- RMB's CEO has called for government to waive local content rules for green energy projects.
- Localisation requirements add to the cost of power projects and are also very difficult to achieve.
- Load shedding will remain a risk until new power generation can fill an energy supply gap of between 4000MW and 6000MW.
As the country is once again plunged into Stage 4 load shedding, RMB is calling for government to waive localisation rules in order to quickly bring down the bring down the cost of renewable energy in South Africa.
South Africa’s localisation rules, intended to encourage local manufacturing, ultimately make renewable energy more expensive and should be waived, James Formby, CEO of the corporate and investment bank, said on Tuesday.
“Local material content rules increase the cost of wind and solar energy production," Formby said in a statement, adding that component parts are typically cheaper when imported and, depending on the item, can be 20% to 50% cheaper than those made locally as South Africa does not have the same production scale.
“The more local inputs are required, the higher the cost of energy production which means consumers are paying more for energy. Given the long-term nature of these contracts, these costs are baked in for many years," Formby said. The bank further said manufacturing processes for many renewable energy components are also largely automated, and create fewer direct local jobs than people might think.
A November report, published by the Centre for Development and Enterprise, found government's localisation strategy to be "misguided" in its aim to stoke economic growth. Rather, localisation is bound to raise costs and reduce competitiveness.
Local content rules have also been lamented by some renewable industry players, who worry that the requirements are also near-impossible to achieve. Government, due to the stop-start nature of its renewables procurement programme, has been accused of creating uncertainty and deterring investment in local manufacturing.
Cutting costs for green projects, where possible, is critical at the moment as the world economy grapples with high commodity and logistics costs which are already spurring fears that the renewable energy projects bidding in the government's latest round of the Renewable Energy Independent Power Producer Procurement programme will be unable to reach financial close at the tariff levels awarded.
RMB also took aim at import tariffs, such as those on imported steel, which make renewable energy even more expensive and should be waived to help lower the cost of solar and wind installations.
As the country faces a worst-case scenario of 100 days of load shedding this winter, South Africa urgently needs a “megawatts first” policy, Formby said. “This means the overriding goal of energy deregulation should be to get as much energy to the grid as quickly as possible to address the severe generation shortfall, currently estimated at 4 000MW to 6 000MW, which will grow as older coal-fired plants are retired. Our country desperately needs economic growth, investment and job creation. Reliable, cost-effective energy supply is the best way to build the economy and strong and resilient local industries.”
There has been notable progress in energy deregulation in South Africa over the past year.
Last year government lifted the threshold for licensing exemption for private generation from 1MW to 100MW in order to cut cumbersome red tape stalling projects.
The Presidency's Operation Vulindlela is seeking to further cut red tape on private electricity generation projects, enabling them to feed into the grid quickly.
Formby however hopes for further advances, particularly around access to local electricity distribution grids to link private generators and consumers.
He noted that Eskom also recently launched a bidding process in Mpumalanga where the intention is for private generators to lease land parcels from Eskom and construct renewable energy plants adjacent to existing grid connection infrastructure which will be used to deliver power to private buyers across the country.
“It’s a good example of a quick and efficient way to get extra energy to the grid, without committing Eskom’s balance sheet or requiring government guarantees to secure long-term power contracts," he said.