THE FUTURE OF WIND ENERGY

A Study on the Prospects of Wind Power in South Africa

Research Paper

The Institute for Manufacturing

University of Cambridge

Dinesh Naidoo

16 February 2010

Supervisor: Jim Platts

 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.
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 23
2.6 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
 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
LIST OF TABLES

TABLE 1: SCHEDULE OF CLIMATE POLICY 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

LIST OF FIGURES

Figure 1: General Distribution of Wind 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
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 world’s
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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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 domestic
electricity 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 earth’s
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 world’s 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:

ƒ The earth’s surface temperature has increased 0.74° C, mostly in the last 50 years –
possibly making this the warmest period of the past 1300 years.
ƒ Carbon dioxide emission and temperature trends are at the high-end of the range
forecasted by the IPCC, with the global average temperature increasing approximately
0.1° C per decade.
ƒ The rate of sea level rise has increased 70 percent since 1993 compared to the
previous 30 year period.
ƒ The frequency of heat waves, forest fires and heavy precipitation events has increased
globally 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.

Research Paper 5
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 continent’s
“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 University
Press.

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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 country’s 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:

ƒ South Africa could grow without carbon constraints and benefit economically, but this
will 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.
ƒ There are certain quantifiable strategic mitigation options which are immediately
implementable. 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.
ƒ South Africa can choose both regulatory and economic instruments. However, neither of
these completely addresses emissions reductions sufficient to meet the “required by
science” targets. Nevertheless, with an escalating carbon dioxide tax, economic
instruments 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):

ƒ 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.
ƒ 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.
ƒ Implement the Business Unusual Call for Action: South Africa intends to prioritize
investment 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.
ƒ Vulnerability and Adaptation. South Africa recognizes its vulnerability to the impacts of
climate 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.
ƒ Preparing for the Future: Government has decided to launch a policy development
process 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 2009
Post-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 government’s Energy White Paper (1998) identified the country’s
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:

ƒ 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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 ƒ Moderate wind power potential areas include the Eastern Highveld Plateau,
Bushmanland, the Drakensberg foothills in the Eastern Cape and KwaZulu-Natal; and
ƒ Areas with low wind power potential include the Folded Mountain Belt, the Western
and 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 Africa’s 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 the
electricity 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 remote
locations, where it is usually more expensive to build a wind farm, but given high wind speeds a plant costing
EUR 1,800 / kW can be fully competitive with thermal plants. Figure 2 reveals more detail about the
distribution of the country’s wind resource and also reveals the seasonal variation in the strength of the wind
speeds.

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

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

9 m.s-1 6 m.s-1
8 m.s-1 5 m.s-1
7 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:

ƒ tendering mechanisms which involve a government sponsored competitive bidding

process for the acquisition of renewable electricity such that long-term contracts are
awarded to lowest price projects;
ƒ quantity based renewable energy portfolio standards, which require a minimum share
of power supply or a minimum level of installed capacity in a given region is met by
renewable energy; and
ƒ price based feed-in-laws that require mandatory repurchase of renewable energy at a
fixed price.

The Renewable Energy Feed-In Tariff (REFIT) is the government’s most recent policy
instrument to facilitate the growth of the renewable energy market.

2.3.2 The Renewable 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 20
years. 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 Initiatives

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

Research Paper 13
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).

ƒ 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 project’s
bottom line by approximately 28%7 .

ƒ Value Added Tax (VAT) Treatment of CERs: The Memorandum also clarified the
treatment 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.

Research Paper 14
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.

Others, 24%
South Africa, 1%

Brazil, 7%

Mexico, 3%

India, 25%

China, 40%

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 country’s
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:

ƒ Projects should use commercially viable technologies, generate at least 1 MW of

power and be located within the borders of South Africa.;

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 ƒ Projects must have undergone pre-feasibility studies;
ƒ The capital costs should not exceed R100 million8;
ƒ There must be a potential purchaser of the renewable energy being supplied; and
ƒ 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.

Research Paper 16
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:

ƒ emissions have longer residence times;

ƒ the environmental and/or public health concern has broad geographic impacts;
ƒ a significant number of sources are responsible for the problem;
ƒ the cost of controls varies from source to source;
ƒ emissions can be consistently and accurately measured; and
ƒ 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:

ƒ carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems
will 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.
ƒ 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.
ƒ carbon taxes can be implemented with far less opportunity for manipulation by special
interests, while a cap-and-trade system’s complexity opens it to exploitation by

Research Paper 17
 special interests and perverse incentives that can undermine public confidence and
undercut its effectiveness.
ƒ carbon tax revenues can be rebated to the public through tax-shifting10, while the costs
of 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 POWER

2.4.1 Electricity 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 rand’s worth of reduction in existing taxes
such 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

Research Paper 18
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 POWER

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

Research Paper 19
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 turbine’s 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 Share of Total Cost
[EUR 1,000 per MW]11 [%]
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 Initial 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.

Research Paper 20
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

Research Paper 21
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.

