Meeting of stakeholders in the renewable energy sector: Exploring solutions to the challenges of financing and certification of locally produced renewable energy products

Meeting report

The Chairperson welcomed delegates to the fourth stakeholder’s meeting arranged by the Committee since November 2011.  A number of challenges in the renewable energy sector were highlighted during the previous engagement with the Committee on 7 June 2012.  Stakeholders were invited to brief the Committee on the challenges faced by the sector and to explore possible solutions.  The renewable energy sector in South Africa was relatively new but progress had been made over the previous eighteen months.  The third round of procurement (Window 3) would commence shortly.

Overview by the Department of Energy (DOE)
Ms Mokgadi Modise, Chief Director: Clean Energy, DOE presented the briefing (see attached document).

The presentation included an overview of the Department’s mandate, mission statement and medium- and long term vision and the drivers and pressures in the energy sector. 

The legislation applicable to the renewable energy sector included the Energy Act and the Electricity Regulation Act (as amended), supported by the Preferential Procurement Policy Framework Act, Tax Incentive Regulations issued by the National Treasury and the Industrial Policy Action Plan (IPAP).  The Independent Systems Market Operator Bill was intended to level the playing field for producers and consumers of electricity.  The participation of the Economic Development Department in the National Economic Development Labour Advisory Council (NEDLAC) had resulted in the signing of a Green Economy Accord, the Local Procurement Accord and the National Skills Development programme.

Policy and regulatory framework developments included approval of the Renewable Energy White Paper in 2003; approval of the Biofuels Industrial Strategy in 2007; approval of the Integrated Resource Plan in 2011; provision for legal and regulatory frameworks for renewable energy in the New Generation Capacity Regulation Act and providing financial support for Government’s policy goals.

The major challenges were high capital costs and the need to build capacity.  Government initiatives included opportunities for skilling people but continued support and proactive participation by all the stakeholders was required.  The development of a sustainable renewable energy sector was costly and required mobilising all the available resources at domestic, regional and international levels.  Multi-disciplinary partnerships needed to be established.
The Renewable Energy Programme was launched in August 2011.  The DOE had negotiated with the Development Bank of Southern Africa (DBSA) to assist with funding the black economic empowerment (BEE) portions of projects.  The programme included specific requirements developers had to adhere to.  The Department and the National Treasury had initiated a concessionary renewable energy funding programme and a number of funding institutions had expressed interest in participating in the programme.  The DOE had formed a partnership with Kreditanstalt für Wideraubau to roll out solar systems in the Eastern Cape.  The German government had provided a grant for the non-grid electrification programme in the Eastern Cape.  The United States of America had approached the Department of Science and Technology (DST) with a view to participate in the development of off-grid technologies for remote, rural areas.  The Global Alliance for Clean Cook Stoves was a public/private partnership to promote clean and efficient household cooking solutions.  The Renewable Energy Market Transformation (REMT) programme of the DBSA offered financial support for feasibility studies of renewable energy power generation and solar water heating projects.  The Energy and Environment Partnership (EEP) programme of the DBSA provided funding for off-grid and grid connected energy feasibility studies.  The Energy and Environment Partnership Programme for Southern and Eastern Africa supported renewable energy projects in eight Southern and East African countries.  The programme was jointly funded by Finland and Austria and was implemented in April 2010.

Climate financing mechanisms included the Fast Start financing resolution included in the Copenhagen Accord.  The Danish Energy Agency had engaged with the DOE in the development of a project document to provide funding for several renewable energy projects in terms of the Fast Start funding programme.  The Cancun agreements included the establishment of the Green Climate Fund, a Finance Standing Committee and a Technology Mechanism.  Progress was made in the establishment of the Green Climate Fund during the 17^th Conference of Parties (COP17) in Durban.

The South African Renewable Initiative (SARi) was established to support the development of the renewable energy sector in South Africa.  SARi aimed to overcome the imbalance between the costs and benefits of renewable energy. 

