Wind Energy Developments in South Africa: A Delineation...

Wind Energy Developments in South Africa:

A Delineation and Analysis of Barriers and Obstacles

Darling Wind Farm

A Research Report

presented to

The Graduate School of Business

University of Cape Town

By Sabine Raab

December 2008

Supervisor:

Professor Anton Eberhard

Wind Energy Developments in South Africa: A Delineation and Analysis of Barriers and Obstacles

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Acknowledgements

I wish to thank my supervisor Professor Anton Eberhard for guiding me

through the research, as well as Glynn Morris and Mike Goldblatt for their

valuable support of my research plan.

A big thank you to all those interviewed for their detailed answers and

insights.

This report is not confidential.

It may be used freely by the Graduate School of Business.

I certify that except as noted above the report is my own work and all

references used are accurately reported in footnotes.

Signed: _______________________

Sabine Raab


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“When the wind rises, some build walls,

others build windmills”

Chinese proverb

Abstract: Worldwide renewable energy projects are growing at a remarkable speed.

South Africa, a country that has a big potential to generate electricity from renewable

energies, especially from wind energy, has so far neglected to develop and invest in

these resources. This despite increasing electricity demands through growth in

population and industry, escalating electricity costs and alarming environmental

concerns.

This research paper identifies the main hurdles that presently impede potential wind

energy developments from being implemented. They are identified and analyzed

through primary research, in the form of interviews. The findings reveal a variety of

barriers, where the lack of government commitment and supportive policies seem to

be the central issue. This leads to uncertainties and consequently reinforces a

number of other obstacles such as difficulties in establishing favorable power

purchase agreements and forecasting income streams, and this consequently means

insecurities for investors. Long lead times for supplying technical equipment and

unanswered questions around grid connection add to this quandary.

Lessons learnt in nations leading in renewable energies are discussed and their

supportive policies are compared. The report suggests recommendations to stimulate

market penetration of wind energy projects in South Africa.

South Africa has an abundance of renewable resources leading to numerous

potential renewable energy projects that could be implemented as soon as the

current barriers are overcome.

Keywords: South Africa, renewable energy, wind energy, obstacles and barriers, renewable

energy policies, feed-in tariffs, Darling, Klipheuwel, Eskom, PPA, coal, electricity.


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“Everyone has the right

to an environment that is not harmful to their health or well-being, and to have the environment protected for the benefit of present and future generations through reasonable legislative and other measures that prevent pollution and ecological degradation, promote conservation, and secure ecologically sustainable development and the use of natural resources while promoting justifiable economic and social development.” — The South African Bill of Rights.

Wind Turbine at Darling Wind Farm


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Table of Contents

Acknowledgements ................................................................................................................ 2

Abstract: .................................................................................................................................. 3

Keywords: ............................................................................................................................... 3

Table of Contents ................................................................................................................... 5

List of tables ........................................................................................................................... 7

List of figures .......................................................................................................................... 7

List of pictures ........................................................................................................................ 7

List of abbreviations .............................................................................................................. 8

Chapter 1 – Introduction ...................................................................................................... 10

1.1 Area of study/Objective ............................................................................................ 10

1.2 Purpose and significance of the research ................................................................ 10

1.3 Key research questions ........................................................................................... 12

1.4 Methodology ........................................................................................................... 13

1.4.1 Primary research .................................................................................................... 13

1.4.2 Comparison of international literature .................................................................... 14

1.5 Layout of the report .................................................................................................. 15

Chapter 2 - Literature review ............................................................................................... 16

2.1 Analytical Framework ............................................................................................... 16

2.2 Comparison of policy and regulatory mechanisms .................................................. 19

2.2.1 Feed-in tariffs – a pricing system ........................................................................... 20

2.2.2 Obligation/Certificate system – a quota system ..................................................... 25

2.2.3 Tendering system – a quota system ...................................................................... 27

2.2.4 Fiscal incentives ..................................................................................................... 29

2.2.5 Other renewable energy policies ............................................................................ 29

2.2.6 Different countries and their policies - Combinations of support mechanisms ....... 30

2.2.7 German Renewable Energy Sources Act (EEG) ................................................... 31

Chapter 3 – Wind energy in South Africa ........................................................................... 32

3.1 South Africa’s problem context ................................................................................ 32

3.2 RE and mitigation scenarios in South Africa ............................................................ 32

3.3 Supportive policies ................................................................................................... 34

3.3.1 Expression of Interest ............................................................................................ 34

3.3.2 Feed-in tariffs ......................................................................................................... 35

3.3.3 Tradable renewable energy certificate scheme ..................................................... 36


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3.4 Wind energy in South Africa .................................................................................... 36

3.4.1 Darling Demonstration Wind farm .......................................................................... 37

3.4.2 Klipheuwel Wind Energy Demonstration Facility (KWEDF) ................................... 41

3.5 Wind projects planned in South Africa ..................................................................... 45

3.5.1 Overview of projects ............................................................................................... 45

3.5.2 Eskom .................................................................................................................... 45

3.5.3 Turbine manufacture in South Africa ...................................................................... 47

Chapter 4 – Obstacles and barriers: legislation and policies .......................................... 48

4.1 Lack of government commitment and supportive legislation ................................... 50

4.2 Policy incoherency from government ....................................................................... 51

4.3 Industry structure ..................................................................................................... 51

4.4 Absence of policies on feed-in tariff to Eskom or municipalities .............................. 52

4.5 Responsibility for grid extensions to wind farms ...................................................... 53

4.6 Need for streamlining Environmental Impact Assessments ..................................... 54

Chapter 5 – ............................................................................................................................ 56

Obstacles and barriers: Financing and business models ................................................ 56

5.1 Inexperience in developing IPPs and SPVs ............................................................. 56

5.1.1 Ownership - IPP ................................................................................................ 57

5.1.2 Potential set up - Special Purpose Vehicles (SPV) ................................................ 59

5.2 Inexperience of local wind industry as project developers and project sponsors .... 61

5.3 Difficulty in financing development costs ................................................................. 62

5.4 Lack of knowledge of local financiers/banks of wind industry .................................. 62

5.5 Difficulty in securing long-term PPAs to provide reliable revenue stream to service debt and reward equity ....................................................................................................... 63

5.6 Low cost of conventional electricity & need for feed-in tariff or price support .......... 64

5. 7 Global credit crunch and scarcity and cost of capital ............................................... 65

5. 8 Inexperience in accessing Carbon Financing .......................................................... 66

Chapter 6 – Policy recommendations ................................................................................ 68

6.1 Need for policies to enable renewable (wind) energy .............................................. 68

6.2 Feed-in tariffs for South Africa ................................................................................. 69

Chapter 7 – Conclusion ....................................................................................................... 72

Bibliography ......................................................................................................................... 74

Appendix 1 – List of individuals interviewed ..................................................................... 82

Appendix 2 – List of planned wind projects in SA ............................................................ 84

Appendix 3 - Facts about Wind Energy .............................................................................. 85

Appendix 4 – Additional obstacle: Lack of information ................................................... 91


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List of tables Table 1: Renewable energy policy instruments (Martens et al, 2001) (GWEC, 2008) ........... 30

Table 2: Operation statistics Klipheuwel (Smit et al, 2004) .................................................... 43

Table 3: List of individuals interviewed ................................................................................... 83

Table 4: List of planned wind projects in SA .......................................................................... 85

Table 5 : Components of a wind turbine (Sunflower, 2008) ................................................... 87

List of figures Figure 1: Wind capacity installed ........................................................................................... 19

Figure 2: Location of the Darling Wind Farm, Western Cape (EEU, 2004) ............................ 37

Figure 3: Location Klipheuwel (Smit et al, 2004) .................................................................... 43

Figure 4: Location of planned Eskom wind facility in Matzikama area (Savannah, 2008) ..... 46

Figure 5: Areas of obstacles………………………………………………………………………..49

Figure 6: Financial Model of a Special Purpose Vehicle………………………………………..60

Figure 7: Returns with and without CDM………………………………………………………….67

Figure 8: Wind Turbine……………………………………………………………………………...86

List of pictures Picture 1: Darling Wind Farm…………………………………………………………………. Cover

Picture 2: Wind Turbine at Darling Wind Farm……………………………………………………4

Picture 3: Klipheuwel Wind Energy Demonstration Facility (Savannah, 2008) ...................... 41


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List of abbreviations

BEE Black Economic Empowerment Btu British thermal unit CDM Clean Development Mechanism CEF Central Energy Fund CH4 Methane CO2 Carbon Dioxide CSIR Council for Scientific and Industrial Research DANCED Danish Cooperation for Environment and Development DARLIPP Darling Independent Power Producer DBSA Development Bank of Southern Africa DEAT Department of Environmental Affairs and Tourism DECAS Department of Environmental and Cultural Affairs and Sport DME Department of Minerals and Energy DNA Designated National Authority EEG Erneuerbare Energien Gesetz (Renewable Energy Sources Act) EEU Environmental Evaluation Unit EIA Environmental Impact Assessment eREACT e-Parliament Renewable Energy Activists ERPA Emissions Reduction Purchase Agreement EU European Union GDP Gross Domestic Product GEF Global Environment Facility Office of Monitoring & Evaluation GHG Green house gases Gt CO2-eq Gigatons of CO2–equivalent GWh Giga Watt hours IDC Industrial Development Corporation IPP Independent Power Project IRR Internal Rate of Return kVArh Kilo Volt Amps Reactive Hours KWEDF Klipheuwel Wind Energy Demonstration Facility KWh Kilo Watt hour LTMS Long Term Mitigation Scenarios O&M Operations & Maintenance Mt CO2-eq Million tons of CO2–equivalent Mtoe Million Tons of Oil equivalent MTPPP Medium Term Power Purchase Programme MW Mega Watt, 1 MW = 1,000,000 Watts NERSA National Energy Regulator of South Africa N2O Nitrous Oxide


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PJ Peta Joule, basic unit of energy, 1 PJ = 1015 Joules PPA Power Purchase Agreement RE Renewable Energy ROE Return on Equity SA South Africa SANTREC South African National Tradable Renewable Certificate Team SATIB South African Tradable Renewable Energy Certificate Issuing

Body SAWEA South African Wind Energy Association SAWEP South African Wind Energy Programme SABREGen South African Bulk Renewable Energy Generation SPV Special Purpose Vehicles REFIT Renewable Energy Feed-In Tariff rpm rotations per minute TRECS Tradable Renewable Energy Certificate System VAT Value Added Tax


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Chapter 1 – Introduction

1.1 Area of study/Objective

Wind energy developers in South Africa are facing numerous barriers and obstacles

that have prevented the establishment of a wind industry so far. Interviews with

individuals involved in planning, developing, consulting or financing potential wind

projects, as well as government officials and wind experts, provide a broad spectrum

of opinions and insights about the current situation. Moreover, suggestions are

offered how current obstacles could be overcome. This research inquires into the

different policy and legislative options in countries that have successfully developed

wind energy on large scales and provides recommendations for South Africa.

1.2 Purpose and significance of the research

Global atmospheric concentrations of green house gases (GHG), like CO2, CH4, and

N2O, have risen tremendously since the beginning of the industrial era due to human

activity. Between 1970 and 2004 they have increased by 70% (Intergovernmental

Panel on Climate Change, 2007). The culprits are primarily the vast industries in

developed countries. Yet it has become each single nation’s responsibility to reduce

further GHG emissions in the interest of managing global warming and protecting the

environment.

South Africa’s contribution to Global Warming is substantial due to the country’s

unusually energy-intense economy, especially the mining and metal processing

sectors. According to the Energy Information Administration, South Africa ranks 15th

globally in terms of electricity consumption - with 210.71 billion KWh in 2006. In 2005,

the country’s per capita total energy consumption was 113.7 million Btu compared to

Germany with 176. South Africa’s use of electricity per unit of GDP output is also very

high, with only 16 countries, like Russia and ex-CIS states having higher kWh/GDP

intensities (EIA, 2008).

South Africa relies heavily on fossil fuels, mainly cheap, indigenous coal and

imported petroleum. The state owned company, Eskom, which generates most of

South Africa’s electricity relies overwhelmingly on coal: 93% of its power production

capacity derives from coal, 5% is nuclear and 2% is hydroelectric (ESKOM, 2007).


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Globally, South Africa ranks 12th in carbon dioxide emissions from the consumption

of fossil fuels, with 423.81 million tons of CO2 in 2006 (EIA, 2008). The country’s

energy consumption is constantly rising due to economic growth and the increasing

numbers of households connected to the national grid.

Consequently, the issues of Global Warming, environmental protection, and the

foreseeable future scarcity of fossil fuels need to be taken into account when

developing a sustainable energy supply. To achieve this, the contribution of

renewable energy (RE) sources needs to be assessed and increased substantially. In

the past many renewable energy technologies were more expensive than fossil fuels;

however as technologies improve and when environmental costs are included,

renewable energy is becoming increasingly competitive. With the White Paper on

Renewable Energy of 2003, the South African government has committed to provide

increasing support in development, demonstration and application of renewable

energy. The goal is “an energy economy in which modern renewable energy

increases its share of energy consumed and provides affordable access to energy

throughout South Africa, thus contributing to sustainable development and

environmental conservation” (DME, 2003b).

Besides wind electricity generation, further possibilities of RE in South Africa include

solar resources, biomass, hydropower, wave power, and to a smaller extent other

resources like geothermal. At the moment, RE contribution to total energy generation

in South Africa is still very low; biomass contributes between 9-14% and hydropower

1% (Banks and Schäffler, 2005).

South Africa’s wind resources are potentially abundant, especially along its coastline

and the lowland / highland escarpment. The current utilization of wind energy in SA,

however, is minute.

At present there are only two grid-connected wind farms operating in South Africa,

totaling 7 turbines compared to 19,450 turbines in Germany, 3,800 in India, and

8,000 in Spain (GWEC, 2008). Both farms are situated in the Western Cape:

Eskom’s Klipheuwel Wind Energy Demonstration Facility and the Darling Wind Farm,

a National Demonstration Project (DME, 2008a). Therefore, South Africa’s wind

energy electricity generation is still in its beginning stages, whereas it has become

well established in numerous other countries worldwide.


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Globally, total installed wind energy capacity exceeded 94,000 MW in 2007, which

was 1% of worldwide electricity consumption (EERE, 2008). Within that year alone,

wind energy capacity increased by 27% with close to 20,000 MW installed,

representing about €25 billion of investment (GWEC, 2008). The leading five

countries in terms of wind capacity installed are Germany (23.7%), the US (17.9%),

Spain (16.1%), India (8.4%), and China (6.3%) (EERE, 2008).

Awareness and consequent demand for environmentally clean energy only started in

South Africa within the last decade. In the White Paper on Renewable Energy of

2003, the South African government acknowledges the apparent advantages of

renewable energies and sets long-term goals to increase renewable energies in

South Africa. In addition, the White Paper indicates the need to achieve energy

security through diversification of supply sources considering the foreseeable scarcity

of fossil fuels (DME, 2003a). However, as already indicated above, the contribution of

renewable energy and, in particular, wind energy, in South Africa is still very little.

The technology of wind turbines is now fairly mature and their application in many

other countries is often extensive. Hence technological development would not

appear to be a barrier for wind energy projects in South Africa. An analysis of the

following key research questions will seek to identify and understand true obstacles

and barriers, compare international experiences, and discuss possible solutions.

1.3 Key research questions

The focus of this research is to understand why there are so few wind energy

developments in South Africa. What are the main barriers and obstacles that wind energy developers face in South Africa and how can these be overcome? International experience suggests that possible barriers can be grouped into two

broad areas: enabling policies & regulations and financing & business models. These

issues are analyzed on a theoretical level as well as practically in dialogue with wind

energy developers by posing the following subsidiary questions:

A To what extent are existing policies and regulations a barrier to wind energy developments in South Africa and what policies and regulations


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need to be put in place by government to support wind energy developments in the country?