Research Paper 22
However, once authorities and grid operators have the experience and are accustomed to the
procedures development can happen very quickly.

2.5.2 Variable 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 a
wind 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).

Research Paper 23
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:

ƒ Array Losses: These occur due to wind turbines shadowing each other on a wind
farm, 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;
ƒ Rotor Blade Soiling Losses: The blades when soiled are less efficient than clean ones
resulting in losses of between 1 to 2%.
ƒ Grid Losses: Electrical heat losses in transformers and cabling within the collection
grid of the wind farm account for approximately 1 to 3% of theoretical outputs.
ƒ Downtime Losses: These may arise when the turbines are difficult to access following
technical 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).

Research Paper 24
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 – primarily
coal 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.

Research Paper 25
Table 4: Potential of Renewable Energy in South Africa [Source: DME, 2004]
Potential Contribution
Renewable Technology
[GWh] [%]
Biomass 6,556 8
Hydro 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 in
the 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

Research Paper 26
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.

Research Paper 27
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:

ƒ What are the limitations to wind power in South Africa?

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

ƒ What practices have wind developers adopted to overcome the problems slowing the
expansion 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.

Research Paper 28
4.2 APPROACH
The proposed approach to this study is inductive and shall consist of the following phases15:

ƒ A literature survey of recent reports and studies on wind power in South Africa.
ƒ 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 a
primary 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 participant’s 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.

Research Paper 29
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 institution’s 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.

Research Paper 30
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 expensive”17. 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.

Research Paper 31
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

Research Paper 32
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 ESKOM’s 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 ESKOM’s 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.

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

Research Paper 33
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).

Research Paper 34
establish guidelines for the implementation of REFIT raises concerns about future legislation,
its timing and implication on renewable energy generation.

5.3 COMPETITIVE PRICING

Neuhoff (2009) suggests that in liberalised markets, investors, operators and consumers
should in theory face the full costs of their decisions. This applies to resources and capital as
well as the social and environmental impacts of energy consumption. However, he argues
that current practice falls short of this ideal for complex reasons. Firstly, impacts are difficult
to quantify. Secondly, in the event these impacts are quantifiable, decisions on the extent to
which they should be internalised can be a highly politicised judgement e.g. internalising the
cost of carbon emissions from coal-fired power generation. Hence, seeking to change what
are perceived existing rights of energy producers in situations where impacts have been
previously tolerated becomes an extremely difficult task. This argument holds for those
energy producers whose commercial viability has relied on a variety of financial and social
subsidies such as ESKOM and SASOL in South Africa.

Pegels (2009, pp 11) points out that the South African energy innovation system is
characterised by a high path dependency, which has its roots in the pre-1994 period. During
the period of international isolation pursuant to the country’s racial discrimination policies –
independence from external energy supplies was a political necessity. As such the bulk of
national investment in energy research and development focused on the production of both
electricity and fuel from coal. Consequently, ESKOM and SASOL developed into almost
monopolistic energy providers that wielded considerable power. These organisations use their
influence to protect those energy market features best suited to their core competencies;
fostering a favourable environment for renewable energy providers is not part of this strategy
(Pegels, 2009). Consequently, levelling the playing field to enable renewable energy to
compete equally with fossil fuel power plants involves tackling the unpriced advantages of
conventional technologies (Neuhoff, 2009).

The mechanisms introduced by the government such as the Renewable Energy and Finance
Subsidy Office (2005) and the environmental levy (2008) are steps in the right direction to

Research Paper 35
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.

Research Paper 36
Nevertheless, while the public’s 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
author’s 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 – 18.8
Solar 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.

Research Paper 37
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 of
British administration and bureaucracy – the most important reason for failure can be attributed to the
electricity 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. The
strategy 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 turbine
manufacturers a chance to produce and install a relatively large number of wind turbines, which brought about
the confidence in design and the accumulation of expertise in production processes. The broader implications
for wind energy developers, including project developers, regional energy planners, electricity utilities and
private 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 actions
regulating 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 renewable
energy 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 British
market expanded with the introduction of the NFFO policy, without a sufficient preparatory period in which
industrial pioneers could accumulate expertise and experience. In these circumstances, strong competition
between 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 established
foreign turbine manufacturers. Consequently, the British wind industry value chain was limited to the wind
farm development sector. In contrast, the gradual evolution of the Spanish market led to market participants’
clear expectations and encouraged their voluntary investments. Further, the Spanish government’s fixed
premium policy for renewables made it possible for wind developers, utilities and manufacturers to invest
their resources with a long-term perspective. Consequently, a broad industry value chain emerged, and
provided good opportunities for new firms to join the wind energy sector (Ahn, 2009, pp 151).

Research Paper 38
6 CONCLUSIONS

South Africa is poised to join other countries in implementing regulatory policy to mitigate
the impact of climate change. The “National Climate Change Response Policy Development
Summit” held from 03 to 06 March 2009 (Midrand, South Africa), 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. The implication for many high carbon emitting industries is that they shall
be forced to adapt to an increasingly carbon-constrained local environment. In this context,
the domestic electricity sector is also being transitioned toward a low-carbon future.

