the future of wind energy: a study on the prospects of wind power in south africa

8/7/2019 The Future of Wind Energy: A Study on the Prospects of Wind Power in South Africa

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THE FUTURE OF WIND ENERGY

A Study on the Prospects of W ind Pow er in South Africa

Research Paper

The Institute for Manufacturing

University of Cambridge

Dinesh Naidoo

16 February 2010

Supervisor: Jim Platts


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ABSTRACT

The challenges posed by climate change are fast emerging as one of the primary concerns for

firms, investors and governments. The electricity sector is an influential part of the domestic

economy, capable of mitigating the economic risks arising from climate change and

promoting a shift toward a low carbon economy. South Africa recognises that its electricity

sector is a high emitter of greenhouse gases and has implemented policy to promote the use

of renewable energy technologies such as wind power. Despite an abundant wind resource

and strong interest from independent power producers and other renewable energy

stakeholders, progress on the establishment of a stable wind energy market has been slow.This study examines the barriers to the development of a local wind power market, the policy

implications of promoting wind energy as an appropriate contributor to the electricity

generation mix and the actions taken by some wind developers to overcome the challenges

they face in deploying their projects.

The report finds that the slow progress in the development of the wind energy market can be

attributed to market, non-market, competitive pricing and technology lock-out barriers. The

greatest impact arising from national policy promoting wind power seems to be in the area of

job creation, while it is also argued that a rapid uptake of wind projects following the

finalisation of the legislative and regulative processes delaying widespread IPP involvement

in the electricity generation sector could hasten the shift to a low-carbon economy. Finally,

the report finds that most wind developers have adopted a wait-and-see approach to wind

projects in the country.

In this context, the report argues that the prospects for wind power are positive, as evidenced

by recent government initiatives and interventions in the electricity market, but these

prospects are still uncertain. The future of the industry depends on government creating a

transparent and efficient framework for the development of a renewables market, which

suggests that there is still a learning threshold that must be crossed by the administration

before a stable energy market for renewables can be realised.


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CONTENTS

1 INTRODUCTION 1

1.1 RESEARCH AREA 2

1.2 PROBLEM STATEMENT 3

1.3 PURPOSE OF THE RESEARCH 4

1.4 RESEARCH SCOPE 4

1.5 RESEARCH ETHICS 4

1.6 CHAPTER ORGANISATION 4

2 LITERATURE REVIEW 5

2.1 THE SCIENCE AND ECONOMICS OF CLIMATE CHANGE 5

2.2 DOMESTIC INTEREST IN CLIMATE CHANGE 6

2.2.1 Long Term Mitigation Scenario 7

2.2.2 South African Climate Policy 8

2.3 THE REGULATORY ENVIRONMENT 9

2.3.1 The National Energy Policy and the link to Wind Energy 9

2.3.2 The Renewable Energy Feed-In Tariff 12

2.3.3 Other Government Initiatives 13

2.4 TECHNICAL ASPECTS OF WIND POWER 18

2.4.1 Electricity Generation 18

2.4.2 Construction 18

2.4.3 Configuration 19

2.5 ECONOMIC ASPECTS OF WIND POWER 19

2.5.1 Initial Capital Costs 20

2.5.2 Variable Costs 23

2.5.3 Resource Base and Power Production Costs 232.6 SOUTH AFRICAN ELECTRICITY SECTOR 24

2.6.1 Structure 24

2.6.2 Size of the Industry 25

2.6.3 Liberalisation of the Market 26

2.7 CONCLUSION 27

3 RESEARCH QUESTIONS 28

4 RESEARCH METHOD 28


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4.1 OBJECTIVE 28

4.2 APPROACH 29

4.3 DATA COLLECTION METHODS 29

4.4 TRANSFERABILITY 29

4.5 RESEARCH LIMITATIONS 29

5 DISCUSSION 31

5.1 MARKET BARRIERS 31

5.2 NON-MARKET BARRIERS 32

5.3 COMPETITIVE PRICING 35

5.4 TECHNOLOGY LOCK-OUT 36

5.5 POLICY IMPLICATIONS 36

6 CONCLUSIONS 39

6.1 GENERAL FINDINGS OF THE RESEARCH 39

6.2 MAJOR FINDINGS OF THE RESEARCH 42

7 REFERENCES 43


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LIST OF TABLES

TABLE 1: SCHEDULE OF CLIMATE POLI CY IMPLEMENTATION 9

TABLE 2: PUBLISHED REFIT RATES AS AT 26 MARCH 2009 13

TABLE 3: CAPITAL COST STRUCTURE OF A 2 MW TURBINE IN EUROPE 20

TABLE 4: POTENTIAL OF RENEWABLE ENERGY IN SOUTH AFRICA 26

TABLE 5: EMPLOYMENT POTENTIAL DATA 37


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LIST OF FIGURES

Figure 1: General Distribution of W ind Power Potential in South Africa 10

Figure 2: Season Variation in Mean Wind Speed 11

Figure 3: Distribution of Clean Development Mechanism Projects 15

Figure 4: Modern Turbine Configurations 19


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1 INTRODUCTION

Climate change poses a major risk to the global economy: it affects the wealth of societies,

the availability of resources and the price of energy. A business as usual scenario may lead to

a catastrophic transformation of the planet and recent scientific evidence points to an urgent

need for reducing greenhouse gas emissions (Meinshausen et al., 2009). A significant level

of these emissions has historically originated from the energy sector in high-income

countries. Stern (2007, pp 175) suggested that less than 25% of cumulative emissions have

been caused by developing countries. However, this situation is changing as the demand for

energy in the developing world is growing. This demand for energy is a result of high

economic growth in some countries and is concomitant with a strong desire for poverty

elimination primarily in Africa and Asia. This demand for energy has been met mostly by the

combustion of fossil fuels in electricity generation, which has contributed to the increase in

greenhouse gas emissions. The International Energy Agency (IEA) reports that global

energy-related emissions will rise by 45% between 2006 and 20301. Further, it is suggested

that 97% of this increase in emissions is expected to originate from non-OECD countries.

Therefore, the challenge lies in decoupling energy and greenhouse gas emissions so that

more widespread energy use and decreasing emissions can be achieved simultaneously

(Pegel, 2009, pp 4).

The use of renewable energy technology on a large scale to replace fossil fuel electricity

generation must be part of the climate change mitigation strategy. The benefit of renewables

is two-fold. Firstly, they offer a means to reduce greenhouse gas emissions and this is a

crucial priority for the global economy. Secondly, renewable energy can help diversify the

energy supply in most countries (Neuhoff, 2009, pp 1). Reducing dependence on energy

imports reduces the exposure of a country to international fuel price fluctuations and potential

security of supply issues arising from political instability. In addition, it can be argued that

renewables provide cleaner energy and as such contribute benefits to the environment and

human health.

1

Source: http://www.worldenergyoutlook.org. Retrieved on Monday, 25 January 2010.


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A growing body of research reveals that renewables have a large technical potential.

However, renewables only supply 13.5% of global energy demand with most of this supply

being generated by established sources of hydro-power and small scale wood fuel and

biomass combustion, which are limited in their potential expansion (Neuhoff, 2009, pp 1).

In this context, wind energy is an alternative clean energy source and has been the worlds

fastest growing renewable energy source with a growth rate of 28% in the past decade2. It has

been reported that India, China, the United States, Spain and Germany together installed over

20 GW of wind power in 2007 (NERSA, 2009). It is suggested that wind power has the

advantage of being harnessed on a local basis for application in rural and remote areas

(Jagadeesh, 1988). The growth in the wind power market can be attributed to the fact that it is

a clean energy source with the technology offering zero fuel costs and industrial-scale on-grid

capacity. The expansion of the market has led to a decrease in wind power costs which has

contributed to its attractiveness as a feasible energy alternative (Ibenholt, 2002). In the best

locations, wind is already competitive with new coal-fired plants (Pallav and Michaelowa,

2007, pp 2). The successful wind business has attracted the attention of the banking and

investment market in addition to governments that are seeking economical ways to mitigate

climate change and energy demand problems.