The DOE had examined the international experience in using public finding to leverage private investment, including providing partial risk guarantees, policy insurance and guarantees, carbon finance facilities, grants and contingent grants, loan softening programmes, foreign exchange liquidity facilities, export credit guarantees, pay-for-performance grants, equity capital pledge funds and ‘green’ bonds.

Presentation by the South African Renewable Energy Council (SAREC)
Mr Johan van den Berg, Interim Chairman, SAREC presented the briefing (see attached document).

The local content requirements for Solar Photovoltaic (Solar PV), Solar Thermal with storage and wind in the first round (Window 1) and second round (Window 2) of procurement were compared.  The thresholds for the solar technologies were met but it was uncertain if the targets for wind energy would be achieved.  The Department of Trade and Industry (DTI) had commissioned studies into the localisation of the Solar PV, Solar Thermal and wind energy industries.  The outcomes of the studies were expected to provide a roadmap for the optimum localisation of the three main technologies used in the renewable energy sector.

The Sustainable Energy Society of Southern Africa (SESSA) was collaborating with the DST and the Council for Scientific and Industrial Research (CSIR) to build a platform for the monitoring, measurement and reporting of actual job creation, enterprise development and skills development in the renewable energy sector.

A long-term vision and roll out plan across the various technologies was required.  The Integrated Resource Plan (IRP) was flexible enough to allow Government to take advantage of new technologies but manufacturers and investors required a degree of certainty and clarity on the allocations for the various types of technology in the medium to long term.  The IRP should only be amended to encourage local manufacturing.  Each type of technology required a minimum annual procurement allocation to allow the local industry to develop.  The studies being undertaken should provide an indication of what the minimum allocation should be for each type of technology.

The briefing included a diagram to illustrate the complex project financing process applicable to the renewable energy sector.  Various certification and guarantee requirements were applicable to each type of technology.  Project financing did not require the developers to sign surety to a bank.  The loans could be very large and the bank’s depositors had to be protected against any default.  Instead, each piece of equipment had to be tested, certified and guaranteed by a financially strong company.  The testing and certification process was lengthy and companies required a strong balance sheet in order to provide the necessary guarantee.  Start-up companies were not able to produce the kind of balance sheet to support a guarantee.  Development institutions such as the Industrial Development Corporation (IDC) were alternative sources of financing.  The cost of financing impacted on the cost of renewable energy and needed to be kept as low as possible.

The certifications and guarantee issues applicable to the Solar PV, Solar Thermal and Wind industries were explored in more detail.  Possible solutions included changing the price: socio-economic scoring system; attracting international manufacturing firms with existing certifications and guarantees to South Africa; developing alternative finance packages through the IDC and DBSA; allowing bids at varying levels of local content; considering the potential of the Southern African region; promoting training and research and development; facilitating small-scale distributed generation and encouraging stakeholders to work together.

SAREC had identified the roles of Government, the renewable energy industry, the IDC and DBSA and academia in the development of the sector.  The briefing was concluded with a table indicating South Africa’s current position in the list of countries producing Solar PV and Wind energy.

Presentation by the South African Bureau of Standards (SABS)
Mr Sadhvir Bissoon, Executive, SABS presented the briefing (see attached document).

The SABS was established in 1945 and was governed by the Standards Act, No 8 of 2008.  Responsibility for regulatory functions was transferred to the National Regulator for Compulsory Specifications (NRCS) in 2008.  The Standards Division comprised 400 Standards Committees and dealt with international (e.g. International Standards Organisation (ISO) standards and the food safety certification HACCP) and local standards (i.e. the South African National Standards SANS).  National standards were developed by technical experts.  The SABC conducted conformity assessments and testing for system and product certification as well as training programmes.  Certification of a product provided the assurance that the product complied with the specified standard.  The SABS Mark was a highly recognizable symbol of credibility and was synonymous with quality, reliability and dependability.  The certification processes for products and for systems were explained.