Analyzing this question will lead to possible steps that can be taken by the

South African government. They will support a sustainable development of

wind energy supply in the interest of lowering green house gas emissions; they

will protect the environment and will achieve a substantial increase in the

percentage contribution made by wind energy sources to power supply.

Based on global comparisons, international experiences and an analysis of the

local policy and regulatory environment, this research focuses on the main

policy and regulatory alternatives: feed-in tariffs, obligation/certificate systems

and tendering mechanisms.

B To what extent is the availability of finance a barrier to wind energy development in South Africa and how best can these developments be financed?

This questions aims at the issues of financing wind energy projects of different

scales and according to the risks involved. It investigates who are the potential

sponsors and financiers of wind projects. The answer will include uncertainties

holding back international investors from engaging in RE projects in South

Africa. The research will also analyze opportunities for Independent Power

Projects (IPPs) and the range of factors relevant for a successful business

model.

1.4 Methodology

1.4.1 Primary research

Primary research was carried out through semi-structured interviews with a total of 29

individuals, all closely connected to the topic of wind energy, including potential wind

energy developers and investors, Eskom, municipalities, Government officials from

different departments (DME, NERSA) and the South African Wind Energy

Programme (SAWEP), the City of Cape Town, and renewable energy experts. A list


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of these individuals is provided in appendix 1. The purpose was to identify the range

of South African wind energy developers and their projects and to gather their

practical experiences and opinions around the above mentioned research questions.

The variety of different sources provided firsthand knowledge and a detailed picture

of issues around wind energy in South Africa. The majority of the interviews were

conducted in personal meetings, only a few of them were undertaken telephonically

or via email.

Information was gathered in accordance with the principles of qualitative research.

Qualitative research is the best approach to explore real organizational goals,

linkages and processes in organizations and to understand failure of policies and

practices (Marshall and Rossman, 1995), as it places emphasis on details, on

processes, on experimental aspects, and allows an understanding of complex

phenomena (Miles and Huberman, 1994). Qualitative research is defined as a

method to achieve insight into certain settings without making predictions about those

settings (Denzin, 2000). The interviews take place in an atmosphere of an ordinary

conversation, which puts the interview in Oppenheim’s (1992) category of an

exploratory interview, as opposed to a standardized interview, such as commonly

used in public opinion polls, market research, and government surveys. In the

interviews, open ‘attitude questions’ (Oppenheim, 1992:147) are mixed with factual

questions and lead to a collection of ideas in the contacts’ own words combined with

data. Burgess would title this interview style ‘conversation with a purpose’ (Burgess,

1984:102; in Mason, 2002:38).

The interviews were followed up by secondary communication via email and

telephone. Certain contradictions and facts which required clarity were encountered

that needed to be resolved through triangulation.

Insights offered by interviewees included in this report are mainly discussed in

chapters 4 and 5 – “Obstacles and barriers”.

1.4.2 Comparison of international literature

This research also relies on an analysis of relevant literature in order to obtain an

understanding of other known potential barriers to wind energy and how these might

be overcome. International literature provides a global overview of renewable energy


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generation and worldwide experiences of forerunners in this field. Relevant

documents were reviewed to establish background knowledge about renewable

energies and especially wind energy developments worldwide. This analysis includes

a comparison of different policy and regulatory mechanisms regarding renewable

energies. Moreover, mitigation scenarios according to legislation and behavior

changes are described to underpin the urgent need for environmentally friendly

electricity production.

The global picture combined with an analysis of obstacles and barriers for wind

energy developments in South Africa leads to possible recommendations for support

of renewable energies in the country.

1.5 Layout of the report

Chapter 1 - Introduction

Provides a background rationale to the topic and explains the methodology of how

the research was conducted. Furthermore, the key research questions are

introduced.

Chapter 2 – Literature review

Presents the framework used to analyze obstacles and barriers and business related

aspects of potential wind projects. Different policy mechanisms are explained in detail

and critically evaluated. This supplies important facts, and leads to the

recommendations given in chapter 5.

Moreover, it describes the way governmental regulations affect caps on countries´

emissions, which consequently lead to different mitigation scenarios.

Chapter 3 – Wind energy in South Africa

Explores South Africa’s problem context. It firstly describes policy models regarding

renewable energies that are currently being planned and developed in South Africa.


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Secondly, it introduces the few wind energy projects in the country which already

exist, and gives an overview of the bulk of potential projects currently being planned.

The possibility of local turbine manufacturing in South Africa is briefly highlighted.

Chapter 4 – Obstacles and barriers: policy and regulations

As another core chapter, identifies and analyzes the obstacles and barriers for South

African wind energy developments from the information gathered through interviews.

Chapter 5 – Obstacles and barriers: financing and business models

Explains barriers for wind projects by focusing on financial aspects and business

related issues.

Chapter 6 – Policy recommendations

Emphasizes the need for stronger policies to promote renewable energies and

recommends feed-in tariffs for South Africa as the simplest and most effective policy

to increase investments in wind energy.

Chapter 7 – Conclusion

Consolidates the previous chapters and gives a summary answering the key

research questions.

Chapter 2 - Literature review

2.1 Analytical Framework

Global warming is one of the most serious environmental problems facing the world

today. The international community agreed that human activities leading to GHG

emissions need to be controlled in a global manner by drafting the United Nations

Framework Convention on Climate Change (UNFCCC) and the subsequent Kyoto


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Protocol. South Africa ratified the Convention on August 29, 1997 (International

Conventions and Protocols on Climate Change, 2008).

The Global Environment Facility (which supports the UNFCCC) argues that

sustainable market transformation favoring renewable energy projects is needed to

successfully reduce and avoid GHG emissions. Their study analyzes the key barriers

that need to be overcome to achieve such a market transformation; these are

“enabling policies, increased access to finance, adequate business/enterprise

capability and infrastructure, increased awareness, and diffusion of technology and

innovation” (Eberhard and Tokle, 2004:viii). Inter alia, emphasis is put on

policymakers’ capacity to develop climate-friendly policies, laws, and relevant power

sector regulations, as well as on financing and business viability.

For the purpose of answering the key questions around the barriers and obstacles

concerning wind energy developments in South Africa, this research will utilize the

broad analytical framework identified by the Global Environment Facility and will

concentrate mainly on the first three areas: enabling policies and regulations,

financing and appropriate business models.

The analysis in chapter 5 of financing and business model utilized the framework

developed by Gratwick and Eberhard’s (2008) study of independent power projects in

Africa. Most wind energy developments are likely to adopt the IPP model: i.e. private

developers relying on project finance. IPPs are seen to introduce private participation

and competition in the power generating system of a country and might offer fast and

relatively straightforward solutions to worsening supply deficits, as well as providing a

benchmark to state-owned supply. IPPs can become an important source of new

investment in a country’s power sector. Gratwick and Eberhard (2008) further provide

a detailed overview of the enabling factors for IPPs on a project level as well as on a

government level.

The elements government would need to provide to make an IPP’s success more

likely include:


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• a favorable investment climate in terms of stable macroeconomic policies and

good repayment records in a legal system allowing for contracts to be

enforced and laws to be upheld. Most of the African countries had incentives

for IPPs in place ranging from custom and VAT exemptions during

construction, full repatriation of profits, and TAX holidays for a certain amount

of years.

• a clear policy framework embodied in legislation that specifies a market

structure, roles, and terms for private and public sector investments.

• lucid, consistent and fair regulatory supervision improving general

performance of private and public sector assets.

• coherent power sector planning with energy security standards in place and

clarified planning roles and functions, as well as built-in contingencies to avoid

emergency power plants or blackouts.

• competitive bidding practices with a transparent procurement process to

potentially drive down prices (Gratwick and Eberhard, 2008:321).

According to Gratwick and Eberhard (2008:335-336) there are six main project issues

contributing to the success of IPP investments:

• Favorable equity partners with preferably local investment as well as

experience in developing country project risk, and expectations of a

reasonable and fair ROE.

• Favorable debt arrangements including low cost financing where the share of

local capital softens the impact of foreign exchange differences, and flexibility

in terms and conditions.

• Secure and adequate revenue streams through commercially sound metering,

billing and collections by the utility, a robust Power Purchase Agreement

(PPA), and security arrangements where necessary, such as escrow

accounts.

• Credit enhancements and other risk management and mitigating measures

including sovereign guarantees, political risk insurance, partial risk

guarantees, and international arbitration.


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• Positive technical performance in terms of availability and capacity factors as

well as sponsors that anticipate potential conflicts like operations &

maintenance or budgeting issues.

• Strategic management and relationship building where sponsors create a

good image through political relationships, development funds, effective

communications and well managed contracts.

2.2 Comparison of policy and regulatory mechanisms

Wind energy is rapidly growing worldwide and

increasingly finds its way into various new

countries. In 2007, a total of 19,865 MW of new

capacity was installed, adding to a global

cumulative installed capacity of 93,867 MW

(GWEC, 2008).

The total installed capacity however is still

geographically concentrated, with almost three

quarters found in just five counties (GWEC,

2008:8), see figure 1.

Figure 1: Wind capacity installed – Top ten countries (GWEC, 2008) International experience demonstrates that excellent wind resources are not the only

criteria to encourage and enable wind energy developments. The success of wind

power depends on a country’s enabling environment and strong political commitment

in the form of stable long-term comprehensive public policies. Such policies need to

focus on reducing costs, on improving revenues to increase profitability, and on

reducing risks for developers and investors.


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The most popular RE policy models will be discussed in the following section. They

are feed-in tariffs and quota schemes, where the latter can be divided into obligation /

certificate models and tendering systems, as well as fiscal incentives.

Research into the various types of renewable energy support policies reveals their

differences, advantages and disadvantages, and their consequences for RE in the

country. It also illustrates possible variations and design options within each policy.

To encourage industry to invest in renewable energies, a reliable and favourable

long-term policy and financial framework needs to be established. This requires a

country to set national targets for renewable energy, to remove non-technical

barriers, and to offer subsidies which motivate development of renewable energies

and augment their competitiveness in the market.

2.2.1 Feed-in tariffs – a pricing system

Feed-in tariffs can be considered pricing systems, in which RE producers are paid a

set rate for the electricity generated for a certain period of time, usually a premium to

existing non-renewable generation sources. Typically, the tariffs differ according to

the technology used, size and time of the installation, plant location, and wind

resources. They should be calculated to guarantee a profitable operation (Mendonça,

2007).

Despite the fact that there are different possible designs regarding this support

scheme, there are common key elements for successful feed-in models.

• Tariffs are valid for all potential developers regardless of their size, from

households to private developers to utility companies;

• Long-term certainty through stable policies applicable over a long period of

time, typically 20-25 years;

• Financial security through a long-term contract with guaranteed prices high

enough for developers to recover their costs and achieve a reasonable rate of

return;

• Guaranteed preferred access to the grid through its strategic development and

an obligation to purchase the power generated for the utility;

• Appropriate and streamlined administrative and application processes;


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• A cost-recovery mechanism for monopoly utilities and cost-sharing system for

utilities in competitive markets;

• Public acceptance through low cost for end consumers and creation of

awareness for the importance of RE;

• Dynamic mechanisms that reflect market, economic and political

developments and establish a level playing field with conventional electricity

generation;

• Opportunity to create a critical mass of renewable energy investment and

support the establishment of a self sustaining market (Schwarz, 2008; Sawin

2004; NERSA, 2008).

2.2.1.1 Differences in design

Feed-in tariffs have been established in more than 36 countries worldwide, including

Germany, Spain, a number of states in the US, and also developing nations including

Turkey, Sri Lanka, Nicaragua, Indonesia, Ecuador, China, Brazil, Argentina and

Kenya (Sawin, 2004).

Klein et al (2006) discuss differences in the models used in these countries. They

range from: whether or not purchase obligations exist, the guaranteed duration of the

compensation levels, to the method used for price determination. The tariff level can

either be based on the electricity generation costs from RE sources or alternatively

on the avoided external costs induced by electricity generation using RE sources.

Regardless of the method of finding a tariff level, the policy makers need to find an

acceptable balance for both the electricity generators and investors requiring a

reasonable profit margin on the one hand, and the electricity consumer on the other

hand, onto who’s electricity price the premium is added (Klein et al, 2006).

2.2.1.2 Fixed tariffs based on electricity generation costs

In the case of tariffs varying according to electricity generation costs, as in most EU

countries, a feed-in tariff should have technology-specific tariff levels. According to

the expected quantity of electricity produced and the estimated lifetime of the wind

farm, a tariff level can be determined taking the following factors into account:

• Investment for the plant

• Other project-related costs, such as expenses for licensing procedures


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• Operation and maintenance costs

• Inflation

• Interest payments for the invested capital

• Profit margins for investors (Klein et al 2006) / (Mendonça, 2007).

2.2.1.3 Fixed tariffs based on external costs

The alternative concept of including external costs in the determination of a support

level, among others, can take the following possible external costs into the equation:

climate change and global warming, health damage due to air pollutants, agricultural

yield loss, material damage, and impacts on the energy supply security. In addition to

these external costs, expenses can be added that would arise without RE plants,

when the electricity would have to be generated in conventional power plants.

This pricing method is for example used in Portugal, where the system is additionally

adjusted to electricity demand with higher electricity prices during daytime than at

night.

Disadvantages described in context with this model of price determination include

high administrative complexity and low transparency, and uncertainties for investors

due to difficulties to predict tariff levels (Klein et al 2006).

2.2.1.4 Premium tariff

There are further variations to the pricing options. In Spain, for example, plant

operators can chose whether they supply electricity at a constant price set by the

regulatory authority who base it on currently existing electricity rates, or whether they

prefer receiving the varying market price plus a premium (Ragwitz and Huber, 2005).

Premium tariffs are also applied in other counties including Slovenia, the Netherlands

and Denmark. This tariff option is more market and demand orientated and therefore

more compatible with liberalized electricity markets compared to fixed feed-in tariffs.

However, risks for RE generators are higher, as the total level of the tariff is not

decided in advance and there is no purchase obligation as is usual in the case of

fixed tariffs. Consequently, prices in the premium model have to be higher to cover

the risks for RE generators. Fluctuations of the resulting tariffs can be limited by

setting a top or/and bottom limit or by having the premium vary according to the

electricity market price, as it is implemented in Denmark (Mendonça, 2007).


23

2.2.1.5 Revision of tariffs

From time to time, tariff levels may need to be revised and adjusted to appropriate

levels so that the stated goals of the energy policy and financial sustainability are

achieved. In addition, generation costs of electricity may experience unexpected

changes due to variations in prices of their components or a technological

breakthrough (Klein et al, 2006). Two different methods are used to revise the level of

remuneration: Periodical revision and adjustment of tariffs and capacity dependent

adjustment of tariffs. Further questions concern whether the tariff adjustment is

exclusively for new installations or also includes already existing ones, and whether

the tariff level is linked to inflation.

The challenge in this design detail is to balance a stable policy framework with long

contracts of fixed tariffs leading to high investment security and high numbers of RE

implementations with sufficient flexibility of the tariff system to allow fast adjustments

according to changes in technology costs and in electricity prices (Mendonça, 2007).

2.2.1.6 Purchase obligation

Within their feed-in tariff system, many countries have some kind of purchase

obligations to bind grid operators, energy supply companies or electricity consumers

to buy electricity generated from RE sources. Exceptions to these obligations are

found in some countries such as Spain, the Czech Republic, and Slovenia, if RE

electricity is offered on the spot market. In Estonia and Slovakia, a system is in place

where grid operators are only obliged to buy electricity from renewable sources up to

the level of their transmission and distribution losses. Part of the reasoning behind

this limitation is that not every grid operator has a license to sell electricity and

therefore can only buy an amount of electricity equivalent to its network losses.

An evaluation of purchase obligations shows advantages, such as investment

security, low administrational complexity, and high RE exploitation in several

countries. A possible disadvantage is the limited market compatibility, as the amount

of electricity bought is independent from the demand (Mendonça, 2007).