1.1 RESEARCH AREA

The South African government, led by the then Department of Environmental Affairs and

Tourism has outlined different scenarios of mitigation action to inform long term national

policy and to provide a solid basis for its position in multilateral climate negotiations on a

post 2012 climate regime (ERC, 2007, pp 1). The Long Term Mitigation Scenarios revealed

possible emission pathways from 2003 to 2050. One is a business-as-usual scenario without

any constraints on the growth of emissions and the other a mitigation scenario. The former

was dismissed as being neither robust nor plausible (ERC, 2007). The latter scenario aims at

reducing emissions by 30 to 40 percent between 2003 and 2050. In this scenario, four options

2 Source: http://www.gwec.net. Position Paper on the IEA World Energy Outlook 2006. Retrieved on Monday,

25 Jan 2010.


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Research Paper 3

with differing levels of ambition are identified3. The final and most ambitious option Reach

for the Goal combines the efforts of the other three and incorporates the use of new

technologies and behavioural change only this option achieves the envisaged emission

reductions, but it entails a high level of uncertainty. The LTMS also concluded that

renewable energy technologies face challenges due to intermittency of the source and

distribution, which at larger shares may require additional investment in the system, e.g.

storage (ERC, 2007, pp 28).

The electricity sector is the highest source of greenhouse emissions and as such all mitigation

options involve changes in that area. These changes have been slow to develop and the

penetration of wind power as an alternative energy source has been shallow. However, the

impact of serious power shortages as a result of rising demand an inadequate investment in

additional supply has created a tense situation in South Africa. The public outcry over the

poorly developed renewables energy sector has forced the government to take a more active

stance in stimulating this industry. The sufficiency of this response by government is largely

unknown making this an interesting area for new research.

1.2 PROBLEM STATEMENT

There are a few Independent Power Producers (IPP) ready to develop wind farms in South

Africa. However, these developers face a number of barriers to investment in the renewables

sector in South Africa. Pegels (2009) reports that the two major barriers to investments in

renewable energy technologies are based in the local energy innovation system and in its

inherent power structure as well as in the economics of renewable energy technologies. In

addition, there seems to be limited awareness by external stakeholders on the sustainable

development benefits of wind energy to South Africa. In this context, it can be argued that a

problem exists in the manner in which to encourage the continued expansion of the wind

power market within this emerging economy.

3

The four options identified are Start Now, Scale Up, Use the Market and Reach for the Goal.


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1.3 PURPOSE OF THE RESEARCH

This study shall review the motivation behind a domestic renewable energy market, the

technological and economic fundamentals of wind power, the structure of the domesticelectricity sector and barriers to the penetration of wind power in South Africa. It shall also

review the ways in which government is promoting the proliferation of this alternative energy

source and examine some of the actions taken by wind power developers to overcome market

challenges.

1.4 RESEARCH SCOPE

The scope of this report shall be limited to a review of the renewable energy policies and practices of the government as well as explore the market development activity of wind

power developers in South Africa.

1.5 RESEARCH ETHICS

There is an ethical risk to the respondents of the proposed survey. However, this risk shall be

minimized by keeping the identities of each participant secret while their answers to the

survey shall be used only with their written consent.

1.6 CHAPTER ORGANISATION

Section 2 [Literature Survey] shall provide an overview of the current knowledge about

climate change, domestic energy regulatory policy, technical and economic aspects of wind

energy as well as the structure of the electricity sector in South Africa. Section 3 [Research

Questions] presents the key questions that the research aims to address. Section 4 [Research

Method] shall describe the important details of the research methodology that is to be

followed in the collection of data. This section shall also discuss research design,

transferability as well as research limitation issues. Section 5 [Discussion] shall describe the

current barriers faced by the wind power market in South Africa. In addition, the section shall

discuss the implications of national policies to promote wind power as an alternative energy

source. Section 6 shall present the conclusions of this study.


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2 LITERATURE REVIEW

A crucial element of the survey discusses the increasing body of knowledge being developed

in the domestic regulatory environment, which has potential impacts for various wind power

stakeholders.

2.1 THE SCIENCE AND ECONOMICS OF CLIMATE CHANGE

The problem of climate change is widely regarded as the most serious environmental

challenge facing the modern world. The science behind climate change suggests that there are

increasing concentrations of carbon dioxide (CO2) and other greenhouse gases in the earths

atmosphere as a result of human activities. This has been shown to contribute to increased

global atmospheric temperatures (global warming) and related changes in the worlds climate

system. A strong argument in support of the effect of human activities on climate change was

presented in a report by the United Nations Intergovernmental Panel on Climate Change

(IPCC)4, which concluded:

The earths surface temperature has increased 0.74 C, mostly in the last 50 years possibly making this the warmest period of the past 1300 years.

Carbon dioxide emission and temperature trends are at the high-end of the rangeforecasted by the IPCC, with the global average temperature increasing approximately

0.1 C per decade.

The rate of sea level rise has increased 70 percent since 1993 compared to theprevious 30 year period.

The frequency of heat waves, forest fires and heavy precipitation events has increasedglobally since 1950.

It can be argued that the economic implications of climate change could be disastrous in a

global economy facing USD 100 barrel oil and a projected 50 percent increase in energy

4 Pachauri, R., Reisinger, A. and Core Writing Team. (2007). Climate change 2007: Synthesis Report. Geneva:IPCC.


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demand over the next 25 years. In fact, the potential economic impacts of climate change

where brought into sharp focus with the publication of the Stern Review5. The report

suggested that human action relating to climate change, over the ensuing decades, could

create risks of major disruptions to economic activity and that costs of extreme weather

conditions could reach between 0.5 and 1 percent of global GDP per annum by the middle of

the 21st Century. However, his viewpoint has since changed as evidenced by recent

admissions to the press - he commented that climate change mitigation would cost 2% of

global GDP per annum, which was double his estimate proposed in 2006 (Jowit and Wintour,

2008). This was followed by a statement indicating that the damages were under-estimated

by the Stern Review and the costs of inaction are even bigger than previously argued (Smith,

2009, pp 1). Crucially, he contends that the cost of inaction could be as high as 30% from his

previous estimate of 20% in 2006. Therefore, it is not surprising that cost impacts from

extreme weather events and greenhouse gas (GHG) regulation are emerging as risk factors in

pricing securities and assigning credit and asset valuations (Cogan, 2008, pp 11).

2.2 DOMESTIC INTEREST IN CLIMATE CHANGE

The Intergovernmental Panel on Climate Change (IPCC) reports that Africa is one of the

most vulnerable continents to climate change and climate variability, a situation aggravated

by the interaction of multiple stresses, occurring at various levels, and low adaptive

capacity (Boko et al., 2007, pp 435). In addition, the report suggests that the continents

major economic sectors are vulnerable to current climate sensitivity, with huge economic

impacts, and this vulnerability is exacerbated by existing developmental challenges such as

endemic poverty, complex governance and institutional dimensions; limited access to capital,

including markets, infrastructure and technology; ecosystem degradation; and complex

disasters and conflicts.

South Africa has identified its own vulnerability to climate change and recognises that it is

also a contributor to greenhouse gas emissions. In 2005, it was responsible for approximately

1.1% of global emissions and 40% of emissions in sub-Saharan Africa (Pegel, 2009, pp 7).

5 Stern, N. (2006). Stern review on the economics of climate change. United Kingdom: Cambridge UniversityPress.


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Pegels (2009, pp 8) suggests that as incomes rise and the government progresses in its efforts

to provide universal access to electricity, emissions intensity is expected to increase if current

carbon intensity of electricity generation is maintained. In response to this situation, the

government produced two Long-Term Mitigation Scenarios in 2007.

2.2.1 Long Term Mitigation Scenario

The RSA Government commissioned a process in 2006 to examine the potential mitigation

of our countrys greenhouse emissions. The process was to be informed by the best available

information. The process aimed to produce Long Term Mitigation Scenarios (LTMS) that

would provide a scientific analysis from which the government could draft a long-term

climate policy (SBT, 2007, pp 1).

The key findings of the LTMS process were:

South Africa could grow without carbon constraints and benefit economically, but thiswill be concomitant with increasing carbon emissions. It is proposed that a four-fold

increase in our emissions by 2050 would not be tolerated by the international community.

