Localisation is key if the nascent wind industry is to deliver socio-economic benefits
to SA
This week, government is expected to make bidding documentation available, which
will mark the official commencement of the first phase of a new era of renewable
energy procurement in SA.
This follows months of uncertainty after the DoE announced in April that renewable energy
procurement would be progressed through a competitive bidding process instead of a REFIT
(Renewable Energy Feed In Tariff). Now with questions relating to roles and legality of the
processes between the Department of Energy (DoE), National Regulator of South Africa
(NERSA) and Treasury clarified, the industry can heave a sigh of relief and turn its attention
towards the immense benefits in the forms of jobs and growth that could flow from this.
It is anticipated that the wind industry in particular could bring new life to the economy.
According to new research from the UCT Graduate School of Business, the SA wind industry
has the potential to take the lead on the African continent, provided that steps are taken to
develop the entire supply chain of the local industry.
Specifically, explains Janos Moldvay, an independent wind industry analyst who led the
research as part of his MBA at the school, the local manufacture of wind turbines and their
component parts will have a significant effect on GDP, the current account and employment
in the country.
“The production of wind turbines could be one of the key drivers for realizing socio-economic
benefits related to a growing wind energy industry,” he said.
The GSB research, which was based on representative case studies, with reference also to
the international experience, found that the direct job creation potential if wind turbines and
most of their components are locally manufactured is 2.8 times as high (per MW installed)
than if components are imported and assembled in the country. About 0.27 total jobs are
created per MW installed, if all components are imported, versus 0.75 if most of the turbine’s
components are manufactured in SA.
“This only takes into account direct employment – including the indirect job creation potential
among South African suppliers and industry cluster effects would increase this proportional
benefit significantly,” says Moldvay.
In addition, manufacturing wind turbines in South Africa would have a beneficial impact on
GDP and the current account. The annual minimum investments necessary to reach the
Integrated Resource Plan for Electricity (2010 to 2030) target of 4500 MW of wind energy
capacity by 2019 roughly approximates to R4.2-billion, excluding costs that necessarily
accrue locally, such as site work, erection, foundation and grid connection. Importing turbines
for R4.2-billion would have increased the 2009 current account deficit by 4.33%, whereas
producing turbines mostly domestically would have only increased the deficit by 0.61%. With
regards to GDP (again using 2009 as baseline), the manufacturing of turbines locally gives
rise to an improvement of approximately 0.15 percentage points compared to importing
turbines.
“Producing wind turbines locally would ensure that the majority of the publicly funded
subsidies paid to operators will stay within the South African economy and not flow into
predominantly developed countries,” said Moldvay.
However, despite these optimistic projections, the reality is that currently there is very little
local content to realise these benefits. A proactive, long-term strategy on the part of
government and developers will need to be adopted to support and grow the local wind
industry.
The GSB study suggests an evolutionary development of the local wind energy industry with
three clear steps. In the first phase, the industry would necessarily rely largely on imports
from foreign manufacturers to supply wind turbines while measures would be put in place to
develop the local market.
In the second phase availability of local content would be increased and developers, as well
as investors and financiers, would start recognising the benefits of local manufacturing.
Reaching this phase quickly would be facilitated by policies that promote local
manufacturing, including local content requirements that are common in many countries, taxbreaks and the provision of business loans. Stimulus programmes should not be provided
solely to turbine manufacturers but also to suppliers and research and educational facilities
to foster the development of a competitive wind energy industry cluster.
In the third phase, local manufacturers dominate the supply of wind turbines to the local
market and begin to export their products into foreign markets to allow for further growth and
expansion. Support mechanisms in this phase should be aimed at fostering export, for
example through export credit assistance.
“The South African government should seek to maximize the socio-economic benefits
associated with the development of a local wind industry, especially if support mechanisms
for this development are publicly funded. Other countries such as Spain have demonstrated
that rigorous policy design and implementation, related to promoting local wind turbine
manufacturing, are a prerequisite for developing an internationally competitive domestic
industry,” says Moldvay.
Interest in SA wind industry accelerated dramatically after the 2009 publication of REFIT
offering some of the highest tariffs worldwide and, despite the current lack of clarity and
changing government policies, the potential of the industry remains solid.
“South Africa possesses many assets that could form a common competitive advantage in
the development of a South African wind energy industry cluster, such as excellent research
and development facilities, a skilled labour force, extensive industrial manufacturing
competencies, as well as enough wind energy resources and future demand for energy to
justify the development of large scale wind energy capacity,” said Moldvay.
The good news is that according to Methuli Mbanjwa, Project Manager for a Cape Townbased wind energy developer, G7 Renewable Energies and a member of the GSB’s
Sustainable Enterprise and Emergent Change research group, the bidding documentation
being released this week is expected to contain selection criteria which will promote
localisation and local content.
“As per the findings of this research, the first phase is not likely to significantly contribute to
the development of the local manufacturing industry, but lessons from this phase will assist in
furthering the development of a local manufacturing industry. While it is not clear how the
change from REFIT to price-based bidding will affect the development of the local
manufacturing industry, it is hoped that in the future, once local content is developed, the
benefits of job creation and growth of a strong wind energy industry will be realised,” he said.
Moldvay adds that the promotion of localisation will help alleviate the inherent risk of pricebased bidding, which could lead to price-dumping by multinational corporations just to kill
potential local competitors.
“Price cannot possibly be the only criteria to choose the best projects for realizing the socioeconomic potential in wind energy,” he said. “I would argue whichever projects support the
three-phase development of the industry the most should be chosen. Only a small portion of
the 4500 MW should be realized within the first phase through imports.”
Ends