The ESKOM rebate scheme for domestic solar water heaters required compliance with SANS 1307.  Performance testing of heat pumps was currently in progress.  The feasibility study on wind turbines had been completed and submitted to the DST.  SANS 941 applied to the energy efficiency labeling of electronic appliances.  The SABS was currently engaged with the DTI to upgrade the laboratory and testing facilities where appliances were tested to determine if energy efficiency claims were met.

ISO 50001 applied to energy management systems.  The SABS was currently engaged in training assessors and auditors on ISO 50001 and preparing for accreditation by the South African National Accreditation Society (SANAS).  The applicable South African National Energy Efficiency Standards were illustrated.

The main challenges were identified as financing challenges in the small, micro and medium-sized enterprise (SMME) sector; education on the differences between product and system certification; the development of standards for new innovations; the maintenance of certification requirements by companies; abuse of the SABS Mark and building testing and certification capacity for the SANS.

Presentation by the National Regulator for Compulsory Specifications (NRCS)
Mr Musa Ndlovu, Executive, NRCS presented the briefing (see attached document).

The NRCS was responsible for administering the compulsory specifications included in regulations.  The specifications were applicable to products that were imported, manufactured, sold and/or exported.  Other responsibilities were defined in the Trade Metrology Act, the National Building Regulations and the Building Standards Act.  Functions included the drafting of technical regulations; the registration of manufacturers, importers and builders; issuing of letters of authority and approval documents; conducting inspections and enforcing sanctions and the removal and destruction of unsafe products.  The NRCS did not participate in the writing of SANS or the certification and testing of products.  The Regulator consulted widely with the relevant sectors and the technical regulations and specifications were published for public comment.

Details were provided of the progress made in providing technical regulations for solar water heaters, domestic hot water storage tanks, electrical appliances, lighting, the energy-efficiency of new buildings and electric vehicles.

Presentation by the Banking Association of South Africa (BASA)
Mr Pierre Venter, General Manager, BASA presented the briefing (see attached document).

The presentation covered the role and contribution of the banking sector to the development of the renewable energy sector in South Africa; the experiences and lessons learnt in the procurement of renewable energy and the prognosis on the key issues.

The involvement of Independent Power Producers (IPP’s) in the IRP since March 2011 was considered to be a great success story by the banking sector.  Project financing by 2012 totaled R100 billion, of which R70 billion was from debt financing, mostly provided by the commercial banking sector.  The first two rounds of renewable energy procurement had resulted in a lot of interest from the financial sector.  The commercial banking sector was looking forward to the next round of bidding, had the finance available and was ‘ready to play’.

BASA recognised that the development of the renewable energy sector in South Africa was at an early stage but had noted the development of healthy competition in the sector.  The commercial banking sector was willing to support and exploit commercially viable and sustainable opportunities.  Banks had already moved into investing solutions such as the Green Exchange Traded Fund, foreign exchange (FX) products, interest rate and commodity hedging and agency/transactional services.  Banking premises were being converted to be more energy-efficient and a substantial amount was being invested in electricity back-up systems for IT platforms.

The challenges concerning IPP’s included risk factors, time constraints, inexperience of bidders and bureaucracy.  The challenges for the State including balancing social and economic imperatives, meeting local content criteria, low manufacturing output (particularly in the Solar PV sector), determining feed-in tariffs and a conflict of interest as the State was both referee and player.

Critical focus areas were providing policy and market certainty; optimising local content; attracting foreign manufacturing investment; developing suitable financing packages for projects; the lack of expertise; de-coupling the value chain and providing infrastructure support.

The prognosis on the key issues was generally positive, provided that the message from the State was positive and that over-regulation of the renewable energy industry was avoided.  The new industries had to be commercially viable and sustainable.  Increased competition was welcomed.  More needed to be done to educate consumers and provide consumers with coherent information.

The policy on renewable energy had been established and the necessary research had taken place.  South Africa should now focus on implementation.  More attention had to be given to develop ancillary businesses and attracting expertise.  The regional options needed to be considered and investors should be encouraged to invest in South Africa rather than in the neighbouring countries.