There are certain quantifiable strategic mitigation options which are immediatelyimplementable. These include: energy efficiency primarily in industry; electricity supply

options; carbon capture and storage (CCS); transport efficiency and shifts and

people-orientated strategies supported by awareness.

South Africa can choose both regulatory and economic instruments. However, neither ofthese completely addresses emissions reductions sufficient to meet the required by

science targets. Nevertheless, with an escalating carbon dioxide tax, economicinstruments are the most effective by almost 75%.

The LTMS conclusions were taken to Cabinet in July 2008. Thereafter, a number of decisions

were taken that provided an overarching framework for the development of a Climate Change

Response Policy for South Africa.


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2.2.2 South African Climate Policy

The decisions taken by government and which were reported in the National Climate Change

Response Policy included the following (DEAT, 2009):

Greenhouse Gas Emission Reductions and Limits: South Africa intends to pursue a peak,stabilization and decline greenhouse gas trajectory over the next 60 years. This would

mean that emissions will peak during the period 2025 to 2035, will stabilize within the

2050 to 2060 period and thereafter decline.

Expand, Strengthen or Scale-up Existing Initiatives: The government aims to deepen,extend and scale-up existing initiatives around energy efficiency, renewable energy, the

development of green industries, current research into climate friendly business

methods in order to achieve a greater impact.

Implement the Business Unusual Call for Action: South Africa intends to prioritizeinvestment into research and technology development that would make a major impact on

greenhouse gas emissions. This would include investments in R+D for electric and hybrid

vehicles, new solar technologies, clean coal technologies, carbon capture and storage as

well as participation in a range of other national and international initiatives that could

achieve breakthroughs in achieving low carbon ways of doing business.

Vulnerability and Adaptation. South Africa recognizes its vulnerability to the impacts ofclimate change. Consequently, it commits to improving awareness across government and

society on the potential impact of climate change and is prepared to meet the resultant

challenges.

Preparing for the Future: Government has decided to launch a policy developmentprocess that would result in a national Climate Change Response Policy in the form of a

White Paper.

Subsequently, a National Climate Change Response Policy Development Summit was held

from 03 to 06 March 2009 (Midrand, South Africa), which laid the foundations for a

participatory process that is to culminate in a Policy White Paper on Climate Change by

2010. The translation of this policy into a legislative, regulatory and fiscal package is

expected by 2012. Table 5 presents the timetable that was proposed to guide the process.


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Table 1: Schedule of Climate Policy Implementation(DEAT, 2009)

Milestone Deadline

Sectoral Policy Development Initiatives Sep 2009

Post-2012 UNFCCC Negotiation Positions Aug 2009Post-2012 UNFCCC Negotiation Complete Dec 2009

National Policy Revised in Alignment with International Commitments Mar 2010

Publication of Green Paper for Public Comment Apr 2010

Publication of National Climate Change Response Policy Dec 2010

Translation of Policy into a Regulatory, Legislative and Fiscal Package Present - 2012

2.3 THE REGULATORY ENVIRONMENT

The role of government is to provide leadership on mitigation measures through the

introduction of policy and regulatory structures within which solutions for climate change can

operate. It is crucial that government place a price on carbon and stimulate demand for

products in the renewable energy market and to communicate a clear message to the financial

services industry that climate change demands a serious commitment in time and resources.

2.3.1 The National Energy Policy and the link to Wind Energy

Prior to the global acceptance of climate change issues, the need for alternative renewable

sources of power generation were sought by the national government in the interests of

security of supply. The governments Energy White Paper (1998) identified the countrys

attractive renewable energy resources with special priority given toward wind and solar

resources. This Energy White Paper laid the basis for the publication of a White Paper on

Renewable Energy (2003) by the Department of Minerals and Energy (DME). The document

presented a renewable energy contribution target of 10,000 GWh to final energy consumption

by 2013. However, the target is cumulative over the 10 year period and as such is equivalent

to an average 1,000 GWh per annum.

The DME estimates of the wind energy potential were based on research performed by Diab

(1995), which concluded that:

Wind power potential is generally good along the entire coast with localised areas,such as the coastal promontories, where potential is very good, i.e., mean annual

speeds are above 6 m/s and power exceeds 200 W/m2

;


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Moderate wind power potential areas include the Eastern Highveld Plateau,Bushmanland, the Drakensberg foothills in the Eastern Cape and KwaZulu-Natal; and

Areas with low wind power potential include the Folded Mountain Belt, the Westernand Southern Highveld Plateau, the Bushveld Basin, the Lowveld, the Northern

Plateau, the Limpopo Basin, Kalahari Basin, the Cape Middleveld and the interior of

Kwa-Zulu Natal (refer: Figure 1).

The upper limit of wind energy available to be captured in South Africa is estimated at 3 GW

(Diab, 1988). Taking a conservative estimate of 30% conversion efficiency and 25% capacity

factor, it was estimated that wind power could supply at least 1% of South Africas projected

electricity requirements (198,000 GWh) in 2002. This excludes the offshore wind energy

potential which should also be assessed (refer: Box 1).

Figure 1: General Distribution of Wind Power Potential in South Africa (Adapted: Diab,1995, pp 136)


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Box 1: Generation Costs - The Location of a Wind Farm

Figure 1 provides a broad view of the wind potential in South Africa, but it is not very effective in pin-pointing the best locations to site a wind farm. The location of a wind farm is crucial to its lifetime generation

costs since mean site wind speed strongly influences the cost of wind power. Milborrow (2010, pp 43)

indicates that wind power is cheapest when a plant is built on a windy, but accessible site close to theelectricity grid, which can bring its cost down to EUR 1,200 / kW or less. However, high wind speeds i.e.greater than 7 m.s-1 are not likely at such locations. He suggests that stronger winds are found in remotelocations, where it is usually more expensive to build a wind farm, but given high wind speeds a plant costingEUR 1,800 / kW can be fully competitive with thermal plants. Figure 2 reveals more detail about the

distribution of the countrys wind resource and also reveals the seasonal variation in the strength of the windspeeds.

Summer [Dec, Jan, Feb] Autumn [Mar, Apr, May]

Winter [Jun, Jul, Aug] Spring [Sep, Oct, Nov]

9 m.s-1

8 m.s-1

7 m.s

-1

6 m.s-1

5 m.s-1

4 m.s

-1

Figure 2: Season Variation in Mean Wind Speed[Adapted: Hageman (2008)]

In order to achieve its renewable energy target, the government is committed to strengthening

competition within the electricity market. Currently, it is actively seeking ways to create an

effective enabling environment for Independent Power Producers that are proponents of

renewable energy sources.


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Metcalf (2009) reports that according to position papers developed by the DME (Department

of Minerals and Energy) in 2009, three alternative policy options have been identified for

facilitating the rapid growth of the renewables market in South Africa. These include:

tendering mechanisms which involve a government sponsored competitive biddingprocess for the acquisition of renewable electricity such that long-term contracts are

awarded to lowest price projects;

quantity based renewable energy portfolio standards, which require a minimum shareof power supply or a minimum level of installed capacity in a given region is met by

renewable energy; and

price based feed-in-laws that require mandatory repurchase of renewable energy at afixed price.

The Renewable Energy Feed-In Tariff (REFIT) is the governments most recent policy

instrument to facilitate the growth of the renewable energy market.

2.3.2 The Renew able Energy Feed-In Tariff

The REFIT scheme was first successfully applied in Germany (Pegels, 2009, pp 4). It has

spread to more than 40 countries worldwide and is reported to be the most common and

probably the most effective policy instrument used to support renewable technology

implementation (Mendonca, 2007, pp 8).

The REFIT guarantees energy producers fixed tariffs for power from renewable energy

sources over a predetermined period of time the norm for most schemes being 10 to 20years. The REFIT permits long-term investment planning by eliminating uncertainty over

revenues and the tariffs are usually differentiated according to the type of renewable

technology being supported. The tariffs are set to exceed the normal electricity price paid by

power consumers in the form of a premium per kilowatt hour. This premium is meant to

compensate the investor for his/her costs and allow for a reason rate of return on the

investment. In some schemes, the tariffs are periodically adjusted to protect consumers from

high pricing and to ensure cost benefits from technology learning curves can be incorporated.