24

2.2.1.7 Stepped tariff design

In most EU countries, tariffs are designed to reflect technology-specific generation

costs and therefore vary with different RE technology, different plant size, or external

conditions at different sites, like wind yield (wind speed and duration). This method

helps sites with less favourable conditions to become profitable as such as it

minimizes the risk of over-compensating very effective plants. It keeps the costs for

electricity consumers low as it limits profit for producers at favourable sites. However,

a stepped tariff design is administratively complex and might lead to less

transparency and increased uncertainty for investors.

2.2.1.8 Technical learning and tariff reduction

Martens et al (2001) argue, that ‘fixed feed-in tariffs do not provide for incentives for

innovations and cost reductions. To counter this deficiency the appropriate regulatory

authority may lower the fixed tariff to reflect falling prices caused by technological and

operational progress.’ This can be done by lowering the tariff level for new

installations within the revision and adjustment of tariffs as described above, or by

having a predefined reduction of the tariff level by a certain percentage per year for

new installations. Germany, France, and Italy partly have such systems of tariff

digression in place, where the year of installation of a plant determines the

reimbursement, with lower rates each year. This concept minimizes the risk of over-

compensation and creates incentives for technological innovation and lowering costs.

2.2.1.9 Net metering

Sawin (2004) describes a variation on the feed-in tariff, the so-called “net-metering”

approach. It allows consumers with small renewable systems at their homes to sell

their excess electricity to the grid. The utility is obliged to buy this excess electricity at

wholesale market prices. This system is in place in Japan, Thailand, Canada, and

various states in the US. Either the producer is paid for every KWh fed into the grid,

or gets credit only to the point where their production equals their consumption. The

net metering system is beneficial to both the electricity providers as well as the

system owners. Especially during peaking hours, this excess power generated

supports the national grid by making up for increased demand.


25

2.2.1.10 Advantages and disadvantages of feed-in tariffs

According to Toke (2007), the system of feed-in tariffs has proven to be the most

affective policy mechanism for promoting RE, as it is the fastest, most

technologically-diverse system at lowest costs. Summing up arguments for feed-in

tariffs, Mendonça (2007) and Sawin (2004) list the following:

• To take changes in technology and the marketplace into account they show

great flexibility in terms of their design.

• Feed-in tariffs encourage steady growth of small-and medium-scale producers.

• The transaction costs are low.

• They facilitate financing through price and revenue certainty

• They help to ease entry.

• Feed-in tariffs have shown the greatest success in developing renewable

markets and domestic industries and were responsible for most of the

additions in RE capacity and generation. Consequently they lead to the related

social, economic, environmental and security benefits.

• Through encouraging the increase in RE capacity, feed-in tariffs drive down

costs through technology advancement and economies of scale.

Mendonça (2007) sees potential disadvantages if tariffs are not adjusted over time,

as this would lead to unnecessarily high prices of RE for the end-user. Menantenau

et al (2003) argue that in a system of feed-in tariffs, project developers are not

exposed to price competition and therefore he assumes that wind power is not

delivered at the lowest possible cost.

2.2.2 Obligation/Certificate system – a quota system

While the pricing scheme of feed-in tariffs establishes a price for electricity and the

market determines capacity, in quota systems the government mandates a minimum

share of capacity of electricity to be generated from renewable energies (Sawin,

2004). The price, on the other hand, is set in the market. There are two main types of

quota mechanisms, the obligation or certificate system and the tendering system.


26

Quota obligations are relatively new and currently in place in a number of states in

the US and in 7 of the 27 EU states including Belgium, Italy, Latvia, Poland,

Romania, Sweden, and the UK. Under such schemes, government sets a target of a

minimum amount of renewable energy that increases over time. Depending on the

policy design, minimum shares of renewable energy are compulsory for consumers

and/ or suppliers and/or producers. This system is often combined with Tradable

Green Certificates (Ragwitz, 2007). Eligible renewable energy producers receive

certificates for the electricity they produce, which are proof of meeting their legal

obligation as well as an additional income source, as they can be traded separately

from the physical commodity (Martens et al, 2001) (Mendonça, 2007). There are

financial penalties or ‘buy-out payments’ for non compliance in place (Butler and

Neuhoff, 2004).

Mendonça (2007:14) gives an overview of arguments for and against these systems.

Advantages:

• Promote least-cost technologies and projects, as the cheapest resources are

used first. Technologies are promoted that are closest to market

competitiveness and prices are brought down early.

• In theory, the certificate system provides certainty regarding future market

share for RE as they provide a steadily growing market for RE. However,

according to Sawin, this is often not true in practice as quota systems create a

“tendency of stop and go and boom and bust markets” (Sawin, 2008:4).

• Quotas can be coupled directly with other government policies, such as

emission reductions (Sawin, 2004).

• Certificate schemes are perceived as being more compatible with open or

traditional power markets.

• This scheme is more likely to fully integrate RE into electricity supply

infrastructure.

Disadvantages:

• Lack of experience with the system and young markets for Tradable Green

Certificates, causing investors to hesitate (Ragwitz, 2007).


27

• Certificate schemes involve high risks and low rewards for equipment

manufacturers and projects developers slowing innovation.

• Prices tend to fluctuate in ‘thin’ markets, creating instability and gaming.

• Larger-scale, centralized production plants are encouraged, rather than small

investors as the investment risks are higher for them.

• Developments concentrate in areas with best resources, which might cause

possible opposition to projects. Consequently, benefits associated with RE are

missed, including jobs, economic development in rural areas, and reductions

in local pollution.

• Governmental targets can set upper limits for RE developments as there are

no incentives to install more than the mandated level. Profitability exists only

within the quota, which makes it unlikely to surpass national renewable

targets.

• Tends to create cycles of stop-and-go development. The speed with which

technologies are introduced is based on political decisions and therefore in

cases largely unrelated to technical progress and the efficiency of using RE

(Sawin, 2004).

• Certificate schemes lack transparency, are complex in design, administration,

and enforcement.

• There are high transaction costs.

• Lack of flexibility and difficulties to fine-tune or adjust in short term if situations

change (Mendonça, 2007).

2.2.3 Tendering system – a quota system

Under tendering systems, governments establish a desired level of renewable

energies and the corresponding growth rates over time. This target amount or

percentage of total capacity is specified as well as sometimes also a maximum price

per kWh. Then RE developers enter a competitive bidding process for power

purchase agreements and/or access to a government-administered fund, while

submitting price bids for contracts. In some cases, government might separate

tenders for different RE technologies, so that for example a wind farm is not

competing against a solar PV project. Commonly, proposals with the lowest bids are


28

accepted first, followed by higher ones until the determined capacity is reached.

Developers who are successful in the bidding process are guaranteed a price for a

certain period of time and electricity providers are often required to buy a certain

amount of RE from these developers at a premium price, where the government

covers the difference between market reference price and winning bid price. In

comparison to the obligation/certificate system, the tendering mechanism is a once-

off competition for funds and contracts, where in the former developers constantly

compete in the marketplace, with existing and new projects, except they have signed

long-term contracts (Sawin, 2004).

As with the pricing law, the additional costs of RE are either covered through special

taxes on electricity or by a premium rate charged to the end-consumer.

Tendering systems have been in use in the UK, Ireland, France, the US, and China

and have often performed weakly (Mendonça, 2007). Reasons for their poor

performance might include uncertainty in the market caused by intermittency of

tenders, and the complexity of the process. Sawin (2007) suggests that unrealistically

low bids are often the result of government tendering processes involving the

assurance of funds to projects that cannot be completed. However, from a

government point of view tendering systems may offer advantages, like the possibility

to tender in specific technology bands as well as considering public interests such as

stimulating domestic industry, local employment, and the country’s export potential

(Martens et al, 2001).

As for the pricing systems, these quota mechanisms also require “political stability

and long-term credible, enforceable and consistent policies” (Sawin 2007:17). In

addition, the following requirements might be important for the success of this policy:

The scheme needs to be relevant to a large market segment; detailed purchase

obligations, end-dates, and penalties for non-compliance need to be established;

different bands need to be set according to technology type; long-term contracts are

required to reduce uncertainty for project developers; and minimum and maximum

certificate prices need to be determined (Sawin, 2007:17).


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2.2.4 Fiscal incentives

Another category of renewable energy promotion schemes are fiscal incentives.

These incentives lower the cost of RE as they reduce the prices for renewable

technologies or energy by increases in received payments or reduction in the

production costs. In addition to several EU countries, such incentives have been in

use in Japan, US and India (Sawin, 2004). This form of economic assistance ranges

from “rebates on general energy taxes, rebates from special emission tax, proposals

for lower Value Added Tax (VAT) rates, tax exemptions for green funds, to fiscally

attractive depreciation schemes” (Martens et al, 2001:85). However, these taxes

were consciously kept at a low level and did not significantly add to the exploitation of

RE due to considerations of international competition (Martens et al, 2001).

Moreover, long-term, low-interest loans and loan guarantees help reduce the cost of

capital. Sawin (2007) mentions that reducing or eliminating subsidies for conventional

energy would help creating a fair market for renewable energies. Even though this is

technically not a direct subsidy for RE, it would help renewables to become more

competitive on a cost basis. Ragwitz et al (2007) see the attractiveness of fiscal

incentives in their direct message to final energy consumers about the added value of

renewable energy projects.

2.2.5 Other renewable energy policies

In addition to the above mentioned specific renewable policy mechanisms, there are

other regulations that might contribute substantially to the development of RE

projects.

Sawin (2007) mentions the importance of policies around industry standards, like

renewable technology standards and certification, and project siting and permitting.

In addition, there is a need for regulations and policies around grid access,

transmission tariffs, or local special planning processes (Martens et al, 2001).


30

2.2.6 Different countries and their policies - Combinations of support mechanisms

Taking the immense diversity of support mechanisms into account, there is no sense

in highlighting one specific instrument as the best possible instrument for all markets

under all conditions. The key to successful exploitation of renewable energy in a

country is the specific design and implementation of the support scheme rather than

the type selected. Furthermore, the additional settings in a country play an important

role. They are discussed in chapter 4 under barriers and obstacles.

Most states that are successful in renewable energies provide a combination of

support mechanisms. A brief overview of mechanisms in the ten countries with the

highest installed capacity is provided in table 1 below.

Feed-in tariff

Certificate/Obligation

Tender Fiscal incentives Tradable Green Certificates

Germany + Large subsidized loans

US (differs from State to State)

+ + + Tax incentives

Spain + Low interest loans

India (differs from State to State)

+ + Tax incentives

China + Denmark + For large

offshore wind farms

Italy +(only for solar PV)

+ +

France + for large RE projects

UK + Grant schemes + Portugal + Investment

subsidies, Tax reductions

Table 1: Renewable energy policy instruments (Martens et al, 2001) (GWEC, 2008)


31

2.2.7 German Renewable Energy Sources Act (EEG)

The German feed-in tariff is part of the country’s Renewable Energy Sources Act

(EEG), an innovative driving force for the fast development of climate-friendly energy

production. Examples of the elements it includes are:

• Guaranteed duration of compensation levels for 20 years for wind

energy

• Graduated rates

• Reduction in rates is pre-defined with 2 - 6.5% per year. The

compensation level per kWh normally remains constant for 20 years for

plants in service, but it depends on the calendar year in which the plant

goes into service. The later a plant is commissioned, the lower the

compensation.

• Even distribution of burdens among electricity consumers, with the

exception of reductions for electricity-intensive industry and railways.

• Access to the grid is legally guaranteed.

• Costs of energy to compensate for fluctuation in feed-in do not have to

be paid by operators of renewable energy systems

• Bonus for innovative technologies such as fuel cells and micro-turbines,

are in place (Federal Ministry for the Environment, 2007).

The EEG is described as “the key to climate protection, new technologies and

employment. It is the basis for multi-billion dollar investments in our [German]

industry” (Federal Ministry for the Environment, 2007:14). Thanks to its overwhelming

success the Act has been imitated by many other nations.


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Chapter 3 – Wind energy in South Africa

3.1 South Africa’s problem context

In the spirit of the World Summit on Sustainable Development, hosted by South

Africa in 2002, a White Paper on Renewable Energy was assembled in November

2003 to supplement the Paper on Energy Policy. It acknowledges a significant

medium- and long-term commercial potential of renewable energies and their

potential to provide the least cost form of energy in certain cases. The White Paper

formulates a medium term target of “10,000 GWh (0.8 Mtoe) renewable energy

contribution to final energy consumption by 2013, to be produced mainly from

biomass, wind, solar and small-scale hydro. The renewable energy is to be utilized

for power generation and non-electric technologies such as solar water heating and

bio-fuels. This is approximately 4% (1,667 MW) of the projected electricity demand

for 2013 (41,539 MW)” (DME, 2003b:i). This is equivalent to replacing two (2 x 660

MW) units of Eskom’s combined coal fired power stations (EEU, 2004:22).

The key question is how will this be best achieved?

According to the DME, “government has developed a Renewable Energy Framework

in order to accelerate and expand the deployment of renewable energy technologies.

In terms of this framework, electric technologies or grid connected projects are

expected to contribute at least 6,000 GWh to the target whilst non-electric

technologies will contribute the remaining 4,000 GWh. Given government’s objective

of stimulating the renewable energy industry and encouraging smaller players to

enter this market, this framework splits the electric target of 6,000 GWh between

Eskom (40%) and IPPs (60%)” (DME, 2008c:3).

3.2 RE and mitigation scenarios in South Africa

Banks and Schäffler (2005) analyze the “potential contribution of renewable energy in

South Africa” in the light of the rising human-generated CO2 emissions and the

consequent environmental threat. They see RE as the only sustainable energy

supply option and picture three possible scenarios, depending on the volume of

renewable energies established in South Africa in the near future.


33

The first scenario is called ‘business as usual’ and assumes only minute support from

decision-makers for renewable generation technology. A huge increase in capacity of

fuel plants would be needed, endangering both, the environment and the economic

stability. The renewable energy contribution would not exceed 4%.

The other two scenarios with increasing input of renewable energy show that

reasonable emphasis on RE is important for local capacity development, job creation,

and for cost reductions in RE technology. The authors speculate that renewable

energies might become the most cost-effective energy options in the future (Banks

and Schäffler, 2005).

The South African Department of Environmental Affairs and Tourism in cooperation

with the Energy Research Center (2007) conducted ”Long-term Mitigation Scenarios”

outlining different scenarios depending on South Africa’s reduction of GHG

emissions. These scenarios are meant to provide a sound scientific analysis as a

basis for long-term policy choices and for next steps towards mitigation in South

Africa.

The first scenario, “Growth without Constraints”, pictures the catastrophic

consequences for South Africa, if the country does not decrease its emissions before

2050, does not implement energy efficiency, and if human behavior patterns do not

change. In this scenario, RE remains minute and energy is derived from additionally

built nuclear plants, and from coal and oil. South Africa’s emissions would have

quadrupled by 2050, from 446 million tons of CO2–equivalent (Mt CO2-eq) in 2003 to

1 640 Mt CO2–eq by 2050 (Energy Research Centre, 2007).

The study further illustrates startling data that South Africa’s current development

plans, including the government’s strategies for energy efficiency and RE

contribution, will in the long-term not lower emissions significantly below the

predictions for the first catastrophic scenario.

A second scenario, the so-called “Required by Science” scenario, describes full scale

mitigation through dramatic differences in everyday life and respective emissions

trajectories.

To indicate the level of emission reductions that would be required by science, it is

assumed that emissions continue to increase only for a short while, peaking by 2020


34

at 473 Mt CO2-eq, before declining to 65% of base year levels. A reduction of 35%

for example would imply the highest peaks of emissions at 483 Mt in 2026, before

declining to -30% or 314 Mt in 2050 (Energy Research Centre, 2007).

