A message to government from one of South Africa’s top banking CEOs

RMB chief executive James Formby has warned that South Africa’s localisation rules are making renewable energy more expensive and should be waived.

“Local material content rules increase the cost of wind and solar energy production. And import tariffs, such as those on imported steel, are making renewable energy even more expensive.

“It’s time steel tariffs, which are a material component in renewable energy projects, are waived to help lower the cost of solar and wind installations,” said Formby.

Formby said it would be preferable to let the market decide where it procures material for green energy projects rather than the government trying to prescribe the minutiae of local manufacturing of key components.

“The more local inputs are required, the higher the cost of energy production which means consumers are paying more for energy. Given the long term nature of these contracts, these costs are baked in for many years.”

Formby noted that component parts are typically cheaper when imported and, depending on the item, can be 20% to 50% cheaper than those made locally as South Africa does not have the same production scale. The manufacturing processes for many renewable energy components are also largely automated, creating fewer direct local jobs than people might think.

Megawatts first 

Formby added South Africa urgently needs a “megawatts first” policy. South Africa faces a worst-case scenario of 100 days of blackouts this winter, according to Eskom’s recent statements.

“This means the overriding goal of energy deregulation should be to get as much energy to the grid as quickly as possible to address the severe generation shortfall, currently estimated at 4,000MW – 6,000MW, which will grow as older coal-fired plans are retired.

“Our country desperately needs economic growth, investment and job creation. Reliable, cost-effective energy supply is the best way to build the economy and strong and resilient local industries.”

Formby said he was encouraged by the ‘profound progress’ in energy deregulation in South Africa over the past year, but hopes for further advances, particularly around access to local electricity distribution grids to link private generators and consumers.

Mineral Resources & Energy minister Gwede Mantashe recently launched bid window 6 of the Renewable Energy Independent Power Producer Procurement (REIPPP) programme, saying 2,600MW of power would be procured in addition to bid window 5, which will reach financial close expected at the end of April 2022.

However, there are fears that the recent global increase in commodity and logistics costs will make it challenging for these projects to reach financial close at the tariff levels awarded.

Eskom also recently launched a bidding process for land in Mpumalanga where the intention is for private generators to lease these land parcels from Eskom and construct renewable energy plants adjacent to existing grid connection infrastructure. These generators would use the Eskom connection points and grid network to deliver power to private buyers across the country.

“It’s a good example of a quick and efficient way to get extra energy to the grid, without committing Eskom’s balance sheet or requiring government guarantees to secure long-term power contracts.”

Formby also commended Operation Vulindlela, the project delivery unit in the Presidency, for reducing red tape on private electricity generation projects to help get them on the grid more quickly.

Last year government lifted the threshold for licensing exemption for private generation from 1MW to 100MW. Although projects must still register with the National Energy Regulator of SA (Nersa), the intention is for this process to take place much faster than the traditional licensing process.

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A message to government from one of South Africa’s top banking CEOs