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In the local context, the National Energy Regulator of South Africa (NERSA) released a

revised set of REFIT rates following a stakeholder engagement process in 2009 (refer:

Table 1). The tariffs are guaranteed for 20 years and shall be reviewed annually for the first

five years. Thereafter, the tariffs will be reviewed every three years to avoid lock-in of

inappropriate tariffs. The tariffs are differentiated according to the type of technology and it

is expected that this system will allow licensees to recuperate the complete cost of their

licensed activities as well as a reasonable return.

Table 2: Published REFIT Rates as at 26 March 2009(Adapted: NERSA, 2009, pp 12)

Renewable Technology Rate [ZAR/kWh]

Wind 1.25

Hydro 0.94

Landfill Gas 0.90

Concentrating Solar 2.10

2.3.3 Other Government In itiatives

Clean Development Mechanism

The CDM (Clean Development Mechanism) is one of the flexible mechanisms provided by

the Kyoto Protocol. It allows emission-reduction (or emission removal) projects in

developing countries, such as renewable energy projects, to earn Certified Emission

Reduction (CER) credits, each equivalent to one tonne of carbon dioxide. These CERs can be

traded and sold, and used by industrialized countries to a meet a part of their emission

reduction targets under the Kyoto Protocol. The mechanism stimulates sustainable

development and emission reductions, while giving industrialized countries some flexibility

in how they meet their emission reduction limitation targets.

The projects must qualify through a rigorous, public registration and issuance process

designed to ensure real, measurable and verifiable emission reductions that are additional to

what would have occurred without the project. The mechanism is overseen by the CDM

Executive Board, answerable ultimately to the countries that have ratified the Kyoto Protocol.

In order to be considered for registration, a project must first be approved by the Designated


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National Authorities (DNA)6. The system allows developers of low carbon projects to

generate carbon credits and sell these in the international carbon market.

The government promotes clean investments by offering tax exemptions for CDM revenues.

On 1 June 2009, the draft Taxation Laws Amendment Bill was released for comment by the

National Treasury, along with a Draft Explanatory Memorandum. The memorandum

explained two tax relief instruments associated with certified emission reduction credits

(Curnow and Hodes, 2009, pp 63).

Income Tax Treatment of CERs: The Bill proposes to amend the Income Tax Act(1962) to provide for an income tax incentive for the disposal of CERs from

registered CDM projects in South Africa. The proposal is for such CERs to be wholly

exempt from income tax which, if accepted, has the potential to increase a projects

bottom line by approximately 28%7 .

Value Added Tax (VAT) Treatment of CERs: The Memorandum also clarified thetreatment of CERs under the classification of a right, facility or advantage

rather than a good. The supply of CERs is to be considered, for the purposes of

VAT treatment, as provision of a service. Since the documentary requirements for

the supply of services are less stringent than for the supply of goods, this would

represent a de facto advantage to CDM project participants in South Africa. Further,

based on the assumption that all CERs generated in South Africa will be exported for

use by Annex I countries or entities, the Memorandum indicates that the supply of

CERs by persons operating CDM projects will, by default, be exempted from VAT in

terms of normal domestic VAT rules.

Currently, the majority of CDM projects are located in China and India (refer: Figure 3).

However, Pegels (2009, pp 20) suggests that there is a significant potential for CDM projects

in South Africa. She suggests that the high emissions produced from the use of coal translate

into a high potential for major reductions. The levels of technological and economical

6 Source: http://cdm.unfccc.int/about/index.html. Retrieved on Wednesday, 27 January 2010.7 This is based on current local corporate taxation rates.


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development are also comparatively high, which when combined with the countries abundant

store of renewable energy resources provides an attractive project development and

investment climate in South Africa. Fakir and Nicol (2008) corroborate this view estimating

that ZAR 5.8 Billion could be earned from the sale of CDM credits generated in South Africa

by 2012.

Figure 3: Distribution of Clean Development Mechanism Projects. (Adapted: UNEP Risoe

Centre, 2010)

Renewable Energy and Finance Subsidy Office

Metcalf (2009) reports that the Renewable Energy and Finance Subsidy Office (REFSO)

were established to provide capital subsidies to renewable energy projects in 2005. The key

objective of the subsidy systems is to increase the share of renewable energy in the countrys

energy supply mix. The system provides incentives to developers and utilities to implement

renewable projects by reducing the risk and using the system to attract other sources of

finance for renewable energy projects (Posorski and Werner, 2009, pp 267). REFSO offers

one-off capital subsidies (R 1,000 per KW with a maximum of 20% on total capital cost) to

qualifying renewable energy projects and stipulates the following criteria:

Projects should use commercially viable technologies, generate at least 1 MW ofpower and be located within the borders of South Africa.;

South Africa, 1%

Brazil, 7%

Mexico, 3%

India, 25%

China, 40%

Others, 24%


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Projects must have undergone pre-feasibility studies; The capital costs should not exceed R100 million8; There must be a potential purchaser of the renewable energy being supplied; and Projects should have a high probability of reaching financial closure within one year.

Six projects were implemented and subsidised for a total amount of ZAR 15 M9. The

government recognises the relatively insignificant amount of this subsidy with regard to the

large capital costs of establishing new renewable projects and has committed to strengthening

the REFSO and other development finance institutions that fund the renewable energy

projects (DME, 2009, pp 5).

Carbon Tax

South Africa has also implemented a environmental levy on non-renewable energy, which

was included as part of a 31.30% electricity tariff increase approved by NERSA (National

Energy Regulator of South Africa) as at 01 July 2009. The environmental levy is ZAR 0.02

per kWh and is essentially a carbon tax.

Komanoff and Rosenblum (2009) argue that a carbon tax must be the central mechanism for

reducing carbon emissions. Currently, the prices of petrol, electricity and fuels in general

include none of the costs associated with devastating climate change. It is suggested that this

omission suppresses incentives to develop and deploy carbon-reducing measures such as

energy efficiency e.g. high-mileage cars and high-efficiency heaters and air conditioners;

renewable energy e.g., wind turbines, solar panels; low-carbon fuels e.g. bio-fuels from

high-cellulose plants, and conservation-based behaviour such as bicycling, recycling and

overall mindfulness toward energy consumption. Conversely, taxing fuels according to their

carbon content will infuse these incentives at every chain of decision and action.

Cap and Trade System

A carbon tax is not the only way to place a price on carbon emissions. A more sophisticated

alternative approach supported by some prominent politicians, corporations and mainstream

8 This condition is currently under review.9 This includes the Darling National Demonstration Wind Farm.


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environmental groups is the cap and trade system. This system is operational in the European

Union, but has not been initiated in South Africa. The Environmental Protection Agency

(EPA) reported that Cap and Trade systems are similar to Carbon Tax measures in that they

are market-based and create a price for emissions. However, the fundamental difference

between the two mechanisms is the way in which they establish a price and reduce emissions.

A Cap and Trade system determines a certain known limit on emissions, causing the price of

allowances to be established by supply and demand. A carbon tax imposes a direct fee but

does not set a limit on emissions. As a result, the emission reductions resulting from the

carbon tax is unknown. In addition, the EPA advises that the Cap and Trade approach is most

effective and best applied in situations where:

emissions have longer residence times; the environmental and/or public health concern has broad geographic impacts; a significant number of sources are responsible for the problem; the cost of controls varies from source to source; emissions can be consistently and accurately measured; and strong regulatory institutions and financial markets exist.

The final objective of both a carbon tax and cap and trade system is to ensure the reduction in

greenhouse gas emissions. However, Komanoff and Rosenblum (2009) propose that the

former is a more effective mechanism for the following reasons:

carbon taxes will lend predictability to energy prices, whereas cap-and-trade systemswill do little to mitigate the price volatility that historically has discouraged

investments in less carbon-intensive electricity generation, carbon-reducing energy

efficiency and carbon-replacing renewable energy.

carbon taxes can be implemented much sooner than complex cap-and-trade systems.Carbon taxes are transparent and easily understandable, making them more likely to

elicit the necessary public support than an opaque and difficult to understand cap-and-

trade system.

carbon taxes can be implemented with far less opportunity for manipulation by specialinterests, while a cap-and-trade systems complexity opens it to exploitation by


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special interests and perverse incentives that can undermine public confidence and

undercut its effectiveness.

carbon tax revenues can be rebated to the public through tax-shifting10, while the costsof cap-and-trade systems are likely to become a hidden tax as money flow to market

participants, lawyers and consultants.