The study describes strategic options and conditions for South Africa, required to

achieve the later scenario, such as CO2 tax and other incentives, as well as

emphasis on future technologies, industrial efficiency, and behavioral change

(Energy Research Centre, 2007).

3.3 Supportive policies

Despite the government’s objectives, there are not yet any policies in place that are

supportive of renewable energies. Interested parties complain that the various

sections of the government departments involved give contradicting signals about

tariffs for renewable energies and about how renewable projects will be selected

(SAWEA, 2008).

3.3.1 Expression of Interest

On October 14th, 2008, the DME sent out a call for Expression of Interest (EoI) to

entities willing to generate electricity from RE sources. Interested parties were given

until November 14th, 2008 to report about their planned projects if there was a high

probability that construction of the plant will start within 30 months. The DME

received more than 100 applications, with a majority of responses interested in wind

energy (45%), followed by biomass (34%) and small-scale hydro energy (8%). The

total estimated capacity of projects based on received responses is more than 5000

MW (Njobeni, 2008b). Amongst the interested parties, a tender process is planned to

determine which projects will be provided with PPAs to generate a certain share of

energy from renewable sources (DME, 2008c). In this case, wind energy projects not

only have to compete amongst each other but also they are in the race with other

renewable resources. This mechanism would put significant limitations on the scale

of a newly developing renewable industry. There are no high profits to serve as

incentives to install more than the mandated level and profitability will exist only


35

within the tender. According to the DME, this is the government’s preferred approach,

as it promotes “a number of ‘early win’ investments” and demonstrates “the potential

of the renewable energy sector to contribute to a sustainable energy mix in South

Africa. In addition, the department wants to ensure that a balanced portfolio of

projects across the different resource types is developed and supported nationally”

(DME, 2008c:3).

According to Daniel Modise (DME) the EoI was aiming to gain an overview of current

renewable projects in planning. Details about its realization are currently being

discussed (Modise, 2008, Personal Interview). This process raises a number of

critical questions that could not be answered by the DME at that point of time: Who

will run the tenders? Who will contract? How much capacity will be contracted and at

which prize? Who will sign the PPAs?

3.3.2 Feed-in tariffs

NERSA, the National Energy Regulator in South Africa, however, is working on

guidelines for feed-in tariffs, and Thembani Bukula, who oversees electricity

regulation at NERSA, announced that the feed-in tariffs would be ready by February

28, 2009 (Njobeni, 2008a). At present, the proposal and consultation papers are

being completed and consequently a NERSA sub-committee needs to approve the

processes and consent on the timelines and papers. The proposal then is made

available for public comment (Rabinowitz, 2008). Interested parties from the industry

in cooperation with a group called eREACT, e-Parliament Renewable Energy

Activists, gathered in Cape Town on November 10th, 2008 and reached agreement

on crucial aspects they would like to have included in policies regarding feed-in

tariffs. These issues range from fair access and evaluation of proposed projects, grid

connection, to methods of setting and renewing the tariffs.

The South African Wind Energy Association (SAWEA) will produce a position paper

adding appropriate suggestions for tariff prices and detailed views of wind energy

developers according to their individual project models and quotations from suppliers.


36

3.3.3 Tradable renewable energy certificate scheme

The tradable renewable energy certification system (TRECS) captures the value

added through the environmentally friendly attributes of renewable energies and can

help facilitate compliance with governments’ renewable energy targets (DME, 2007).

Wind farms qualify as low carbon technologies and their carbon abatement potential

enables them to generate income.

The renewable energy certificate industry in South Africa is in its infancy. In March

2008, the DME established the South African National Tradable Renewable

Certificate Team (SANTRECT) to facilitate and coordinate the establishment of an

issuing body as a non-profit organization. This South African Tradable Renewable

Energy Certificate Issuing Body (SATIB) will be responsible for managing the

certificates in South Africa, beginning in March 2009. TRECS can be a seen as an

extra income stream for wind projects and can be traded worldwide (DME, 2008d).

TRECs are usually denominated in 1 MWh units. “They are priced at the differential

between the cost of renewable energy generation and the Eskom supplied cost of

coal-fired plants” (Munnik, 2008:5).

3.4 Wind energy in South Africa Estimations of South Africa’s potential total wind energy capacity vary widely.

Eskom´s estimate is currently set at only 500 to 1,000 MW (Eskom, 2006), where

more optimistic numbers are up to tenfold that number (SAWEA, 2008).

At present only about 0.05% of annual installed capacity is derived from wind energy.

This tiny amount can be divided into the following four categories:

• Connected to the national grid (total capacity: 8.4 MW) (DME, 2008a),

• Rural mini-grid (0.045 MW),

• Off-grid (0.510 MW),

• Over 20,000 bore-hole windmills countrywide (12 MW)

(DME, 2003a).

The only grid-connected systems are the Darling Wind Farm and Eskom’s Klipheuwel

Wind Energy Demonstration Facility.


37

3.4.1 Darling Demonstration Wind farm

The Darling wind farm project was first identified in 1996. The Darling Independent

Power Producer (DARLIPP) was founded as a Proprietary Limited Company to

enable shareholding by the public. Herman Oelsner, founder shareholder and now

Managing Director of DARLIPP was the main driving force behind the Darling project.

It was declared a National Demonstration Project by the National Government in the

person of the Minister of Minerals and Energy, Phumzile Mlambo-Ngcuka, in June

2000. The wind farm is shown in the cover picture of this report. It is located at the

Moedmaag Hill on the Windhoek Farm, 12.2 km north-west of Darling and

approximately 2.2 km north of the road to Yzerfontein on the West Coast, about

75km north of Cape Town, see figure 2 below.

Figure 2: Location of the Darling Wind Farm, Western Cape (EEU, 2004)

The project was planned to be developed in three phases. Phase one is

accomplished already: four 1.3 MW wind turbines producing 5.2 MW of electricity

have been connected to the grid since March 2008. The capital cost amounted to

ZAR 75 million, including development costs. The project was made possible through

donor funding by the Danish Cooperation for Environment and Development

(DANCED), by the Central Energy Fund (CEF), and by a loan from the Development

Bank of Southern Africa, DBSA. The total of ZAR 75 million for 5.2 MW equals a very

high price of US$ 2,000 per KW. However, much of the DANCED grant was used for


38

development costs. Discounting any grant money, the installed costs of the wind

turbines was US$ 1,333 per KW (Oelsner, 2008).

Phase two, at present, is not being actively pursued. It will comprise six further 1.3

MW wind turbines adding up to a total capacity of 13 MW. The potential third phase

would add 10 additional turbines. However, those further developments will only be

initiated after the South African government has finalized a regulatory framework in

support of renewable energies. The first phase could only be completed thanks to

donor money, and is just covering its costs through the Power Purchase Agreement

(PPA) with the City of Cape Town and the subsidy from DANCED (Oelsner, 2008).

However, the project had to overcome 12 years of obstacles before its turbines finally

could be connected to the national grid in March 2008.

Prior to the erection of the turbines, the Council for Scientific and Industrial Research

(CSIR) monitored wind speed and direction over a 24 month period and declared the

Darling site to be a near perfect location. The average wind speed was found to be

around 7.5 meters per second at 50 meters turbine hub height. Higher wind speeds

are more frequent during the months of October to March and wind conditions are

more moderate during the months of May, June and September. The predominant

wind direction in this area depends on the season with southerly directions between

August and April and north-western winds in winter (EEU, 2004).

The Darling Wind Farm project required an Environmental Impact Assessment (EIA)

to be carried out according to the EIA Regulations (Regulations in terms of the

Environment Conservation Act, R1182, R1183, September 1997). Despite the

initiation of an EIA at an early stage of the process, the EIA was one of the main

delaying factors of the project and it took some seven years to achieve a Positive

Record of Decision.

In 1998, the Environmental Evaluation Unit (EEU) of the Department of

Environmental and Geographical Science,, University of Cape Town, was

commissioned to carry out the environmental studies. The Danish Cooperation for

Environment and Development (DANCED) covered all costs involved, and in

September 1998, the EEU submitted an EIA Scoping Report to the Western Cape

Department of Environmental and Cultural Affairs and Sport (DECAS). The DECAS

approved the report under the following three conditions: an EIA had to be carried


39

out, specialist studies recommended in the Scoping Report had to be undertaken,

and the public participation process was to be continued throughout the EIA process.

In June 2001, DANCED commissioned the EEU to undertake an EIA, which was

submitted to DECAS in January 2002. Six months later, in July 2002, DECAS

granted authorization for the erection of four turbines.

Subsequently, in August 2002, three appeals were received which led to a temporary

standstill. The main motivations for the appeals were that no alternative sites had

been investigated and concerns with regard to the potential impacts on birds and to

the visual impact of the turbines.

In February 2003, the Acting Minister of Environmental Affairs and Development

Planning declared that the Western Cape supported the appeals on the subject of the

concerns regarding alternative sites and impacts on birds. He demanded a new

application for authorization with the same Department, should DARLIPP wish to

proceed with the project.

After taking legal advice and eleven months without any progress, DARLIPP

instituted action in the Supreme Court (case number 515/04) in the Cape of Good

Hope Provincial Division to force the Provincial Authorities to refer the project to

National Government, the National Department of Environmental Affairs and Tourism

(DEAT). Agreement was reached before going to court and the matter was referred

to National government on February 9th, 2004. However, no decision was made by

August 2004 and DARLIPP ran the risk of losing their donor, the Danish government.

DARLIPP again instituted court action to obligate National Government to come forth

with a decision in the near future.

DEAT was identified as the appropriate authorizing agency for this application and

required the initiation of a new environmental assessment process. Since there was a

new authorizing agency a new application had to be submitted. The EEU carried out

a second scoping process to fulfill legislative and DEAT requirements. It was

submitted to DEAT in October 2004. A substantial amount of information already

existed and could be integrated into the new assessment. The EEU further examined

some issues in particular: The noise environment caused by the turbines, birdlife of

the Darling site, alternative sites that needed to be considered before starting the

wind project, and conformity to a variety of international and national policies,


40

including the National Environmental Management Act, the Western Cape Planning

and Development Act, and the West Coast District Spatial Plan.

Finally, in February 2005, a Positive Record of Decision was obtained and the

Darling wind project could advance. This was about seven years after the initiation of

the EIA process.

DARLIPP set up a lease agreement with the landowner of the site and established

rights to special uses of the land in terms of the Ordinance on Land Use Planning

with the West Coast District Council.

German wind turbine manufacturer Fuhrländer AG supplied four 1.3 MW wind

turbines which were installed at a hub height of 50 meters. The four turbines

generate a maximum of 5.2 MW into the national grid which is sold to the City of

Cape Town with whom DARLIPP has a PPA for the total amount of electricity

generated for a period of 20 consecutive years. Moreover, DARLIPP entered into a

wheeling agreement with Eskom which establishes that DARLIPP may feed their

electricity into Eskom’s grid from where it will be transmitted to the purchaser free of

charge (Jones, 2008).

The Darling project’s goals and purposes are manifold and can be divided into

various categories.

• Technical aspects: the project’s aim was to adapt, develop and apply existing

technology to local conditions and to act as a pilot project in the country.

• Environmental benefits:

o Saving of 100,000 tons of coal and 60 million liters of water over a 20

year period

o Reduced pollution compared to conventional electricity generation:

• 298,125 tons of carbon dioxide or 15,000 tons/annum

• 3,180 tons of sulphur dioxide

• 2,915 tons of nitric oxide

• 1,250 tons of particulates

• 19,875 tons of slag and fly ash (DME, 2005)


41

• Social benefits: social upliftment especially in the Darling and surrounding

areas by creation and retention of jobs and skills, and sharing wealth (e.g.

equity share holding) with the local community (EEU 2004).

• Market: “To demonstrate the generation of electricity from wind energy and its

potential to contribute positively to the infrastructural development of South

Africa within a successful and sustainable national growth and development

strategy” (EEU 2004, p7).

• Creation of awareness towards environmentally friendly energy generation.

• Pilot function: to identify barriers for possible replication of wind farms and

provide suggestions on how those barriers could be removed.

3.4.2 Klipheuwel Wind Energy Demonstration Facility (KWEDF)

The Klipheuwel wind farm was built by South Africa’s electrical utility, Eskom, in

2002/03 as part of its South African Bulk Renewable Energy Generation (SABRE-

Gen) program. KWEDF, shown in the picture below, is located about 50 km north

from Cape Town. It was designed as a demonstration project to explore the use of

wind energy for bulk electricity generation and to evaluate wind based technologies

and their economic viability.

Picture 3: Klipheuwel Wind Energy Demonstration Facility

(Savannah, 2008)


42

Klipheuwel was intended to play a pivotal role in reflecting change in support of

renewable energy policy and to gain skills and knowledge in a variety of areas, such

as:

• Wind turbine technologies, including different generators, blades and control

technologies

• Project and construction experience and relation to cost factors

• Local generation load profiles and associated dispatch ability and contribution

to supply peak loads

• Operation and maintenance experience

• Verification of wind resource in South Africa and associated production

forecasting

• Power quality and grid connections: local effect of wind turbines on grid and

vice versa

• The environmental impact response with regards to noise, visual impact, avian

interaction and electromagnetic interference

• Information required by decision makers and interested parties

(Smit et al, 2004)

Klipheuwel’s three turbines were commissioned from August 2002 to February 2003

and have a combined total capacity of 3.2 MW. They are a Danish Vestas V47 with

0.66 MW, a V66 with 1.75 MW, and a French Jeumont J48 with 0.75 MW (ESKOM,

2006). The KWEDF is connected via 2.6 km of 11 kV overhead lines and cables to

the Klipheuwel substation where actual energy delivered to and from the grid,

including network losses and auxiliary supplies are measured (Smit, 2008). KWEDF

was established at a cost of about R 42 million (Smit et al, 2004).

Figure 3 shows Klipheuwel’s location and Eskom’s wind speed and wind energy

density estimates in the Western Cape.


43

Figure 3: Location Klipheuwel (Smit et al, 2004)

Eskom has made data available that contains measurements from inception till end

October 2004. In that time span KWEDF has produced 7.33 GWh. This production

was influenced by wind turbine availability, where planned outages, like scheduled

inspections and demonstrations are negligible. KWEDF produced 4.23 GWh in the

period August 2003 to July 2004 which leads to an average production of 4.6 GWh

per annum at a capacity factor of 16.7%. This is slightly lower than the initial estimate

of about 20%. Operational statistics from inception dates to October 31st 2004 are

given in the table 2 (Smit et al, 2004).

Operational Data Vestas V47

2002-08-16 Vestas V66 2002-12-17

Jeumont J48 2003-02-20

Total on 2004-10-31

Gross Energy Sent Out (kWh)

1,954,133 4,286,546 1,153,209 7,393,888

Auxiliary Consumption (kWh)

7,284 37,959 20343 65,586

Net Energy Sent Out (kWh) 1,946,849 4,248,587 1,132,866 7,328,302 Reactive Power (kVArh) 108,067 3,2905 N/A Turbine Availability (%) 90.09 91.82 79.53 Energy Utilization Factor (%)

15.23 14.79 10.32

Table 2: Operation statistics Klipheuwel (Smit et al, 2004)

Klipheuwel


44

Turbine availability was clearly below expectation and contributed to the overall lower

utilization factors. The major problems could mostly be corrected by replacing

defective components:

• Faulty timer on V47 that randomly operated

• Rotor current control module as main factor of V47 downtime

• Faulty contactors on V66

• Electrical motor for gearbox oil pump on V66

• Failure of hydraulic coupler on J48

• Various monitoring and adjustments needed for J48, specifically due to high

temperatures and cable twist (Smit et al, 2004).

Further, detailed data from July 2003 to June 2004 investigates Klipheuwel’s monthly

energy production according to turbine and wind resource availability.