Discussion
Mr L Greyling (DA) observed that it was unlikely that the rural electrification targets for 2014 would be met.  During an oversight visit to a rural area in the Eastern Cape, the Committee was informed that solar power would not be provided if the area was on the ESKOM list of areas to be electrified.  The problem was that ESKOM took a long time to deliver electricity to these areas.  He suggested that the provision of small solar powered grids were provided in these areas as an interim measure.

Mr Greyling thought that SARi was not being developed fast enough and was not being actively supported by the National Treasury.  South Africa risked losing a lot of potential foreign investment to other countries as a result of the slow pace.  Companies had expanded in anticipation of increased demand, which did not materialise.  Companies had complained over the high cost of SABS testing and the need for re-testing the entire component.  Consideration should be given to providing financial assistance to SMME’s from the fiscus for these costs.  The installation of solar water heating required a substantial up-front payment and he wondered if the banking sector had considered allowing homeowners to finance the installation of alternative energy systems by increasing their bonds.  He asked who was responsible for enforcing the building regulations for energy-efficient buildings.  There appeared to be little knowledge in the building sector of the regulations, which were not being taken seriously.

Mr Zubair Habib, Account Manager, Industrial Development Corporation (IDC) provided input on the role played by the IDC as a financing institution with the primary objective to develop local manufacturing.  The IDC had established a specialist ‘green’ unit.  Concessionary finance options included preferential interest rates (prime minus 3%) and capital breaks to allow enterprises to develop.  It was recognised that South Africa had higher input costs and developers had to meet local content requirements.  It took on average six years to establish a new business and market certainty was imperative for encouraging investment.  The IDC was currently engaging with two foreign Solar PV partners, who were willing to invest in South Africa and who had the necessary expertise.  The DTI provided grant funding for the acquisition of new equipment and additional grants were available if the equipment was imported.  This was one example of inter-agency cooperation and innovative financing options.  The IDC also considered financing the equity portion and had access to foreign funding.  The IDC was investigating the potential of renewable energy in neighbouring countries.

Prof Ernst Uken, Head: Energy Institute, Cape Peninsula University of Technology said that the DOE had a programme to provide 1 million homes with solar cookers.  These cookers had been available for the previous 20 years but the programme had not been successful as householders found the system to be impractical.  He suggested that the DOE considered developing a programme to provide patented solar-powered sewing machines instead.  A sewing station had been established on the West Coast but a drawback was the cost of the solar panels that doubled the price of the machines.  The cost of solar panels had escalated since the SANS standards were imposed.  It was doubtful if the panels would last ten years.  Hot water geysers only lasted for three years.  He asked if the SABS allowed for the re-testing of products after installation.

Ms Ntombifuthi Ntuli, Director: Renewable Energy, DTI asked how cost-effective different local content bidding would be as the preparation of a bid was expensive.  She asked for comment from BASA on the perception that the local content requirements increased the level of risk.

Mr John Notoane, Policy Analyst, Oneworld Group referred to the comment that SMME’s were reluctant to enter the sector.  He asked BASA how much funding was provided to SMME’s.  He suggested the development of a toolkit that could be used by SMME’s to access funding.

The Chairperson asked for a written suggestion on the toolkit to be submitted to the Committee.

Mr Thomas Schaal, Director: ESA-Meridian (Pty) Ltd was a shareholder of Isivunguvungu Wind Energy Converter (Pty) Ltd (i-wec).  The company was established in 2009 and manufactured wind turbines, using German technology.  The first turbine was successfully assembled and tested.  The company was facing financial difficulties and found it difficult to get funding.  As a start-up company, the enterprise was unable to provide the kind of balance sheet to get a guarantee for a loan.  Local content was a prerequisite for loans.  The company had requested several Government entities to consider providing support but had not received a response.  The IPP procurement process did not support the development of the local industry and encourage SMME’s to get involved in the renewable energy sector.  The restriction of bids to 25 MW (megawatts) and 5 MW was too low.  Government was requested to develop a consistent market demand for small scale power production and to develop a framework for the development of the local industry.