2.4 TECHNICAL ASPECTS OF WIND POW ER

2.4.1 Electrici ty Generation

The wind has considerable kinetic energy when moving at high speeds (Patel, 1999). This

energy when passing through the blades of a wind turbine is converted into mechanical

energy and rotates the wind blades, which in turn is connected to a generator this transfer of

energy to the generator produces electricity (Burton et al., 2001).

2.4.2 Construction

A wind turbine primarily consists of a main tower, blades, nacelle, hub, main shaft, gearbox,

bearing and housing, brake and generator (Spera, 1994). The main tower can be between 50

and 100 m high. Typically, three blades manufactured from fibre reinforced polyester are

mounted on the hub, while the major components are located in the nacelle. Patel (1999)

suggests that under normal operating conditions the nacelle would be facing the upstream

wind direction. The hub connects the gear box and the blades, while solid high carbon steel

bars are used as the main shaft. The function of the gearbox is to increase the speed ratio so

that that the rotor speed is increased to the rated generator speed (Burton et al., 2001). Oil

cooling is employed to manage the heating of the gearbox during operation while the

dampers situated under the gearbox assist in minimising vibration. The gearbox can be

considered the most critical component since its failure could mean the shutdown of a wind

10 This means that each rand of carbon tax revenue would trigger a rands worth of reduction in existing taxessuch as the PAYE or national sales tax. It is argued that as carbon-tax revenues are phased in line with

increasing tax rates, existing taxes will be phased out and possibly eliminated


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plant, possibly for an entire season depending on the availability of spares. Consequently, the

gearbox requires regular maintenance.

2.4.3 Configuration

Modern turbines can be classified into two basic groups: horizontal and vertical axis turbines

(refer: Figure 4). The former design is most common in the modern era, making up most of

the large utility-scale turbines in the global market (Purohit and Michaelowa, 2007).

Figure 4: Modern Turbine Configurations(Source: Purohit and Michaelowa, 2007)

2.5 ECONOMIC ASPECTS OF WIND POW ER

The applications of wind power are numerous and can include both grid-connected and

stand-alone electricity production and water pumping systems. Historically, windmills have

been used primarily for water pumping applications in South Africa. However, this market is

in decline and is not expected to recover (Karottiki et al., 2001, pp 75). Therefore, this review

of existing literature will focus primarily on the economics of wind energy in relation to

grid-connected turbines.

Krohn et al. (2009, pp 29) suggest that the key elements that determine the basic costs of

wind energy are: capital costs (primarily the turbines); turbine installation costs; the cost of


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capital i.e. the discount rate; operational and maintenance costs; other project development /

planning costs; turbine lifetime and electricity production costs i.e. the resource base and

energy losses. Table 3 presents the cost structure of a typical wind turbine installed in

Europe. It can be noticed from Table 3 that an average turbine in Europe has a total

investment cost of approximately EUR 1.23 M per MW. The turbines share of the total cost

is the highest at 76%, while grid-connection and foundation costs amount to approximately

9% and 7% respectively.

Table 3: Capital Cost Structure of a 2 MW Turbine in Europe (Source: Krohn, 2009)

Cost Component Investment

[EUR 1,000 per MW]

11

Share of Total Cost

[%]Turbine [ex works] 928 75.60

Grid Connection 109 8.90

Foundation 80 6.50

Land Rent 48 3.90

Electric Installation 18 1.50

Consultancy 15 1.20

Financial 15 1.20

Road Construction 11 0.90

Control Systems 4 0.30

Total 1,227 100

It is argued that in terms of variation, the single most important additional cost (apart from

the turbine cost) is the cost of grid connection, which can account for almost half of the

auxiliary costs (Krohn et al., 2007, pp 31). This cost is followed by lower shares of the total

cost attributable to foundation and electrical installation costs respectively. Typically, the cost

components such as consultancy and land only account for a minor share of additional costs.

2.5.1 In itial Capital Costs

Turbine Costs

The wind turbine including the cost of blades, towers, transportation and installation

constitute the largest cost component of a typical wind farm a cost amounting to

approximately 75% of the capital cost.

11 This is calculated by the author based on selected data for wind turbine installations in Europe. It is also

references 2006 prices.


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The wind turbine is priced in proportion to its swept surface area and usually in proportion to

the square of their hub height. The size of the generator of a wind turbine plays a fairly minor

role in its price, even though the rated power of the generator tends to be fairly proportional

to the swept rotor area (Krohn et al., 2009, pp 38). Wind turbines that are constructed for

rougher climates, cold temperatures, in deserts or for offshore conditions are generally more

expensive than those built for more clement climates. In addition the technological cost of

wind turbines also increases in accordance with stricter technical requirements imposed by

transmission operators. However, the costs of wind turbines are also influenced by other

issues such as the lifetime of the turbines onshore and offshore, the increase in turbine size

and the cost decreases that have been achieved by the swept rotor area.

Wind turbines tend to be type-certified for clearly defined external conditions. The

certification is requested primarily by investors and insurance companies and states that the

turbine shall be secure and fit-for-purpose for their intended lifetime of approximately 20 or

25 years for onshore and offshore projects respectively. The wind conditions at sea are less

turbulent at sea than on land. Therefore, turbines offshore are type-certified for 25 to 30

years. However, installation costs at sea are much higher than onshore so life extension is an

important criterion. The lifetime of the turbine is an important concern for investors since

profitability of the investment in the plant is dependent on the duration of the operational

period of the plant after pay-back of the initial investment.

The size of a turbine can influence the associated costs of the plant small wind turbines

remain much more expensive per kW installed than larger turbines. Krohn et al. (2009, pp 39)

argues that this is partly because towers need to be higher in proportion to diameter in order

to clear obstacles to wind flow and escape the worst conditions of turbulence and wind shear

near the ground. However, the main reason is attributable to the fact that controls, electrical

connection to the grid and maintenance are a much higher proportion of the capital value of

the system in small turbines than in larger ones.

The swept rotor area is a better indicator of the production capacity of a wind turbine than the

rated power of the generator. In addition, the costs of manufacturing large wind turbines are


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roughly proportional to the swept rotor area (Krohn, 2009, pp 42). Krohn et al. (2009) argues

that when the rotor area is used, instead of the installed power rating, as a measure of turbine

size the result is smaller energy productivity increases per unit of turbine size and a larger

increase in cost effectiveness per kWh produced. Consequently, total investment costs should

be evaluated on the basis of swept rotor area (ZAR per m2) to establish the correct return on

investment potential of a wind project.

Installation and Other Costs

Krohn et al. (2009) suggest that wind turbine installation costs notably include: foundations;

road construction; subterranean cabling within the wind farm; low to medium voltage

transformers; medium to high voltage substation; transport; craning; assembly and testing;

administrative, financing and legal costs. Usually, larger turbines have comparatively lower

installation costs per swept rotor areas while the cost of turbine components such as

electronic controllers, foundations, etc. vary less than proportionately with the size of the

wind turbine.

There is a cost implication with electrical grid connection of wind turbines. The larger wind

farms are typically connected to the high voltage electrical transmission grid (60 kV and

above), whereas individual turbines or clusters of turbines are connected to the distribution

grid (8 to 30 kV). In the event that the local grid is already saturated with other electrical

equipment, additional grid connection costs could arise from upgrading the grid to

accommodate the introduction of the wind turbines to the grid. Depending on regional

policies the wind turbine owner may be expected to pay a part of the grid connection costs

or this cost may be covered by the transmission company.

Other costs associated with wind farms tend to the result of stringent requirements for

environmental impact assessments, which can be higher than wind resource mapping costs.