The “wind resource was not sufficient for 27% of the time to produce a net production

to the grid, after supplying own auxiliary supplies. The output of KWEDF was limited

to 500 kW in total for a further 43% of time. It is also evident that the facility will only

generate for about 10% of the time above half of its installed capacity of 3.16 MW.

This is mainly due to the wind regime at the site, and is also typical of the area

surrounding Cape Town, excluding the Cape Point Nature Reserve where average

wind speeds are expected to be much higher than [in the] rural area of Klipheuwel”

(Smit et al, 2004:4,5).

Klipheuwel Wind Energy Demonstration Facility is contributing to various studies to

enhance understanding of wind energy related matters under South African

conditions. Smit et al (2004) report that no bird strikes were experienced in the first 2

years of operations and that no electromagnetic interference was recorded with radio

and communication sites in the immediate vicinity, within an approximate 1,5 km

radius of the wind turbines. Overall, experiences at Klipheuwel encouraged Eskom to

invest further in wind energy and currently a 100 MW wind farm is being planned for

the West coast. This project will be described in more detail in the following section.


45

3.5 Wind projects planned in South Africa

3.5.1 Overview of projects

Wind energy projects in South Africa are still in the early development stages. The

majority of developers identified in the country are currently in the process of

finalizing decisions about their sites, putting up masts for detailed wind

measurements, and looking into preliminary environmental impact assessments.

Moreover, pre-building analysis of the grid in the areas of the projects is being done

by Eskom. None of the developers are in the actual construction phase yet. A few

entrepreneurs already have PPAs with municipalities in place. Their tariffs however

were decided at the time of initial interest, mostly years ago. Consequently, the

agreement has to be re-negotiated, as the old prices are not viable under today’s

conditions. PPAs need to include a clause for changes in policies like the

establishment of feed-in tariffs (Chown, 2008).

The list of developers identified for this research might not be complete, but gives an

idea of the number of interested parties. The sum of projects planned by the

interviewed developers amounts to a capacity of about 3,045 MW, excluding those

who had confidentiality issues, see list in appendix 2. The projects that are close to

implementation stage might add up to roughly 1000 MW. The wind farms vary in size

and include smaller projects with less than 10 MW up to large farms with up to 500

MW. There are other wind projects that might have not been identified in this

research. Five developers interviewed did not want to provide any details about their

projects. As explained elsewhere in this document, developers have different

confidentiality issues regarding size, location, and viable tariffs for competition

reasons, therefore the initial plan to show potential sites on a geographical map had

to be abandoned.

3.5.2 Eskom

Eskom Holdings Limited (Eskom) has begun development of a commercial wind

energy facility on a site within the Matzikama Municipality on South Africa’s West

Coast, as shown in figure 4 below. The necessary Environmental Impact

Assessment, undertaken by Savannah Environmental, is almost completed.


46

Figure 4: Location of planned Eskom wind facility in Matzikama area (Savannah, 2008)

The construction and commissioning of this wind farm is designed in two phases,

with the first one consisting of about 50 2 MW industry standard turbines, planned to

generate roughly 100 MW. Eskom’s optimistic plan is to have the first unit connected

to the grid by the end of 2009. However, to date the project is already about 3

months behind schedule, with a current setback of the tender allocation. At the time

of writing this report, there is no approval of the tender yet. It was expected to be

allocated by end of November 2008. The first phase of the facility is hoped to be

accomplished by March/June 2010 (Smit, 2008).

Over a period of the last 3 years, wind measurements were taken in the vicinity of the

site. Applied to typical wind turbine performance the data leads to expectations of an

energy utilization factor of roughly 26% (Savannah, 2008).

Besides the 50 turbines and their concrete foundations, the infrastructure associated

with the wind farm and needed to enable connection with the grid will include a

substation and underground electric cabling between each turbine and the

substation, and about 40 km of overhead power line (132 kV distribution lines) from

the substation to the electricity grid at the Juno submission substation near

Vredendal (Savannah, 2008). The expected costs only for the components enabling

the grid connection are estimated to amount to about ZAR 100 million (Smit, 2008).


47

Besides the second phase of the current wind project, which is anticipated to double

the farm’s capacity, Eskom is looking for possible sites for a large scale wind farm

with a planned capacity of 500 MW. There is no time frame for both these future

projects yet.

3.5.3 Turbine manufacture in South Africa

Local manufacturing of 2 MW turbines is planned in the Atlantis area. Isivunguvungu,

managed by the German engineer Dr. Michael Kast, sees the high potential of wind

industry in South Africa and is currently in negotiations with potential partners, South

African authorities, and future developers. Isivunguvungu is planning to build

AeroMaster 2.0 wind turbines based on the internationally proven design of Aerodyne

GmbH in Germany. Part of their concept is to manufacture most of the components

locally, including blades and generators. Bypassing import costs, availability of

turbines and spare parts, and lower transportation costs would be beneficial to

developers. In addition a whole new industry would develop in South Africa, creating

a wide field of new and specialized jobs. Estimated time for production and

presentation of a prototype is targeted for mid 2009.


48

Chapter 4 – Obstacles and barriers: legislation and policies

Despite the abundance of the wind resource and the two mentioned small scale

demonstration wind farms there are no commercial wind energy projects up and

running in South Africa yet. This chapter gives an overview of obstacles and barriers

for these developments caused by legislation and policy deficits in South Africa. They

are gathered from interviews with wind energy developers, possible investors,

Eskom, consultants, as well as provincial and national government, adding up to 29

individuals in total. A list of the interviewees is given in appendix 1.

The findings have to be interpreted carefully as they represent indications and

viewpoints from the mentioned groups and individuals. Nevertheless, their insight

should reflect the real situation in South Africa, often including suggestions for

improvement.

Compared to international obstacles and barriers found in relevant literature, the

central issues in South Africa indicate that the country is still in its beginning stages of

developing wind energy. Hurdles described for the European market seem to

concentrate on administrative issues, in particular the high number of authorities

involved or long lead times to obtain necessary licenses, as well as permission

procedures and grid issues. Only then legislative and financial barriers are mentioned

(Coenraads et al, 2008), (Ragwitz et al, 2007). It might be of benefit for South Africa’s

approach to look at international experience and lessons learnt bypassing some

problem areas in advance.

Figure 5 illustrates the four different areas of obstacles commonly mentioned by

professionals in the industry. The main two areas are policies & legislation and

financing & business models. They answer the key research questions and the

following chapters concentrate on them.

The other two areas of obstacles in figure 5 are found to be less relevant for this

research. Issues around technology are mentioned in chapter 5.7 and a discussion

around the lack of information is attached in appendix 4.


49

Figure 5: Areas of obstacles

Information

Lack of information about wind in South Africa

Lack of public awareness

Policies and regulations

Lack of government commitment and supportive legislation

Policy incoherency from government

Industry structure

Absence of policies on feed-in tariff to Eskom or municipalities

Responsibility for grid extensions to wind farms

Need for streamlining Environmental Impact assessment

Financing and Business Models

Inexperience in developing IPPs and SPVs

Inexperience of local wind industry as project developers and project sponsors

Difficulty in financing development costs

Lack of knowledge of local financiers / banks of wind industry

Difficulties in securing long-term PPAs to provide reliable revenue stream to service debt and reward equity

Low cost of conventional electricity & need for feed-in tariff

Global credit crunch and scarcity and cost of capital

Inexperience in accessing carbon financing

Technology

Long lead times for equipment

Currently no local production of turbines or components

Wind farms in

South Africa


50

4.1 Lack of government commitment and supportive legislation

Developers and investors complain about a lack of government commitment towards

renewable energies and demand the establishment of a supportive legislation

combined with the required financial support, allowing RE projects to become

financially viable. The Government’s renewable energy target of 10,000 GWh, which

equals 4% of renewable energy contribution, by 2013 (DME, 2003b) seems

meaningless without supporting steps towards reaching this goal. For scale and

speed of wind energy developments in South Africa, there is an urgent need for

policies to encourage such developments.

The levels of knowledge about potentially supportive policies varied substantially

within the professionals interviewed. There was a general consensus however, that

the instrument established is only as good as its terms, and that the policy’s

conditions must be adequate and its terms adapted to developers’ needs.

A number of voices favored feed-in tariffs as they have proven to kick-start renewable

industries in other countries and made wind energy projects worthwhile. Moreover,

feed-in tariffs were seen as crucial to make projects bankable. On the other hand,

feed-in tariffs were perceived to give security for developers but not to put pressure

on generation and technology prices (Jackson, 2008, Personal Interview).

Experiences from other countries should be studied and applied to the South African

context. Also a mixture of support mechanisms seems to be a possible solution. In

addition, some individuals mentioned that extra fiscal incentives are needed, like

special loans. A system compared to the German EEG (Erneuerbare Energien

Gesetz - Renewable Energy Sources Act) appeared favorable for many, consisting of

various factors like a feed-in tariff, the obligation for the utility to buy all RE, and a

‘pass-through’ system to finance extra costs. The feed-in conditions acceptable for

South African conditions would consist of a duration of 20 years minimum and

acceptable guaranteed tariff prices varying from 85-120 c/kWh (SAWEA, 2008). For

confidentiality issues, many developers were not prepared to mention acceptable

price ranges. In case of a bidding system being implemented, competition obviously

becomes a crucial element.


51

With Eskom planning a 100 MW wind farm project on the west coast, some

developers and investors believe that Eskom´s experience gathered through that

process will support realistic tariffs (Potgieter, 2008, Personal Interview).

4.2 Policy incoherency from government

Developers and investors report of confusing and contradicting information from

government officials and departments involved causing uncertainty and frustration.

The industry wishes for decision makers to have a coherent policy (SAWEA, 2008).

While NERSA on the one hand, is working on guidelines for feed-in tariffs and hopes

to have them ready by the end of February 2009, the DME calls for an expression of

interest from entities willing to generate electricity from RE sources and declares they

will prepare an appropriate tender (DME, 2008c). This however would lead to a quota

policy, where a bidding system determines which projects will receive PPAs, until a

certain share of energy is being generated by different renewable sources. Different

potential dangers are seen in this scheme, for example wind energy projects might

have to compete not only amongst each other but also with other renewable sources.

This would clearly put limitations on the scale of industry around renewable energies.

Moreover, developers are concerned as the DME has no track record and no

expertise regarding bidding systems (SAWEA, 2008).

4.3 Industry structure

The South African electricity industry is dominated by Eskom, whose ownership vests

in the South African government. It is a vertically integrated operation that generates,

transmits and distributes electricity, without any serious competition in the country.

Eskom is responsible for 95% of South Africa’s and roughly 50% of the whole of

Africa’s energy supply. Looking at the diverse tasks Eskom handles in addition to its

current struggle with capacity shortages and increasing demand, renewable energies

are only a very small focus of Eskom’s whole range (Smit, 2008, Personal Interview).

The described structure of the electricity sector with Eskom incorporating three

divisions (generator, transmitter, and buyer) under one umbrella is seen as a


52

potential source of bias towards favoring its own developments, even if they might be

more expensive and less profitable. Eskom, as the monopoly organization, must

either demonstrate its commitment to promote RE participation in the market or

another organization must be appointed to ensure fair access and unbiased

evaluations of proposed projects. Strong governmental policies and regulations are

needed to set clear rules and consequently limit Eskom’s authority. With Eskom as

the single buyer as proposed in NERSA’s guidelines, supportive policies like feed-in

tariffs are needed to ensure that Eskom buys RE for a fixed tariff and wheels it to the

end-user.

The close and non-bureaucratic cooperation between developers and Eskom

concerning grid connection and wheeling of the energy is seen as essential for the

success of wind projects (SAWEA, 2008).

4.4 Absence of policies on feed-in tariff to Eskom or municipalities

The described lack of supportive legislation for renewable energies (Chapter 4.1)

includes the absence of price support systems for RE. Wind project developers

experience difficulties in receiving acceptable prices for their electricity. As there is no

governmental support of renewable energy prices so far, the average prices offered

for renewable energy are too low to make RE projects feasible (Oelsner, 2008).

Potential price support mechanisms include for example fixed feed-in tariffs, or a

premium system, where the generator is paid the varying market price plus a

premium (Ragwitz and Huber, 2005).

Besides Eskom, municipalities or large industrial companies, such as mines, are the

only possible buyers of RE. Appetite for green electricity is still very limited in South

Africa. Marketing Surveys and Statistical Analysis (MSSA, 2004), commissioned by

the United Nations Development Programme South Africa, undertook a survey to

assess the market for renewable electricity amongst businesses and industries in

area of Greater Johannesburg. They found, that municipalities and industry do not

yet have enough awareness of environmental concerns. Despite a general interest in

using green energy, half of the companies are not ready to pay a premium for


53

electricity produced from renewable sources (MSSA, 2004). Only few municipalities,

like Port Elizabeth or Beaufort West are currently tendering for renewable energy

projects.

4.5 Responsibility for grid extensions to wind farms

South Africa's national transmission grid is made up of roughly 27,000 kilometers of

power lines. The main generating stations are located in Mpumalanga province,

where the vast coal reserves are found. Wheeling electricity to the Western Cape

leads to about 15% offset transmission costs. Wind farms and other RE projects in

various areas will de-centralize power generation, reduce long wheeling distances,

and will help to save costs for Eskom. However, in many areas, the national grid

would need to be up-graded or re-built to handle the additional capacities from these

sites (Smit, 2008, Personal Interview).

Precedence for renewable energy wheeled through to the national grid is the Darling

Demonstration wind farm described in chapter 3.

Eskom’s transmission license mandates third party access. However, some more

radical parties would prefer that transmission was not Eskom’s responsibility and

dealt with by a completely separate entity. There was general consensus that

legislation needs to oblige Eskom to grant priority to renewable energy projects when

it comes to the building and extension of grids and dispatching priorities. In addition,

Eskom must not be allowed to offload costs of network reinforcements onto

renewable energy projects (SAWEA, 2008). The details regarding up-grading of the

grid and wheeling charges need to be decided and established as part of the policy.

Moreover, connection costs to the network need to be rationalized to provide

adequate individualized protection depending on the capacity of the equipment and

the operation of the network without overburdening the individual project. Smaller

units require less sophisticated controls and protection compared to huge units (Smit,

2008, Personal Interview).

The process of attaining grid access for RE projects follows an Eskom internal

Network Asset Creation process as used for other supplies. Developers start with

filing a written request for a quote for grid connection with Eskom Customer Services.

Lead times for projects may vary, based on complexity and infrastructure required.

Current lead time is about three years to allow for an EIA, to build line routes,


54

associated planning, design, execution, and commissioning, etc. Substations alone

may become operational faster. With Eskom’s current pressure on resources, longer

lead times are more realistic (Smit, 2008, Personal Interview).

4.6 Need for streamlining Environmental Impact

Assessments

An EIA determines the environmental feasibility of a planned facility. It identifies and

analyzes environmental impacts associated with all phases of the project including

design, construction, and operation. The assessment and its approval currently take

up to 2-3 years (Smit, 2008, Personal Interview). The EIA report aims to provide the

environmental authority, the Department of Environmental Affairs and Tourism

(DEAT), with sufficient information to make an informed decision regarding the

proposed project. Developers interviewed that have gone through the process of an

EIA describe it as a slow and cumbersome process with some delays being

potentially caused by factors like the lack of capacity within provincial government,

and as a consequence being unable to deal timeously with the applications;, their

inability to understand the information given, as not many have had experience with

wind farms, as well as the huge cost of the EIA itself (up to ZAR 80,000). It was

described as one of the biggest hurdles in the development of the two

demonstrations wind farms. Especially in case of the Darling project the process of

evaluating and approving the environmental findings was one of the main delaying

factors (Oelsner, 2008; Smit, 2008; Personal Interviews). streamlining the process of

environmental assessment of planned wind projects will be important in order to

shorten the development process for projects.

Additional steps before feasibility of a wind farm is proven are also time consuming

and expensive. In addition, time delays due to bureaucracy present another concern

(Oelsner, 2008, Personal Interview). After a possible site is identified and contracts

with the land owner are in place, detailed wind measurements need to be performed.

