” she says.
Following the failure of DCD Wind Towers, GRI, located at Atlantis, in the Western Cape, is the country’s only remaining wind tower manufacturer. It is likely to be able to increase its yearly output to support 750 MW of new wind capacity. Another steel tower manufacturer will, thus, probably be required in future, even though some developers are considering concrete towers.
Blade manufacturing is also likely to be expanded, with the initial REIPPPP having attracted interest from blade manufacturer LM Wind Power, which makes blades for various original equipment turbine manufacturers.
Local production of the nacelle, which houses the components that transform the wind’s kinetic energy into mechanical energy to turn a generator that produces electricity, is less likely immediately. Nevertheless, several turbine manufacturers are said to be considering local assembly should South Africa be able to restore the credibility of its REIPPPP programme.
As part of an emerging ‘just transition’ strategy, some of these new facilities could even be developed in Mpumalanga, where the majority of South Africa’s coal mines, coal-fired power stations and coal jobs are located.
Ntuli stresses, though, that the wind value chain is far larger than manufacturing, spanning professional engineering, legal and financial services upstream, to ongoing operations and maintenance downstream. Logistics is also a major feature of the industry, with abnormal loads required for the towers, blades and other components. Most of the jobs in the wind supply chain are also not located in manufacturing, but in construction.
“We see endless opportunities not only to create jobs but, as importantly, to create the environment for the development of new transformed enterprises across the value chain. For the credibility of the domestic wind industry, however, it is vitally important that we begin to see the emergence of black developers and active IPP equity owners during this next wave of wind procurement,” Ntuli concludes.