Krohn et al. (2009, pp 44) suggest that there is a administrative learning curve for each region

embarking on a wind power project and this can be steep for the initial 1,000 MW of installed

capacity. This occurs because early projects are time consuming to establish and it can take

several years to adapt regulatory and administrative systems to deal with new challenges.


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However, once authorities and grid operators have the experience and are accustomed to the

procedures development can happen very quickly.

2.5.2 Variab le Costs

The operation of a wind turbine incurs service and maintenance costs or operation and

maintenance costs, which constitute a significant share of the total annual cost of a wind

turbine. O&M costs related to a limited number of cost components which include: insurance;

regular maintenance; repair; spare parts and administration. It is possible to estimate some of

these cost components easily e.g. insurance and regular maintenance, but costs associated

with repair and spare parts can be difficult to predict. In particular, the cost of spare parts

tends to be heavily influenced by turbine age starting low and increasing over time.

Research based on experiences in Germany, Spain, the United Kingdom and Denmark reveal

that O&M costs are estimated to be between EUR 0.012 to EUR 0.015 per kWh of wind

power generated over the total lifetime of a turbine.

In addition, land rent is a possible variable cost. A developer of a wind farm has to

compensate a landowner for siting a wind turbine on their land, which could otherwise be

used for other purposes. This rental cost of the land may either be included in the O&M costs

of a wind farm or capitalised as an upfront once-off payment to the landowner.

2.5.3 Resource Base and Power Production Costs

The local wind resource is arguably the most important determinant of the profitability of awind energy investment. Therefore, the correct micro-siting of each individual turbine is

crucial for the economics of any wind energy project. The quality of wind resource

assessments is often the most important economic risk element in the development of wind

projects. Consequently, project financiers of large wind farms usually require a

comprehensive due diligence reanalysis of the resource assessment (Krohn, 2009, pp 55).


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Energy losses from production also affect the cost of a wind farm. The power generation

from a wind farm can be reduced by a number of factors:

Array Losses: These occur due to wind turbines shadowing each other on a windfarm, leaving less energy in the wind downstream of each wind turbine these losses

may account for 5-10% of the theoretical output described by the power curves;

Rotor Blade Soiling Losses: The blades when soiled are less efficient than clean onesresulting in losses of between 1 to 2%.

Grid Losses: Electrical heat losses in transformers and cabling within the collectiongrid of the wind farm account for approximately 1 to 3% of theoretical outputs.

Downtime Losses: These may arise when the turbines are difficult to access followingtechnical failures. However, most modern turbines are extremely reliable with

availability rates of 98% - suggesting losses due to maintenance or technical failure

are about 2%.

2.6 SOUTH AFRICAN ELECTRICITY SECTOR

2.6.1 Structure

ESKOM is the state-owned utility in South Africa. The company owns, operates and

maintains the national transmission grid and is in effect a monopoly on both the generation

and transmission level (Posorski and Werner, 2009). In 2009 its network comprised 371,000

km of power lines, 28,200 km of which constitute the national transmission grid. 12 In

addition, municipalities contributed 90,600 km of distribution lines in 2007. Currently, there

are 187 licensed municipal distributors, which serve a small client base. Consequently,

ESKOM is the largest single distributor with more than 50% of electricity sales for final

consumption and 47% of the total domestic customer base13.

12 Source: ESKOM (2009).13 Source: NERSA (2007).


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2.6.2 Size of the Industry

NERSA (2008) reported that the installed electrical generation capacity amounted to

43,601 MW, where 31,413 MW (90.40%) derived from thermal power stations primarilycoal and gas; 2,258 MW (5.20%) from hydropower and pumped storage, 1,800 MW

(4.13 MW) from nuclear power, 125 MW (0.30%) from bagasse and 5 MW (0.02%) from

wind power. ESKOM is the primary producer of electricity with municipalities and

independent power producers contributing 2.5% and 3.4% of the remaining domestic

capacity respectively.

New Capacity

In 2008, South Africa experienced a series of scheduled and unscheduled power blackouts as

a result of electricity demand outstripping supply. ESKOM had serious problems in

immediately mitigating the situation as a result of cash flow issues arising from low

electricity prices and high demand14. The shortage of supply has led to a massive expansion

programme, involving the planning and construction of various additional coal, gas and

nuclear power plants as well as transmission lines leading up to 2026.

In response to the shortages, the government has proposed that 30% of new capacity will be

provided by independent power producers to reduce the dependency on ESKOM. ESKOM

has plans to deliver an additional capacity of 16,000 MW by 2016 12,300 MW will be

coal-fired, 1,000 MW gas-fired, 2,800 MW pumped storage and 100 MW wind energy. The

majority of this capacity is in construction phase (Posorski and Werner, 2009, pp 258).

Renewable Energy

It can be argued that South Africa has been slow to develop its renewable energy potential

mostly the result of its reliance on cheap electricity generated from coal-fired plants. Table 4

reveals the contribution that each of the renewable energy technologies make to a

conservative economical electricity production potential estimate of 86,843 GWh.

14 Source: http://reeep-sa.org/regionalreviews. Retrieved on 31 January 2010.


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Table 4: Potential of Renewable Energy in South Africa[Source: DME, 2004]

Potential ContributionRenewable Technology

[GWh] [%]

Biomass 6,556 8Hydro 9,245 11

Solar 6,940 8

Wind 64,102 74

Total 86,843 100

South Africa has mainly developed its hydropower energy potential. NERSA (2008) reported

a total of 10 hydro-power plants (ESKOM [6], Municipalities [2] and IPP [2]) with a total

capacity of 669 MW.

Independent Power Producers hold the six bagasse-fired power stations with an installed

capacity ranging from 12 MW (Tongaat Hulett, Amtikulu Plant) to 32 MW (Tongaat Hulett,

Felixton Plant).

Solar energy provides for one-third of the renewable energy electricity with an annual

production of 511 GWh and a capacity of 242 MW. The bulk of this generation is for private,

water heating use only 10 solar systems are connected to the grid.

Currently, the Darling (5.2 MW) and the Klipheuwel (3.2 MW) Wind Farms owned by an

IPP and ESKOM respectively are operational.

2.6.3 Liberalisation of the Market

Imbewu (2009) suggest that ESKOM has a monopoly on the bulk of electricity generation inthe country even though it does not have exclusive generation rights. The government has

tried to liberalise the domestic electricity market by converting the utility into a public

company in 2002, but it remains in effect a parastatal. In addition, the government

encouraged an increase in private participation in the electricity market in 2003, when it

decided to permit the entry of independent power producers and share power generation

between ESKOM and independent power producers such as City Power. The IPPs are

permitted to generate up to 30% of new installed capacity, but the power produced must be


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Research Paper 27

sold to ESKOM and not to any other consumers. NERSA (2009) also states that ESKOM

determines the price at which it purchases the electricity from the IPPs. Further, the IPPs are

required to commit to long-term power purchases agreements (PPA) with the utility.

Posorski and Werner (2009, pp 261) highlight that in response to the liberalisation of the

market ESKOM revised its business model such that power generation and transmission

remain with the national utility, but its distribution division is to be severed and merged with

the electricity departments of local municipalities to form six Regional Electricity

Distributors (REDs). The REDs shall buy electricity from ESKOM at a tariff set by NERSA

and offer the electricity at a competitive price and efficient service to end-users. They report

that due to complex legal and political processes only one RED has been established in the

Western Cape as at 2005.

2.7 CONCLUSION

The current body of scientific evidence seems to indicate that unlimited energy use and

resource extraction are resulting in climate change through the release of greenhouse gas

emissions. The new climate reality suggests that business leaders cannot ignore the threat

to the environment and the socio-economic issues arising from it. The energy sector plays a

crucial role in mitigating the impact of climate change.

The South African energy market is dominated by the national utility, which is a generator of

primarily coal-fired electricity in a country that has a good resource of wind energy. In

addition, the government has implemented policies to encourage a strong renewable energy

market in the country. Therefore, it can be argued that there are good prospects for the

development of a market for wind power in South Africa. However, progress in this area has

been slow the cost of technology deployment, complex political and legal issues, and a

non-liberalised electricity sector are among the problems affecting the introduction of wind

power projects by independent power producers.