6.1 GENERAL FINDINGS OF THE RESEARCH

What are the limitations to wind power in South Africa?

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. Market barriers seem to
arise from the involvement of the vertically integrated national utility in the selection process
for independent power producers. ESKOM dominates the domestic electricity sector and
seems resistant to the inclusion of independent power producers with regard to additional
on-grid power generation capacity. This is evidenced by their stance that wind power is a
capital intensive, expensive and intermittent electricity generation alternative to coal, gas or
nuclear technology. The utility has also been slow to finalise power purchase agreements
with prospective renewable energy developers, which has cast serious doubt on the prospects
for a stable renewable energy market by 2013.

The appearance of non-market barriers can be explained by the fact that there is a learning
threshold that must be crossed by the administration before a stable energy market for
renewables can be realised. The documents released by the National Energy Regulator reveal
a positive attitude by the government to include wind power in the national energy generation
mix. However, the “REFIT Guidelines” and the “Electricity Regulations on New Generation

Research Paper 39
Capacity” are not sufficiently aligned and raise concerns among wind power stakeholders on
matters pertaining to: the designated single buyer for the renewable energy generated;
procurement issues related to the criteria to be used for the selection of independent power
producers, the limitation on generation capacity of wind projects as well as who shall
administer the selection process; and future legislation, its timing and implication on
renewable energy generation.

There is also evidence corroborating arguments from independent power producers that more
must be done by government to eliminate the unpriced advantage of competing electricity
generating technologies such as coal and nuclear power. The government has introduced an
environmental levy in an attempt to advantage energy generated from renewable sources, but
until the true cost of carbon emissions from fossil fuel generation is integrated into the price
for electricity it will be difficult for wind energy to be competitive.

Finally, the wind energy industry is in its infancy in South Africa. The fledgling wind market
faces a possible technology lock-out scenario unless large scale deployment of projects can
be approved, financed and connected to the national grid. The economic costs of wind power
get better with economies of scale and its inherent benefits could be serious limited by the
criteria established by either NERSA or ESKOM for the selection of new renewable power
generation projects.

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

In addition to pursuing 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. The greatest potential for policy promoting wind power seems to be
in the area of job creation. 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. In a country with high unemployment (23.6%), limited rural electrification and an
abundant wind resource (64,102 GWh) – the socio-economic impact of national policy
favouring wind energy projects could be highly positive. Further, a rapid uptake of wind

Research Paper 40
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. It could result in regional electricity distributors switching to
renewable energy generators for electricity in remote parts of the country and a gradual
acceptance of “climate-friendly” initiative in these areas. Finally, progressive policy
implementation like that in Spain, could encourage a strong self-sufficient wind turbine
manufacturing and service industry that can sustain a long-term wind power market.

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

The interview participants sampled in this study included investors; developers, energy
consultants and local wind interest groups. These stakeholders agree that the major issues
confronting the wind power market include: inadequate leadership within the energy sector; a
vertically integrated national utility that does not seem to understand or believe strongly in
the potential for wind power as a reliable contributor to the electricity generation mix;
lengthy environmental approval process for the installation of wind monitoring masts;
non-alignment in policy responses from government that raise concerns about the selection
process related to independent power producers, the mechanism for finalisation of power
purchase agreements and the role of NERSA/ESKOM in the administration of the renewable
energy market.

The majority of the stakeholders have resolved to wait out this period of uncertainty before
committing time and finances to potential projects. However, there are a few investors and
developers that have decided to pursue their project development plans at risk. They maintain
on-going links to government, the national utility and NERSA in an effort to mitigate the
assessed risks.

Research Paper 41
6.2 MAJOR FINDINGS OF THE RESEARCH

The research revealed that there is great potential for on-grid wind power generation in South
Africa, but there are regulatory and financial limitations to the development of this energy
market in South Africa – evidence of the domestic wind potential has been corroborated by a
number of academic and commercial studies. Currently, there is a joint programme being
pursued by the CSIR (South Africa), CSAG (South Africa) and RISO (Denmark)21 to revise
the wind atlas data in order to better estimate the value of the country’s wind resource. This is
considered a key development to settle the debate on the potential contribution of wind
energy to the grid and ensure the expansion of the market for wind power.

Further, it can be argued that there are serious limitations to the development of a stable wind
energy market, which can be inferred from publicly available policy documentation,
academic and business reports related to the potential of wind power in South Africa. In
addition, corroborating evidence of the problems faced by market participants was obtained
through the interview process. However, it is important to recognise that these conclusions
are limited by information accessibility constraints as well as an inability by the researcher to
involve ESKOM, NERSA or the DME in the interview process.

21
CSIR (Council for Scientific and Industrial Research), CSAG (Climate Systems Analysis Group) and RISO is
part of the Technical University of Denmark (DTU).

Research Paper 42
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