They need to be carried out on site at the right height for at least twelve months to

produce a representative profile of wind data. Putting up a mast of more than 15

meters height however requires a basic environmental assessment, which includes

the publication of this activity at a very early stage of development and the


55

consequent risk of competition for the identified area (Chown, 2008, Personal

Interview). These issues combined with obstacles described in the following sections,

including unanswered questions around grid-connection and turbine supply, explain

the long time span of up to four years, before a wind farm might start generating

electricity and revenue to cover start-up costs. During these preceding stages, money

has to be invested in the project without guarantee that it will be approved (Ramsden,

2008, Personal Interview).


56

Chapter 5 –

Obstacles and barriers: Financing and business models

The above mentioned barriers around policies and legislation create a situation of

numerous uncertainties regarding the potential of wind projects in the country.

Uncertainties increase the risks of wind farms and consequently lessen the interest of

potential investors. For many potential wind farm developers, discussing financial

aspects of planned projects was a delicate matter. Confidentiality, especially in early

stages, where negotiations with investors were not completed at the time of the

interview, is a major concern. Only few projects had partnered with investors or

secured their financing at the time the interviews were conducted.

This chapter describes the main financial barriers identified. They can be divided into

different categories:

• Inexperience in developing IPPs and SPVs

• Inexperience of local wind industry as project developers and project sponsors

• Difficulty in financing development costs

• Lack of knowledge of local financiers / banks of wind industry

• Difficulty in securing long-term PPAs to provide reliable revenue stream to

service debt and reward equity

• Low cost of conventional electricity and need for feed-in tariff or price support

• Global credit crunch and scarcity and cost of capital

• Inexperience in accessing Carbon Financing

5.1 Inexperience in developing IPPs and SPVs

The parties interviewed agreed that there is no particular set of characteristics under

which a wind energy project will be commercially feasible. The structure and

combination of various conditions and characteristics as well as the overall risk profile

will determine a project’s final viability. Some of the individual developers admitted

their lack of experience with set ups of wind projects. For confidentiality reasons, a

number of developers were not prepared to share their detailed business plans. Only

rough overviews were discussed. The components mentioned to be included in a

business plan firstly include the main project components, like site, wind data,


57

licenses and permits, PPA, financing, construction, operation, and maintenance

plans. Secondly, a detailed financial model needs to be developed. (See for example

the model offered by the United Nations Environment Programme and Global

Environment Facility available online at http://www.retscreen.ne. Their free of charge

software helps to facilitate a wind project’s evaluation process. A financial analysis

worksheet allows the project decision-maker to consider various financial parameters

according to their individual parameters and financial performance indicators like

capital cost, debt/equity ratio or IRR, and return on equity.)

Thirdly, relevant feasibility factors need to be addressed and evaluated including

Environmental Impact Assessments, grid connection, and legal issues.

5.1.1 Ownership - IPP

The White Paper argues for 30% of South Africa’s power generated to be produced

by Independent Power Producers, which can be seen as a step towards liberalization

of the energy market. Renewable energy might benefit from an IPP network. The set

up of an IPP is largely seen as the best solution for wind farms. However, in most

cases, detailed ownership arrangements are not yet fully decided on and some

developers seem to struggle in finding a solution. Partnerships or joint ventures with

established project developers and international players might be of advantage.

Decisions will largely depend on the contract details but the majority of developers

seemed to prefer these setups over partnerships with Eskom.

Developers need to bear in mind that IPPs are obliged to have a minimum of 25%

shareholding from black economic empowerment (BEE) groups to qualify for

government support and approval.

When evaluating the contributing elements to successful IPP investments with

developers and investors, most of the success criteria outlined by Gratwick and

Eberhard (2008) (as discussed in chapter 2, analytical framework) are not evident.

5.4.1.1 Favorable debt arrangements

Financing costs are a major part of a wind project’s operational costs. Wind

developers struggle to secure low interest rates, as their risk profiles are perceived as

relatively high. The insecurities around policies that will regulate future PPAs with

http://www.retscreen.ne/�


58

Eskom lead to insecurity around the project’s income stream. Developers are in

negotiations on debt financing with a variety of national banks, like ABSA, Investec,

RMB, and Standard Bank. Local capital has the advantage to mitigate foreign-

exchange risk.

5.4.1.2 Favorable equity partners

The long term low return type of investment of a wind farm combined with the low

level of public awareness limits the pool of possible equity investors. In addition,

there is little experience with the risks involved in wind projects. However, as soon as

the sector becomes more established, wind farms could become an ideal niche

investment opportunity for institutional investors such as insurance firms or pension

funds (NuPlanet, 2004). Examples of potential equity investors identified in the

research are the Industrial Development Corporation (IDC), Development Bank of

Southern Africa (DBSA), Central Energy Fund (CEF), and the Old Mutual Investment

Group.

In many projects the debt/equity ratios are not decided yet, but are estimated to be in

a range of 50/50 to 80/20.

5.4.1.3 Secure and adequate revenue streams

Secure and adequate revenue streams are not yet guaranteed as details about

metering, billing and collections by the utility are only formulated as guideline drafts

by NERSA. However they are neither final nor put into practice yet. Moreover, at this

point of time, the PPAs discussed are only temporary drafts, as potential policies

deciding over renewable tariffs will not be established before February 2009.

5.4.1.4 Credit enhancements and other risk management and mitigation measures

Credit enhancements and other risk management and mitigation measures were

generally not addressed by developers and investors. They see no urgent need for

such measures but rely on robust PPAs to establish and guarantee reliability of the

utility and the end consumer. However, if a contract is made with a small municipality

or individual company as the sole buyer, chances of defaulting increase and risk

management might be needed.


59

5.1.2 Potential set up - Special Purpose Vehicles (SPV)

Developers or owners of a wind power project most likely hold a variety of real

property rights, equipment, permits and regulation approvals, as well as intellectual

property. It is of importance to create the optimal corporate structure. Not all of the

potential developers have processed their projects to that point, but the anticipated

ownership structures tend to be Special Purpose Vehicles (SPV). This structure

allows for any mixture of shareholding, local and international and seems to be the

most familiar for potential investors and debt providers. The limited recourse nature

of wind farms is generally reinforced by the structures of SPVs.

Figure 6 below illustrates a potential set up for the financing structure of a wind farm.

The project financing employs a mix of equity and debt, with the larger portion of

funds generated from debt institutions. Furthermore, carbon financing can form an

additional share of income for the project. Concessionary financing mechanisms, like

capital subsidy grants are apparently not easily available for wind farms but might be

of help to get a project off the ground. Financial incentives are currently being

investigated by the South African government (DME, 2008b). Regardless of the size

of incentives, any governmental support will send an important positive signal

regarding renewable energies in the country.

The DME lists state institutions that provide affordable financing for emerging energy

markets. For example the Renewable Energy Fund and Subsidy Office (REFSO)

offer a subsidy to help lower the gap between the purchasing price of power and its

usually higher generation costs. REFSO requires specific criteria from its potential

projects: the project needs to be less than R100 million, have a minimum of 1 MW

generation capacity, and the subsidy must not exceed more than 20% of the project

costs. The state’s development finance institutions, such as the Development Bank of

Southern Africa (DBSA), Industrial Development Corporation (IDC), National

Empowerment Fund, and Central Energy Fund (CEF) are recommended by the DME

to be approached for grant funds and soft loans. In terms of foreign funding, the DME

mostly mentions European donors such as the Department of Foreign and

International Development (DFID), the Danish International Development Agency

(DANIDA), and the Norwegian Agency for Development (NORAD) (DME, 2008b).

The wind farm’s security lies in its assets and income stream and will most likely be

limited recourse or project financed. Therefore, favorable and robust PPAs with the


60

buyer are important to secure the project’s revenue stream. In the South African

setting the buyer will either be Eskom, a municipality, or a bigger industrial company.

Figure 6: Financial Model of a Special Purpose Vehicle

International comparison and calculations of local developers suggest capital costs in

the order of €1.3-1.8 million per MW installed. These prices include the components:

hardware, like generators, masts, blades, etc. which certainly are one of the biggest

shares, as well as design and construction consisting of civil works like foundations

and roads, logistics with transport, cranes, and erection, grid connection, and fees.

As for the operation and maintenance costs fixed cost arrangements would be

preferable in terms of control.

To lower the risks for the SPV, any penalties regarding deficits in the amount of

electricity generated are attempted to be passed on to the entities design and

construction or operation and maintenance.

Development costs are not included in figure 7 as they occur before the project gets

to the point where it can secure external financing. As mentioned in detail in chapter

Design & Construction

Buyer Eskom, Municipality, Industry

preferrably fixed cost arrangements

Debt ABSA Investec RMB Standard Bank

CDM

SPE

PPA

Penalties for generating

deficits

Income stream

Concessionary financing / Financial

incentives

Capital Cost

Buyer Eskom, Municipality, Industry

TRECs

EquityDBSA IDC CEF Old Mutual

Operations & Maintenance

Development & Construction


61

5.3 below, development costs are often an initial hurdle especially for smaller

projects.

5.2 Inexperience of local wind industry as project developers and project sponsors

In South Africa, there is neither an established wind energy market nor wind industry

yet. It is seen as crucial for the country to develop such a playing field rapidly to

counteract various initial hurdles.

Local project developers and project sponsors lack experience and expertise.

Developers suggested that government and the South African Wind Energy

Programme could offer support measures for interested developers through

workshops by international developers providing information on wind project

development cycles, strategies and techniques, or having consultants in place who

can be of assistance with implementation strategies and business plans (SAWEA,

2008).

As discussed in detail in the section about policies, incentives are needed to increase

confidence in the sector and to attract national and international developers,

investors, and turbine suppliers (Kast, 2008, Personal Interview). Especially

international parties would contribute expertise to the industry. Worldwide markets

are very promising for wind energy as countries with strong legislative support for RE

and established RE markets have lower risk profiles. At present, there is no

enticement for potential international players to choose South Africa (White, 2008,

Personal Interview). But even local investors, like local banks are still rather hesitant

to offer finance for wind farms, as they have no experience in the wind sector.

Moreover, for turbine suppliers a market is only worthwhile when sufficient numbers

of projects guarantee adequate demand for turbines. Operation and maintenance

contracting and local storage of spare parts is only feasible in a reasonably sized

market (White, 2008, Personal Interview).

Local production of equipment components would change the situation dramatically

and would involve various benefits for South Africa, including job creation in different

sectors and diversification of the manufacturing industry.


62

5.3 Difficulty in financing development costs

Banks do not seem to be prepared to take the initial risks included in developing a

wind farm. Developers need seed money for beginning stages like wind

measurements and feasibility studies. As described in the section “administration and

time issues”, the costs up to the point of bankability are substantial. Investors for

example require on site wind data of at least 12 months at the appropriate height to

gain certainty concerning resource conditions. Especially inexperienced and smaller

entrepreneurs see the biggest hurdle in finding the initial pre-feasibility and feasibility

finance (SAWEA, 2008).

5.4 Lack of knowledge of local financiers/banks of wind industry

Investors were found to be hesitant to invest in wind energy projects in South Africa.

The reason is seen in the lack of an established wind industry in South Africa and the

consequent lack of successful wind farm precedents. As discussed in chapter 3, the

two demonstration wind farms do not provide experience or lessons in financing a

commercial project.

Local financiers and local banks are not experienced in wind projects and lack

knowledge about the industry. They are slow in evaluating wind energy applications

and usually reject them for their high perceived risks (Chacko, 2008, Personal

Interview).

To be considered by investors, developers need to have high credentials,

experience, and a track record in the wind industry, which is only given if they partner

with strong international players (Callcott-Stevens, 2008).

Some investors mentioned their preference for bigger projects, as the share of

development costs and capital investment becomes smaller with increased size of

the wind farm. Generally, investors aim at highest returns possible and accept only

premium wind developments with a strong portfolio of wind projects. Preferably, the

projects would have associated technologies included in their group, like turbine

blades or gear box manufacture to diversify revenues and avoid sole dependence on

electricity production from wind, an intermittent source (Clarke, 2008, Personal

Interview).


63

5.5 Difficulty in securing long-term PPAs to provide reliable revenue stream to service debt and reward equity

The Power Purchase Agreement is the essential element of the credit picture in RE

projects’ financing as it is the main source of revenues. The difficulty in obtaining a

satisfactory PPA is as huge concern to the majority of wind energy developers

(SAWEA, 2008). Eskom is designated as the single buyer of renewable energy and

has so far not offered acceptable PPAs for wind energy (Eskom, 2008). The only

purchase agreement currently available for renewable energies is a Medium Term

Power Purchase Programme (MTPPP). The MTPPP aims to support government’s

directive to generate 30% of new generation capacity by the private sector to support

Eskom’s short to medium term power supply. The MTPPP is generally perceived as

neither feasible nor financeable for wind projects with a contract length of 10 years

and maximum rates of 105 c/kWH for the first five years, which then gradually taper

off to 35 c/kWH. Under these conditions developers struggle to raise capital and

especially for debt financing, the time span of 10 years is too short. Eskom admits

that the MTPPP does not cater well for smaller long-lived RE project like wind farms

and refers to NERSA’s intentions of implementing a renewable policy in the near

future which then might offer a solution with regards to duration of contracts and

ability to secure financing (Eskom, 2008).

For individual buyers, electricity generated through wind could be an additional

source next to Eskom’s conventional base line provision, as availability of wind and

consequently of the amount of wind generated electricity is not constant. An

advantage concerning individual buyers could be created when renewable energy is

being generated in their vicinity so that wheeling distances are short and availability

and strength of the national grid is less relevant.

The most important criteria for all possible buyers are credibility and a high credit

rating to keep counterpart risk low (Jenman, 2008, Personal Interview). However,

even Eskom’s credit ratings are being down rated, keeping its severely strained

finances and huge future investment requirements in mind, as mentioned by

Eberhard (2008).


64

5.6 Low cost of conventional electricity & need for feed-in tariff or price support

South Africa’s history and the responsibility to supply electricity for everyone at

affordable prices, also for the poorest classes in society, lead to an economic

challenge for renewable energy in the country. Historically, prices for electricity have

been low in South Africa with annual increase rates below inflation rates for longer

than a decade. It is especially the large component of abundant and easily available

coal that enabled these extremely low electricity prices with coal prices of only about

a tenth of the world average (Eberhard, 2008). Any investments in the energy sector

will have to compete with average Eskom prices. Consequently, renewable energies

struggle to enter the South African energy market and will initially depend on

incentives and subsidies. Even large efficient wind farm projects (>100MW) are not

expected to be able to bring generation prices below Eskom’s average electricity

prices (Jenman, 2008, Personal Interview).

However, electricity tariffs are increasingly rising with an increase of 27% in 2008 and

planned 20% per annum for the next 3 years (Eberhard, 2008), and eventually these

higher prices for electricity might become a business driver.

Wind farms will most likely be limited recourse or project financed, as the project’s

security lies in its assets and income stream. Consequently, supportive policies need

to guarantee favorable PPAs as they secure the project’s revenue stream. With

Eskom’s only offer so far, the MTPPP, wind projects are not feasible. NERSA is still

in the planning phase of support policies for RE and as long as they are not

established yet, there will be uncertainty and increased risk. Information incoherency

and contradicting signals from different government departments are currently

causing confusion and insecurity about the nature and implementation time of future

regulations.

These resulting uncertainties are a huge concern to investors. To lower their risks,

they are likely to charge high risk premiums and require long-term contracts with a

buyer with guaranteed prices.

To circumnavigate these policy and regulation issues completely, certain investors

currently are considering financing the project development cycle up to the point of

financial close and then selling the finalized mature project, provided they would find


65

a project fulfilling certain prerequisites. Among these requirements are a prime site

with promising wind data and a developer with a strong track record.