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3 RESEARCH QUESTIONS

In the context of the literature reviewed it is posited that:

I There is great potential for on-grid wind power generation, but there are regulatory

and financial limitations to the development of this energy market in South Africa.

In order to assess the position of the domestic wind power market the following research

questions are proposed:

What are the limitations to wind power in South Africa?

What are the implications arising from national policies and related developments onthe wind power market in South Africa?

What practices have wind developers adopted to overcome the problems slowing theexpansion of the wind energy market in South Africa?

4 RESEARCH METHOD

The research shall review reports from academic institutions, government organisations, wind

power stakeholders and other publicly available research material as useful sources of

information for addressing issues on the wind energy market in South Africa. This study will

be mainly a qualitative investigation into the factors limiting the expansion of the domestic

wind power industry.

4.1 OBJECTIVE

The research aims to use the stipulated reports as a basis for evaluating the prospects for wind

power in South Africa.


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4.2 APPROACH

The proposed approach to this study is inductive and shall consist of the following phases15:

A literature survey of recent reports and studies on wind power in South Africa. The execution of semi-structured interviews to gain a perspective of the market

prospects from various wind power stakeholders e.g. investment banks, wind power

developers and wind energy associations16.

4.3 DATA COLLECTION METHODS

This study shall rely on publicly available reports from academic and business journals as aprimary source of information or data. A secondary source of data shall be the responses to

the semi-structured interview process.

4.4 TRANSFERABILITY

The research does not aim to survey a large number of persons from the local wind energy

market. In fact, the pool of respondents could be as small as 5 persons. The interview

questions shall be designed to obtain a general view of the participants position on the

prospects for wind power in the country. However, no claims of transferability are made in

this study because with a small number of individuals in a certain organisation being

interviewed or surveyed it is impossible to know how the findings can be generalised to other

settings (Bryman and Bell, 2007, pp 423).

4.5 RESEARCH LIMITATIONS

It is not the intention of the author to provide detailed quantitative information in the

research. Nevertheless, the findings of this study could be developed to inform analyst

research and financial sector decision making.

15 The process of induction involves drawing generalisable inferences out of observations (Bryman and Bell,

2007, pp 14).16

The interviews are subject to interviewee participation in the research.


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The research is limited by confidentiality restrictions on information from participating

institutions. In order to avoid constraints placed on the publication of this study, only

information available in the public domain will be used.

It is assumed that the respondents to the intended interview process have sufficient

knowledge of the local wind energy industry and their institutions position on the matter to

offer an informed response to the questions posed. However, the research findings could be

limited by the participants access to information or biased by their individual opinions on the

prospects for wind power in South Africa.


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5 DISCUSSION

The Energy Information Administration (2009) indicates that renewable energy sources are

the fastest-growing energy source for world electricity, increasing by an average of 2.9 % per

year from 2006 to 2030. Of the 3.3 trillion kWh of new renewable generation added over the

projection period, 1.8 trillion kWh (54 %) is attributed to hydroelectric power and 1.1 trillion

kWh (33 %) to wind power. Other than hydroelectric power, most renewable technologies are

not able to compete economically with fossil fuels over the projection period, except in a

limited number of niche markets. Government policies and incentives typically are the

primary drivers for the construction of renewable generation facilities (EIA, 2009, pp 10).

It can be argued that South Africa is among the group of countries actively developing

policies to promote the inclusion of wind power in their electricity generation mix. The slow

progress in the development of the wind energy market can be attributed to market,

non-market, competitive pricing and technology lock-out barriers.

5.1 MARKET BARRIERS

The main operational concern for renewable energy technologies such as wind power is that

it cannot be predicted with sufficient accuracy (Neuhoff, 2009) an observation validated by

comments by ESKOM suggesting that the wind does not always blow and this makes

electricity from wind power expensive17. Further, it is argued that by the time the prediction

accuracy improves (approximately four hours prior to final production) most international

electricity transmissions have been allocated and liquidity in energy markets is low.

However, this argument is invalidated by the fact that most transmission flows can be

adjusted within seconds most power plants can be started, stopped and their outputs

changed within this time frame. Yu (2009) argues that the development of a good profile of

regional wind power fluctuations can provide a basis for effective load balancing plans that

address the intrinsic intermittency and utilisation issues of wind power.

17

Source: http://www.eskom.co.za. Retrieved on Thursday, 04 February 2010.


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Alderfer et al. (2000) reports that vertically integrated companies are more prone to obstruct

the entry of renewable energy technologies especially in situations were the renewable

generator takes market share from their conventional generation assets or in circumstances

where the inclusion of the renewable to the grid results in changes to the transmission system

and in this way reducing the value of some of their existing assets. There is a strong case for

such an argument in South Africa. ESKOM has been criticised for instituting a competitive

tender process to seek out suitable independent power providers and then delaying in

reaching any agreement on power purchase agreements with the selected IPPs.

5.2 NON-MARKET BARRIERS

The complex interaction between electricity system operators and the public, administration

and the private sector create barriers for new energy technologies (Neuhoff, 2009, pp 10).

The domestic regulatory process promoting the increased use of renewables was hit by

numerous set-backs since the publication of the Energy White Paper in 2003. It can be argued

that these set-backs could have been avoided had the government been more decisive in their

response to calls from renewable energy developers suggesting that the mechanisms proposed

unfairly favoured the national utility.

However, Neuhoff (2009) points out that the administrative frameworks address the needs of

existing technologies and not those of renewable energy technologies. In this context, there is

a learning threshold that must be crossed by the administration before a stable energy market

for renewables can be realised. The stance of the government on renewables such as wind

power has been positive, but has not been sufficiently clear it has been posited that progress

on the reaching the stipulated renewable energy targets has been slow because no clear

implementation guidelines were provided (Posorski and Werner, 2009, pp 266). This

uncertainty in the implementation process can be noticed in a review of documents released

by NERSA.

Buyer Uncertainty

The Regulatory Rules for Power Purchase Cost Recovery for example identifies a single

buyer for electricity from renewable generators as ESKOM. In addition, the REFIT


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Guidelines stipulates that the ESKOM Single Buyer Office as the REPA (Renewable Energy

Purchasing Agency) to purchase all power generated pursuant to the REFIT programme.

NERSA proposes to amend ESKOMs licence conditions to expressly require it to be the

purchasing authority. Brodsky (2009, pp 5 and 6) comments that the appointment by

ESKOM as the purchaser of power under the REFIT scheme is in line with the Cabinet

Decision in 2007 to designate ESKOM as the single buyer, as well as the Electricity

Regulations on New Generation Capacity (The Regulations)18, which provide that the buyer

must purchase all generation capacity procured pursuant to the REFIT programme. However,

the requirement for ESKOM to enter into power purchasing agreements appears to contradict

the willing buyer, willing seller principle. Further, it is not clear from the Guidelines or

the Regulations how and when NERSA intends to amend ESKOMs licence conditions to

require it to be the REPA.

Clarity on the issue of a designated buyer for the power generated by independent power

producers is critical, since this has implications for the bankability of the project from the

outset. Financiers will only support wind or other renewable projects that have secure power

purchase arrangements.

Procurement Issues

Brodsky (2009) argues that it is crucial that potential investors and developers understand

how projects under REFIT will be selected. He states that in countries were REFIT has been

used licences are approved on a first come, first served basis. This has the benefit of

encouraging prompt uptake and rewarding first movers. An alternative process is for the

regulator or neutral organisation to manage a tendering programme to select developers on

the basis of specified criteria.

In the local context, it is difficult for developers to determine how they will be selected to

participate in the REFIT Programme. The Guidelines suggest a first come, first served

approach subject to the usual conditions applied in the issuing of licences by NERSA.

18The Regulations were promulgated by government on 05 August 2009. These regulations were made pursuantto the Electricity Regulation Act (2006). The deal primarily with the process for procurement of newgeneration, including generation from independent power producers, but also include the provisions that

pertain specifically to the procurement of new generation under REFIT.