Another option to improve the risk profile would be to exclusively invest in projects

with private to private PPAs, where electricity is directly produced on the private

buyer’s property. Here any involvement of Eskom and the national grid is avoided

(Clarke, 2008, Personal Interview).

5. 7 Global credit crunch and scarcity and cost of capital

The global credit crunch has worldwide consequences, and also influences South

Africa with a possible decline of short-term foreign investment inflows. Interest rates

are high in South Africa. The global situation might have direct consequences for the

wind projects in South Africa, including a potential rise in turbine prices. South African

wind developers will have to offer attractive returns to foreigners so that they consider

investing their capital into local projects (Chacko, 2008, Personal Interview).

As the market will be tighter on debt financing than before, PPAs will need to be even

sounder to receive financing.

The international wind turbine industry struggles to keep up with the booming global

demand for wind power, which surged to nearly 20 GW in annual installations during

2007, and is on track to more than double within a decade led by rapid growth in the

US and China (GWEC, 2008). Global demand for wind turbines is currently

exceeding supply and waiting times for turbines on the world market range from 2 to

4 years. Especially for small individual wind energy developers, scarcity of turbines

can become a problem. To avoid delays, orders have to be made way in advance

usually requiring deposits at that time. Bigger companies with a track record of

worldwide wind operations apparently have easier access to turbines and experience

shorter waiting times. Similar to investors, turbine suppliers prefer bigger and

experienced projects for various reasons including project security, operations and

maintenance, etc (Jenman, 2008, Personal Interview).

The turbines contribute the biggest portion of the capital needed for a wind farm,

exposing South African projects to a substantial amount of risk due to danger of

exchange rate fluctuations and weakening local currency. At the moment, no wind

energy equipment is locally produced in South Africa. As described in chapter 3,


66

there is one company in the Western Cape which is in the planning phase of

constructing 2 MW turbines.

5. 8 Inexperience in accessing Carbon Financing

The Clean Development Mechanism (CDM) was established under article 12 of the

Kyoto Protocol. It is an important potential instrument to promote foreign investment

in GHG emission reduction options, like wind projects, while it is at the same time

addressing the issue of sustainable development. CDM can be an additional source

of revenue generation for South African wind projects.

To be accredited as a CDM project in South Africa, the project has to apply with the

Designated National Authority (DNA) which is located within the Department of

Minerals and Energy. Then, if approved, it can be registered internationally.

Currently, South Africa has 27 CDM projects in the United Nations Environment

Programme CDM ‘Pipeline’, 13 of them are fully registered and 14 projects are in the

approval phase (Fenhann et al, 2008). None of these are wind energy projects,

whereas worldwide there are 179 wind projects registered in the programme.

The interviews revealed that the potential developers are aware of CDM as an

additional source for funding, but were inexperienced in how to get access. Their

degrees of knowledge and opinions about long-term reliability of the CDM process

differed substantially, however. Some developers were convinced, that only a small

share of the project’s revenue should rely on carbon financing, others had the CDM

mechanism integrated as a substantial part of their revenue stream covering up to

10-20% of their project (SAWEA, 2008).

Certain financial institutes specialize in carbon financing. The World Bank Carbon

Finance Unit for example accepts projects that might be marginal in terms of their

internal rate of return (IRR). It offers up to 25% of the Emissions Reduction Purchase

Agreement (ERPA) value upfront and undiscounted, as well as a secured carbon

payment stream beyond 2012, when changes in the Kyoto Protocol might be made

(World Bank Carbon Finance Unit, 2008).

‘Additionality’ applies for those projects that would not have been feasible without the

additional CDM revenue, as they would not have surpassed the investment

threshold. Projects exceeding the IRR hurdle rates even without CDM cash flows are

commercially attractive without CDM and therefore, by definition, are not additional


67

unless other non-financial barriers prevent them from their commercial

implementation. In these cases, where CDM revenues enable an otherwise not

feasible project, CDM can be seen as a real driver of the RE project (Fenhann et al,

2008). Figure 7 below demonstrates the returns of such additional projects.

Figure 7: Returns with and without CDM (Fenhann et al, 2008)

Hurdle rate

Gap between project return and hurdle rate

Project return without CDM

revenue

Project return with CDM revenue

CDM Cash flow


68

Chapter 6 – Policy recommendations Obstacles and barriers for wind energy developments in South Africa have proven to

be manifold and currently they still hinder the establishment of a wind industry of

scale in the country. However, regardless from which aspect the barriers are

analyzed, the same conclusion is reached: government’s renewable energy

objectives and its related policies are the prerequisites for success of renewable

projects. With sound regulations supporting wind energy, most of the other hurdles

might be overcome: Tariffs for PPAs would be fixed and guaranteed and roles and

rules for developers and Eskom would be clearly defined. Consequently, projects

would bear less risk and would be more favorable for financiers, and an industry of

scale could develop.

6.1 Need for policies to enable renewable (wind) energy

Of most urgent importance are the environmental reasons, for which renewable

energy sources need to be established. Banks and Schäffler’s (2005) analysis of the

“potential contribution of renewable energy in South Africa” and corresponding

environmental consequences depending on the volume of renewable sources used,

is described in chapter 3. It gives a comprehensive picture of the volume of

renewable energies that need to be established in South Africa in the near future.

The authors emphasize, that ongoing failure to support renewable energy

technologies will endanger both the environment and economic stability.

Similarly, the ”Long-term Mitigation Scenarios” developed by the South African

Department of Environmental Affairs and Tourism illustrate shocking data that South

Africa’s current strategies for energy efficiency and RE contribution, will not lower

emissions significantly in the long-term (Energy Research Centre, 2007). The

Intergovernmental Panel on Climate Change (IPCC) explains the disastrous

consequences of such emission levels especially for the African region with its low

adaptive capacity and high projected climate change impacts (IPCC, 2007).

The quoted scientific predictions as well as longer-term vision require a stronger

emphasis on RE from the South African government. With the development of a

renewable industry in South Africa, the population will not only benefit from a

healthier environment, but also from local capacity development, job creations, and


69

social upliftment. Considering the currently escalating electricity prices, renewable

energies might even become the most cost-effective energy options in the future

(Banks and Schäffler, 2005). Consequently, South Africa is in urgent need of policies

that will enable the establishment of a reasonable scale renewable industry.

International experiences show that enabling core elements of the legislation include

the obligation of grid operators to give priority to electricity from renewable sources,

and to pay for it according to fixed tariffs (Federal Ministry for the Environment,

2007). Consequently, feed-in tariffs would be the simplest and most effective

instrument to promote renewable electricity in South Africa, as further explained in

the following chapter.

6.2 Feed-in tariffs for South Africa South Africa is a developing country, and the country’s apartheid history and its

rather short experiences as a democracy might add additional challenges for new

developments in the country. Nevertheless, South Africa would benefit from

investigating the experiences other countries have made with feed-in tariffs and

broader legislation like the German Renewable Energy Sources Act (EEG),

introduced in chapter 2.2.7.

The renewable energy policy for South Africa would have to be tailored to the specific

situation in the country and policy makers will need to carefully choose the

appropriate terms, prices, and conditions of the feed-in tariff model adjusted to the

South African situation to avoid potential disadvantages. Having the elements of the

EEG in mind, a South African feed-in tariff model would have to include a variety of

adapted details:

• Tariffs should be applicable for all potential developers, regardless of their

project size, to create the opportunity for a critical mass of renewable energy

investment and for the establishment of a self sustaining market.

• Long-term certainty for involved parties should be established through stable

policies and long-term contracts with guaranteed prices for at least 20 years.

Tariffs should be high enough to recover costs and for achieving a reasonable

rate of return. Tariff levels should be technology-specific and rather based on

electricity generation costs than on avoided external costs, so that various

factors can be taken into account, such as investment for the plant, expenses


70

for licensing procedures, operation and maintenance costs, inflation, interest

payments for the invested capital, and profit margins for investors (Klein et al

2006)/(Mendonça, 2007). In addition, the method of establishing prices needs

to be transparent and avoid high administrative complexity and uncertainties

for investors due to difficulties to predict tariff levels.

• Grid access must be legally guaranteed and additionally required grid

connection must be established on a priority base.

• Eskom has to be obliged to purchase all renewable power generated.

• Administrative and application processes, such as processing of (pre-)

feasibility studies, basic environmental assessments, and Environmental

Impact Assessments need to be streamlined.

• There needs to be a cost-recovery mechanism for Eskom, for example

subsidies for additional expenses, such as up-grading of the grid or wheeling

of electricity.

• Even though the premium is added to the electricity price of end consumers,

public acceptance needs to be reached through affordable electricity prices

and through awareness creation for the importance of renewable energies.

• Dynamic mechanisms need to reflect the market, economic and political

developments and establish a level playing field with conventional electricity

generation. Tariff levels need to regularly be revised and adjusted to

guarantee reaching stated goals of the energy policy (Klein et al, 2006).

Feed-in tariffs would be the simplest and most effective policy to increase

investments in wind energy in South Africa. The system has proven successful in

promoting renewable energies. Compared to other policies, it is the fastest, most

technologically-diverse system with the lowest transaction costs (Toke, 2007). Feed-

in tariffs stimulate steady growth of small-and medium-scale producers in South

Africa and ease access to financing and consequently the entry into the industry

(Mendonça, 2007). Through the encouraged increase in renewable capacity, feed-in

tariffs drive down costs through technology advancement and an economy of scale in

the country. With the development of a new industry in South Africa, related social,

economic, environmental and security benefits can be expected (Sawin, 2004).


71

Other supportive models, such as the quota systems or tendering processes have

contributed very little to increasing capacity from renewable energy (Federal Ministry

for the Environment, 2007). In South Africa, they should at the most be established in

combination or supplemental to feed-in tariffs. They can for example be added after

the wind industry had been kick-started to then expose developers to price

competition and ensure that wind power is being delivered at the lowest possible cost

(Menantenau et al, 2003).


72

Chapter 7 – Conclusion The focus of this research is to understand why there are so few wind energy

developments in South Africa. Primary research identifies obstacles and barriers for

potential wind energy projects in the country. These issues are analyzed on a

theoretical level as well as practically in dialogue with potential wind energy

developers, investors, government officials, and experts in the industry.

The preceding chapters present a consolidated report on the factors that are

impacting potential developers and give answers to the two key research questions:

• To what extent are existing policies and regulations a barrier to wind energy

developments in South Africa and what policies and regulations need to be put

in place by government to support wind energy developments in the country?

• To what extent is the availability of finance a barrier to wind energy

development in South Africa and how best can these developments be

financed?

The picture gained through primary research emphasizes the lack of government

commitment and a supportive legislation. The South African government gives

contradicting and confusing signals regarding the establishment of renewable energy

policies. The described structure of the electricity sector with Eskom incorporating

three divisions (generator, transmitter, and buyer) leads to further problems as long

as the utility does not show commitment to promote RE participation in the market.

Part of Eskom’s responsibilities would for example be to give priority to grid

extensions to wind farms. Further administrative issues like the Environmental Impact

Assessments need to be streamlined to save time and costs in the developing phase

of projects.

The lack of supportive policies and legislation is closely linked to problems found in

the field of financing and business models. Wind projects typically rely on non-

recourse project finance and therefore need guaranteed revenue streams through

sound PPAs to service debt and reward equity. As long as there are no supportive

policies like feed-in tariffs in place, potential developers struggle to secure favorable


73

long-term PPAs. The low cost of conventional electricity in South Africa increases the

need for a feed-in tariff or price support mechanism even more.

Further analysis of financial barriers shows that the inexperience of the local wind

industry as project developers and project sponsors leads to a number of difficulties,

like developing a project structure, or accessing carbon financing. The typical set ups

of IPPs and SPVs are described in the report. The industry around wind and other

renewable energies does not exist in South Africa yet, and consequently a lack of

knowledge is found amongst local financiers and banks who are hesitant to invest.

Especially investment in the development phases of wind farms are perceived as too

risky. The global credit crunch and scarcity of wind turbines intensifies financial

difficulties around developing wind energy.

A literature review on different supportive policy mechanisms and an international

comparison of renewable energy regulations leads to the recommendation of feed-in

tariffs as the most effective support policy for renewable energies in South Africa.

The report explains a number of specific implementation details adequate for the

South African context and describes the benefits of the system of feed-in tariffs

supporting sustainable development of wind energy supply in the interest of lowering

GHG emissions and protecting the environment. Feed-in tariffs are identified as the

most adequate mechanism to increase the percentage contribution of wind energy

sources to power supply in South Africa.


74

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Oelsner H, DARLIPP, December 2007, Project Design Document Form (CDM PDD), version 02, Darling, South Africa. Oelsner H, 2008, Personal Interview, Darling, 29/07/2008. Oppenheim AN, 1992, Questionnaire, Design, Interviewing and Attitude Measurement, Continuum, New York. Potgieter T, Investec, 2008, Personal Interview, Cape Town, 23/10/2008. Rabinowitz Dr R, 2008, member of eREACT, e-Parliament Renewable Energy Activists, Telephonic Interview, 30/10/2008. Ragwitz M, Huber C, 2004, Feed-in systems in Germany and Spain, and a comparison, Fraunhofer Institute for Systems and Innovation Research, Karlsruhe, Germany. Ragwitz M, Held A, Resch G, Faber T, Haas R, Huber C, Coenraats R, Voogt M, Reece G, Morthorst PE, Jensen SG, Konstantinavicitue I, Heyder B, 2007, Assessment and optimisation of renewable energy support schemes in the European electricity market, final report, Karlsruhe, Germany [online]. Available from: http://ec.europa.eu/energy/res/publications/doc/2007_02_optres_en.pdf [10 October 2008]. Ramsden H, 2008, Personal Interview, Cape Town, 28/10/2008. Savannah Environmental (Pty) Ltd, 2008, “Environmental Impact Assessment Process Final EIA Report, Proposed Wind Energy Facility and Associated Infrastructure, Western Cape Province”, Prepared for Eskom Holdings Limited, February 2008, Johannesburg. Sawin JL, 2004, National Policy Instruments, Policy Lessons for the Advancement & Diffusion of Renewable Energy Technologies Around the World, International Conference for Renewable Energies, January 2004, Bonn, Germany. Scenario Building Team, 2007, “Long Term Mitigation Scenarios: Scenario Document”, Department of Environment Affairs and Tourism, Pretoria.

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Schwarz V, 2008, Promotion of Wind Energy: Lessons learned from international experience and UNDP-GEF projects, United Nations Development Program, Bureau for Development Policy, Energy and Environment Group. Smit R, Smit I, Van der Westhuyzen D, Van Heerden Dr L, Eskom, 2004, Wind Energy Research and Operations Experiences at Klipheuwel, European Wind Energy Conference, November 2004, London. Smit R, Eskom Distribution, 2008, Personal Interview, Brakenfell, Eskom Western Cape Head Office, 21/10/2008. South African Wind Energy Association, SAWEA, 2008, Workshop: Development of a Business Plan for SAWEA, V&A Waterfront, Cape Town, 17/10/2008. Sunflower, 2008, “Wind Turbines” [online]. Available from: http://www.sunflower.net/how_wind_works.htm [22 November 2008]. The World Bank Carbon Finance Unit, Carbon Finance Helpdesk, Telephonically, 17/11/2008. Toke D, 2007, Making the UK Renewables Programme FITTER, The Renewables Obligation, the general case for a feed-in tariff and the feasibility of a feed-in tariff for small renewables. World Future Council, London, UK. University of Stellenbosch, 2006, “University signs agreement with the South African National Energy Research, 10/8/2006” [online], Available from: http://www.sun.ac.za/News/NewsItem_Eng.asp?ItemID=10685&Zone=AEX [10 October, 2008]. White J, 2008, Personal Interview, Cape Town, 15/10/2008. Wikipedia, 2008, “Record-holding turbines” [online], Available from: http://en.wikipedia.org/wiki/Wind_turbines [10 October, 2008].

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http://en.wikipedia.org/wiki/Wind_turbines�


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Appendix 1 – List of individuals interviewed

Person Company Contact details Date of Interview

Hermann Oelsner

DARLIPP +27 22 492 3095 [email protected]

29/07/2008 and 10/11/2008

Noma Quase and Daniel Modise

DME +27 012 317 8717 28/08/2008, 18/09/2008, 03/12/2008

Dave George

+27 12 460 8233 [email protected]

07/10/2008 (via Email)

Christopher Clarke

Evolution One Fund

021 702 1290 [email protected]

10/10/2008

George Ferreira

Nelson Mandela Bay Municipality


13/10/2008

James Lech Phieco, Motorwind turbines

+27 83 335 3958 [email protected] www.phieco.net

13/10/2008

Douglas Jenman and Luke Callcott-Stevens

Macquarie +27 21 670 1240 [email protected] [email protected]

14/10/2008

Nick Pruim


15/10/2008

JamesWhite

Vestas +27 79 1828 808 [email protected]

15/10/2008

South African Wind Energy Association

SAWEA Workshop: Development of a Business Plan for SAWEA V&A Waterfront, Cape Town

17/10/2008

Andre Otto SAWEA +27 11 317 8428 17/10/2008 21/11/2008

Francis Jackson

Windlab

+27 71 689 5442 [email protected] www.windlabsystems.com

20/10/2008 and 23/10/2008

Riaan Smit Eskom +27 21 980 3452 [email protected]

21/10/2008

Brian Jones City of Cape Town


22/10/2008

David Nicol

CEF Sustainability


23/10/2008

Tommie Potgieter

Investec

+27 11 286 7258 +27 83 678 2016 [email protected]

23/10/2008

Davin Genesis +27 21 7835814 24/10/2008

mailto:[email protected]�







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Chown +27 83 4603898 www.genesis-eco.com

Leila Mahomed

Western Cape Clean Energy Governance Programme

[email protected] 24/10/2008

Dr. Andries Van der Linde

Consultant +27 11 902 6722 [email protected]

28/10/2008 (telephonically)

Martin Gasela

EX4 Energy +27 11 680 3593 +27 82 700 7818 [email protected]


Howard Ramsden

TerraPower +27 73 672 2502 [email protected]

28/10/2008

Julia Kupka ABSA [email protected] 30/10/2008 Dr. Ruth Rabinowitz

e-REACT [email protected] 30/10/2008 (telephonically)

Jacob Chako

Old Mutual Investment Group


03/11/2008

Feed-in tariff workshop

V&A Waterfront, Cape Town 10/11/2008

Pieter Francois Roux

Earthpowersa +27 76 435 4241 [email protected]

11/11/2008

Dr. Michael Kast

Isivunguvungu +27 82 255 5336 [email protected]

20/11/2008

Nicolas Rolland

Umsehle [email protected] 24/11/2008 (telephonically)

Davin Berelowitz

Conco +27 11 805 4281 [email protected]


Table 3: List of individuals interviewed

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Appendix 2 – List of planned wind projects in SA

Developer Company Contact details Size Eskom Klipheuwel Wind Energy

Demonstration Facility 3.2 MW (operational since 2002/03)

Eskom 100 MW Hermann Oelsner

DARLIPP +27 22 492 3095 [email protected]

5.2 MW, (operational since March 2008)

Hermann Oelsner

100 MW at Langefontain

Douglas Jenman and Luke Callcott-Stevens

Macquarie +27 21 670 1240 [email protected] [email protected]

100 MW at Hopefield, Western Cape, amongst other wind projects

Francis Jackson

Windlab Partnership with Investec

+27 71 689 5442 [email protected] www.windlabsystems.com

various wind projects; biggest one 500 MW

Tommie Potgieter

Investec Partnership with Windlab

+27 11 286 7258 +27 83 678 2016 [email protected]

See above

Davin Chown Genesis +27 21 7835814 +27 83 4603898 www.genesis-eco.com

15 MW at Jeffrey’s Bay and 80 MW St Helena Bay

Nick Pruim and Kim Geldenhuys


60-80 MW at Lamberts Bay and 50 MW development also at West Coast

David Nicol and Mark Tanton

CEF Sustainability


20 MW in PE with municipality

Howard Ramsden

TerraPower +27 73 672 2502 [email protected]

370 MW of various projects altogether

George Ferreira Nelson Mandela Bay Municipality


7.4 MW and 20 MW

Martin Gasela EX4 Energy +27 11 680 3593 +27 82 700 7818 [email protected]

1000 MW altogether; still in planning stage

Carlo Van Wyk Beaufort West Municipality


4.5+30+50 MW

James Lech Phieco, Motorwind turbines

+27 83 335 3958 [email protected] www.phieco.net

100 MW (motorwind turbines)

Davin Berelowitz

Conco +27 11 805 4281 100 MW (+200 MW)




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Confidential developer

330 MW

Mike Msizi Watt Energy +27 41 379 4415 +27 71 432 9360 [email protected]

No information given

Pieter Francois Roux

Earthpowersa No information given

Jon Kincaid Smith

Westcoastwind No information given

Gerard Latouf No information given

Mike Msizi Watt Energy +27 41 379 4415 +27 71 432 9360 [email protected]

No information given

TOTAL 3,045.3 MW Table 4: List of planned wind projects in SA

Appendix 3 - Facts about Wind Energy

History

In fact, wind energy can be seen as another form of solar energy, as the sun creates

wind by unevenly heating up the planet´s atmosphere. Surface irregularities, rotation

of the earth, vegetation and water surfaces alter wind flow patterns. It has been used

for hundreds of years, like for sailing, and windmills have been used to pump water or

grind grain. Today, the windmill's modern equivalent, a wind turbine, can use the

wind's kinetic energy to generate electricity and mechanical power.

How wind turbines work

Almost all wind turbines producing electricity for the national grid consist of rotor

blades which rotate around a horizontally orientated hub. Usually they consist of 3

blades, while 2 and single blade turbines are also in use. The blades consist of

fibreglass-reinforced polyester or wood-epoxy. The hub is connected to a gearbox

and generator, which are located inside the nacelle. The nacelle houses the electrical

components and is mounted at the top of the tower. This type of turbine is referred to

as a 'horizontal axis' machine. Vertical axis turbines are usually not in use in large-

scale wind farms.


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“The turbine can be divided into three components:

• the rotor component, which is approximately 20% of the wind turbine cost,

includes the blades for converting wind energy to low speed rotational energy.

• the generator component, which is approximately 34% of the wind turbine

cost, includes the electrical generator, the control electronics, and most likely

• a gearbox component for converting the low speed incoming rotation to high

speed rotation suitable for generating electricity.

The structural support component, which is approximately 15% of the wind turbine

cost, includes the tower and rotor pointing mechanism” (Fingersh et al, 2006). In big

wind turbines with blades of great length, transport and installation cost sometimes

make up to 20%.

Inside a wind turbine

The most important components of a wind turbine are illustrated in figure 8 below and

will be explained in table 6.

Figure 8: Wind turbine (Alliant Energy, 2008)

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Component Explanation Anemometer Measures the wind speed and transmits wind speed data to the controller. Blades Most turbines have either two or three blades. Wind blowing over the

blades causes the blades to "lift" and rotate. Brake A disc brake, which can be applied mechanically, electrically, or

hydraulically to stop the rotor in emergencies. Controller The controller starts up the machine at wind speeds of about 8 to 16 miles

per hour (mph) and shuts off the machine at about 55 mph. Turbines do not operate at wind speeds above about 55 mph as they might be damaged by the high winds.

Gear Box Gears connect the low-speed shaft to the high-speed shaft and increase the rotational speeds from about 30 to 60 rotations per minute (rpm) to about 1000 to 1800 rpm, the rotational speed required by most generators to produce electricity. The gear box is a costly (and heavy) part of the wind turbine and engineers are exploring "direct-drive" generators that operate at lower rotational speeds and don't need gear boxes.

Generator Usually an off-the-shelf induction generator that produces 60-cycle AC electricity.

High-speed shaft Drives the generator. Low-speed shaft The rotor turns the low-speed shaft at about 30 to 60 rotations per minute. Nacelle The nacelle sits atop the tower and contains the gear box, low- and high-

speed shafts, generator, controller, and brake. Some nacelles are large enough for a helicopter to land on.

Pitch Blades are turned, or pitched, out of the wind to control the rotor speed and keep the rotor from turning in winds that are too high or too low to produce electricity.

Rotor The blades and the hub together are called the rotor Tower Towers are made from tubular steel, concrete, or steel lattice. Because

wind speed increases with height, taller towers enable turbines to capture more energy and generate more electricity.

Wind direction This is an "upwind" turbine, so-called because it operates facing into the wind. Other turbines are designed to run "downwind," facing away from the wind.

Wind vane Measures wind direction and communicates with the yaw drive to orient the turbine properly with respect to the wind

Yaw drive Upwind turbines face into the wind; the yaw drive is used to keep the rotor facing into the wind as the wind direction changes. Downwind turbines don't require a yaw drive, the wind blows the rotor downwind.

Yaw motor Powers the yaw drive Table 5 : Components of a wind turbine (Sunflower, 2008)

Rotor blades

Rotor diameters range up to 130 meters, operating in towers at heights between 30 –

130 meters where they take advantage of the faster and less turbulent winds in these

heights. “A blade acts much like an airplane wing. When the wind is blowing, a


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pocket of low-pressure air forms on the downwind side of the blade. The low-

pressure air pocket then pulls the blade towards it, causing the rotor to turn. This is

called lift. The force of the lift is actually much stronger than the wind's force against

the front side of the blade, which is called drag. The combination of lift and drag

causes the rotor to spin like a propeller, and the turning shaft spins a generator to

make electricity” (GE Energy, 2008).

Wind Power

“The amount of power transferred to a wind turbine is directly proportional to the area

swept out by the rotor, to the density of the air, and the cube of the wind speed.

The power P in the wind is given by:

,

Where P = power in watts, α = an efficiency factor determined by the design of the

turbine, ρ = mass density of air in kilograms per cubic meter, r = radius of the wind

turbine in meters, and v = velocity of the air in meters per second” (Iowa Energy

Centre, 2008).

The power is controlled automatically as wind speed varies and machines are

stopped at very high wind speeds to protect them from damage. All turbines are

equipped with shut-down features to avoid damage at high wind speeds.

The yaw mechanism turns the turbine into the wind. Sensors measure wind direction

and the tower head is turned to face into the wind.

Towers are mostly cylindrical and made of steel; generally they are painted light grey.

Towers range from 25 to 130 meters in height.

Commercial turbines range in capacity from a few hundred kilowatts to over 5

megawatts. Larger turbines are grouped together into wind farms, which provide bulk

power to the electrical grid. The crucial parameter is the diameter of the rotor blades -

the longer the blades, the larger the area 'swept' by the rotor and the greater the

energy output. At present the average size of new machines being installed is now

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89

about 2 MW. The trend is towards moving to larger machines as they can produce

electricity at a lower price.

“There are many different turbine designs, with plenty of scope for innovation and

technological development. The dominant wind turbine design is the up-wind, three

bladed, stall controlled, constant speed machine. The next most common design is

similar, but is pitch controlled. Gearless and variable speed machines follow, again

with three blades. A smaller number of turbines have 2 blades, or use other

concepts, such as a vertical axis” (BWEA, 2008).

Most turbines are upwind of the tower - they face into the wind with the nacelle and

tower behind. However, there are also downwind designs, where the wind passes the

tower before reaching the blades.

Stall and pitch control

“There are two main methods of controlling the power output from the rotor blades.

The angle of the rotor blades can be actively adjusted by the machine control system.

This is known as pitch control. This system has built-in braking, as the blades

become stationary when they are fully 'feathered'.

The other method is known as stall control. This is sometimes known as passive

control, since it is the inherent aerodynamic properties of the blade which determine

power output; there are no moving parts to adjust. The twist and thickness of the

rotor blade vary along its length in such a way that turbulence occurs behind the

blade whenever the wind speed becomes too high. This turbulence means that less

of the energy in the air is transferred, minimising power output at higher speeds. Stall

control machines also have brakes on the blade tips to bring the rotor to a standstill, if

the turbine needs to be stopped for any reason.

Most wind turbines start operating at a speed of 4-5 metres per second, reach

maximum power at about 15 m/s and will cut out at speeds of about 25 m/s to protect

the machine” (BWEA, 2008).


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Factors affecting performance

“Most important is the windiness of the site. The power available from the wind is a

function of the cube of the wind speed. Therefore a doubling of the wind speed gives

eight times the power output from the turbine. All other things being equal, a turbine

at a site with an average wind speed of 5 meters per second (m/s) will produce nearly

twice as much power as a turbine at a location where the wind averages 4 m/s.

Second is the availability of the equipment. This is the capability to operate when the

wind is available - an indication of the turbine's reliability. This is typically over 98%

for modern machines. Last is turbine arrangement. Turbines in wind farms must be

carefully arranged to gain the maximum energy from the wind - this means that they

should shelter each other as little as possible from the prevailing wind” (BWEA,

2008).

Records

“Matilda was a wind turbine located on Gotland, Sweden. It produced a total of 61.4

GWh in the 15 years it was active. That is more renewable energy than any other

single wind power turbine had ever produced to that date. It was demolished on June

6th, 2008.

The world's largest turbines are manufactured by the Northern German companies

Enercon and REpower. The Enercon E-126 delivers up to 6 MW, has an overall

height of 198 m (650 ft) and a diameter of 126 meters (413 ft). The Repower 5M

delivers up to 5 MW, has an overall height of 183 m (600 ft) and has a diameter of

126 m (413 ft)” (Wikipedia, 2008).

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http://en.wikipedia.org/wiki/REpower�


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Appendix 4 – Additional obstacle: Lack of information

Information about wind in South Africa

Some developers and investors argue that easier access to more detailed wind data

in South Africa would be of advantage. It could not only demonstrate South Africa’s

possibilities in wind energy, but might even have the potential to boost wind industry

due to greater confidence in this renewable source.

Furthermore, interested national and international developers or investors would get

an overview of potentially feasible areas where investments into specific wind

measurements at appropriate heights might identify sites for further wind projects

(SAWEA, 2008).

Lack of public awareness

In a global comparison, South Africa’s awareness for environmental issues is still

rather minute. For the majority of South Africans, electricity is a basic need. The

country still lacks a broad local market for RE consisting of individual households as

well as local industry. Apart from very few exceptions, there seems to be neither

interest nor pressure from local or international partners, suppliers, or customers to

include green components like renewable energy for a premium price (MSSA, 2004).

The current and forecasted energy shortages in South Africa however, might create

effective drivers of renewable energy due to issues of energy security and rising

prices for conventional electricity.

Understanding of all RE benefits needs to be promoted including important factors

like job creation and economic growth for the local and national economy. In this

regard, local production of components would be more than favorable.

Awareness about RE is important on all levels, from high government officials and

decision makers to ordinary citizens who additionally might become interested in

small private renewable energy generators enabling them to be independent and

even to feed excess electricity into the grid, as it is common practice in various

countries (GWEC, 2008).

Promotion of wind energy should be teamed with basic education about wind farms

to get rid of misconceptions. Wrong interpretations in parts of the population are for

example that the inconsistency of wind in South Africa hinders energy generation


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from that source. Additionally, land owners need to be reaffirmed that turbines have

no potential negative effects on their animals (Oelsner, 2008).

There are also positive sides. Wind energy seems to create increasing interest in the

whole of Southern Africa, including neighboring countries like Namibia, Botswana,

and Kenya, and recently the number of potential developers is perceived to be

growing.

Moreover, South African Universities have started offering courses in RE and wind

energy, like the University of Stellenbosch with its postgraduate programme in

renewable and sustainable energy studies (University of Stellenbosch, 2006).

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