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However, the Regulations discuss procurement under an IPP Tender Programme, which

specify the use of a tender process involving requests for pre-qualification, proposals and

negotiations with the preferred tenderer. Further, the Regulations describe a special process

for the procurement of renewable energy under REFIT. Regulation 7 indicates that NERSA

shall develop rules related to the criteria for selection of renewable energy IPPs the list of

issues influencing the criteria for selection includes: compliance with the national integrated

resource plan19 and the preferred technologies; the acceptance of a standardised PPA by the

IPP; preference for projects demonstrating an ability to raise finance; and a preference for

generators that can be commissioned rapidly. Consequently, it seems that successful projects

may not be selected through a tender process, but rather will be selected on the basis of

prescribed criteria the substance of these criteria is still unknown.

Since the rules governing the selection process for renewable projects have not been

established by NERSA, investors and developers are left uncertain on critical issues related to

procurement. An example is the introduction of potential limits placed on generation capacity

from independent power producers - either in terms of overall capacity that may be procured

under REFIT or in terms of particular renewable technologies. It is also not clear who holds

ultimate responsibility for the selection process for preferred IPPs. The Guidelines stipulated

that NERSA is responsible for the administration of REFIT, but the Regulations indicate that

selection will be managed by the system operator suggesting the ESKOM will select

participants under REFIT. In the context of wind power, investors and developers need to

understand the limitations on wind farm generation capacity and the manner in which

ESKOM intends to allocate new generation capacity between competing REFIT applications

and the utilities own new build programme.

Legislative and Regulatory Issues

Brodsky (2009, pp 6) suggest that investors and developers will expect the structure of the

final REFIT Programme to be in place before they begin investing time and finances into the

scheme. Currently, ambiguity arising from a lack of alignment between the Guidelines and

the Regulations on the issue of whether NERSA or the Minister of Energy has the mandate to

19 The NIRP is a least cost plan that assesses a variety of demand and supply side options to satisfy customer

electricity needs in accordance with environmental and social considerations (NERSA, 2009).


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address the unpriced advantage of conventional power technologies, but more is required.

The environmental levy does not adequately internalise the environmental impacts e.g.

carbon emissions, from fossil fuel generated power and until this situation is corrected

clean energy technologies such as wind power will seem to be less cost competitive with

convention power sources. Historically, environmental regulation sets emission limits and

requires firms to invest in emission abatement technologies. However, emissions below these

limits still cause environmental damage, but firms are not exposed to these costs and do not

include them in the energy price. Therefore, it can be argued that for wind power market to

gain a foothold in the domestic market heavy industry consumers of electricity need to face

the true cost of conventional power generation.

5.4 TECHNOLOGY LOCK-OUT

Neuhoff (2009) explains that without large-scale applications, the cost of new technologies

can stay high and investors will continue to use established technologies. Consequently, new

technologies can be locked-out and energy systems may be highly path dependent. Although,

wind power technology is not new large-scale deployment of turbines within the country

could lead to capital cost reductions due to domestic economy of scale savings. The criteria

established for the selection of new power generation by either NERSA or ESKOM could

serious limit the expansion of the wind energy market if not managed correctly.

5.5 POLICY IMPLICATIONS

The implementation of national policy promoting the widespread deployment of on-grid wind

power plants could have a significant and positive impact on the country. Apart from

furthering the national goals of reducing greenhouse gas emissions the benefits of wind

energy include improved health through reduced air pollution, job creation and greater energy

security. Despite the inherent benefits of wind energy generation the government faces a

difficult challenge in gaining public support for what may be perceived as a costly renewable

energy scheme. South Africa is a developing country and one of its primary policy objectives

is poverty elimination. The government recognises that widespread access to cheap electricity

is a means to achieve this goal. However, gaining public acceptance for policies that increase

the cost of electricity will continue to meet public resistance as is currently the case.


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Nevertheless, while the publics general awareness of environmental issues such as climate

change or the social health benefits arising from wind energy use may be low it is the

authors opinion that job creation information is easily recognised, rapidly disseminated and

understood within local communities. South Africa has a high unemployment rate by

international standards. Statistics (South Africa) reported that unemployment was stable at

23.6%20 as at 28 July 2009. An increase in the employment rate depends on the patterns of

economic growth (Joffe, 2003). Although, it is outside the scope of this research to define the

impact that rapid uptake of wind energy technology will have on the greater economy and

overall job creation, it can be argued that a stable wind energy market within the country can

bring positive change in both areas.

Austin et al. (2003, pp 51) reports that wind power development creates opportunities for

employment in a number of fields - it requires meteorologists and surveyors to select and rate

sites, structural engineers to design turbines and supervise their assembly, metal workers to

supply the rotors, mechanics and computer operators to maintain and monitor the system.

However, is important that this employment potential be factored into the development of a

local wind manufacturing industry to ensure sustainable benefits for the country (refer:

Box 2). A survey on the labour requirements of constructing and operating a 37.5 MW wind

farm in South Africa, it was found that the number of jobs created is 4.8/MW. Table 5

presents a summary of the employment potential of renewable energy sources.

Table 5: Employment Potential Data[Adapted: Austin (2003)]

Renewable Technology Total Jobs / MW Range of Jobs / MW

Solar Thermal 5.9 0.3 18.8Solar PV 35.4 7.2 876.7

Biomass 1.0 1.0 4.4

Landfill 6.0

Wind 4.8 3.8 5.9

An estimation of the potential impact of policies favouring wind energy promotion can be

seen in a review of international experience. The implementation of 800 MW of wind

20

Source: http://www.statssa.gov.za/news_archive/press_statements. Retrieved on Sat, 06 February 2010.


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Research Paper 38

capacity in India (Tamil Nadu) resulted in rural employment of between 8.75 and 11.25 per

MW (Austin et al, 2003, pp 14). Renner (2000) cites evidence where wind and solar

photovoltaic power has been found to compare favourably with coal and nuclear generated

electricity in its job creating capacity. It was revealed that wind energy with an overall

electricity generation contribution of 1.2% contributed 15,000 jobs in manufacturing,

installation and operation of wind machines in Germany (1998). In comparison, coal and

nuclear power held 26% and 33% of the electricity market, but created only 38,000 and

80,000 jobs respectively. Another important implication of national policy is the possibility

that it could strongly influence the development path of the local wind turbine manufacturing

industry. Britain and Spain began to develop wind energy industries in the 1970s, but by the

end of the 1990s both countries achieved very different levels of success (refer: Box 2).

Box 2: Case Study Development of Local Manufacturing Capability

Ahn (2009, pp 73) suggests that the wind industry in Britain was a market strangled at birth. He comments

that although the failure to create an initial wind energy market might have involved many different facets ofBritish administration and bureaucracy the most important reason for failure can be attributed to theelectricity tariff system and the local property tax system.

In comparison, the Spanish national wind energy programme developed a different pattern to that in Britain.The Spanish government revealed its commitment to wind power by establishing a Renewable Energy Plan,

which focused on the demonstration of both the technical and commercial viability of wind technology. Thestrategy to stimulate technology development through the installation of a series of small wind farms was beneficial to both manufacturers and wind energy developers. This approach provided wind turbinemanufacturers a chance to produce and install a relatively large number of wind turbines, which brought aboutthe confidence in design and the accumulation of expertise in production processes. The broader implicationsfor wind energy developers, including project developers, regional energy planners, electricity utilities andprivate companies, a series of wind farm installations gave a unique chance to learn collectively (Ahn, 2009,pp 99).

The key dynamics for the creation of the wind energy market was the interaction between political actionsregulating market-related legislation and market participation from industry participants. A comparison of the

two countries revealed that in both cases the wind energy market was promoted by government renewableenergy policy. However, some details of the market creation process were different and responsible for

different levels of success in encouraging the emergence of new firms and industrial capabilities. The Britishmarket expanded with the introduction of the NFFO policy, without a sufficient preparatory period in whichindustrial pioneers could accumulate expertise and experience. In these circumstances, strong competitionbetween wind developers, which was intended by the Government in order to reduce the cost of renewables

for the benefit of electricity consumers, inadvertently favoured large wind developers and more establishedforeign turbine manufacturers. Consequently, the British wind industry value chain was limited to the windfarm development sec

the future of wind energy: a study on the prospects of wind power in south africa

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