The Chairperson recalled that Isivunguvungo was one of the first companies to get involved in the renewable energy sector.  He was perturbed to hear that the company was facing closure.

Mr Willie de Beer, Corporate Consultant, South African National Energy Development Institute (SANEDI) said that there was room for small-scale energy producers but consideration had to be given to who would purchase the product.  Currently, energy could only be sold to ESKOM as the Municipal Finance Management Act (MFMA) did not allow local government authorities from purchasing electricity from other power producers.  In addition, the legislation required municipalities to purchase the cheapest electricity available and renewable energy currently cost more than energy from non-renewable resources.  He suggested that the Department of Cooperative Governance and Traditional Affairs (COGTA), the National Treasury and the DOE considered amending the MFMA to allow local government authorities to buy energy from IPP’s.

Ms Modise responded that the DOE and SANEDI was already looking at the installation of mini-grid systems.  The National Treasury had been approached to provide funding and the availability of international funding options was being investigated.  A progress report on SARi was released in April 2012.  Although it would appear that little progress was being made, the main issue was that it was a cross-cutting exercise that required an integrated approach.  The National Treasury was considering different funding models.  The DOE was engaging with other international players.  The Department followed a broad approach and need to ensure that an enabling environment was created and that all the issues were considered.

The DOE had commissioned legal opinion on the enforcement of building regulations.  The Cabinet had approved the establishment of a steering committee that included all the key departments.  The steering committee would consider the implementation of the regulations and what legislative framework would be most appropriate.  Building plans were approved by the local government authorities but many municipalities suffered from a lack of capacity.  The DOE was engaging with the National Treasury on the issue of allowing local government authorities to purchase electricity from IPP’s.

Mr Van den Berg was confident that localisation and household demand for renewable energy would increase.  The cost of preparing bids was substantial but he did not think that bids at different levels of local content would significantly increase the cost.  He agreed that access to financing was difficult for small and start-up enterprises.  The banks were risk-averse and the plight of Isivunguvungo was a prime example of the problems of companies to secure adequate funding.

Mr Tshembe Demana, Chief Director, DTI advised that the DTI had a product testing and product enhancement programme in place.  Various incentives were available, depending on the size of the investment and the number of jobs involved.  Companies were encouraged to submit applications.  The programme could be used by small companies to finance the cost of component testing by the SABS.  Components had to comply with the standards and it was not feasible to only test individual segments.  The DTI promoted local procurement rather than encouraging the import of foreign products and technology.

The Chairperson wondered if the core role players were working together.  He did not get the impression that there had been sufficient engagement amongst all the stakeholders.  There appeared to be a degree of uncertainty in the sector and it was essential that the stakeholders engaged with each other to deal with the issues.

Mr Van den Berg conceded that more engagement was necessary.  It had taken time to get the four industry associations together.  The industry was under much pressure and representatives had little time to devote to discussions.  The DTI arranged regular discussion sessions and an indaba had been arranged.  The meetings of stakeholders arranged by the Committee were valuable.

The Chairperson noted that BASA had stated that capital was not a problem but the furnishing of guarantees was another matter.  Government supported the development of the renewable energy sector and he wondered what could be done to improve flexibility and unblock the bottlenecks.

Mr Van den Berg referred to the identification of the various role players included in the SAREC presentation.  He agreed that open engagement with all the stakeholders was the way forward.

Mr Venter agreed that BASA should have further engagement with SAREC.  He disagreed that the banking sector had not done enough to encourage investment in the sector.  However, market certainty was a prerequisite and initiatives should be applied consistently.  Consideration should be given to the prevailing adverse economic conditions.  There was a high level of over-indebtedness in the country and consumers were already over-burdened.  The escalating cost of electricity made the installation of solar water heaters more viable.  The ‘green bond’ concept allowed for added value if green technologies were used.  However, the concept had not been adopted in South Africa.  The ‘green’ economy was still in its infancy but was expected to develop rapidly.  Bondholders were allowed to access the equity in their bonds to fund the installation of alternative energy systems in their homes but other solutions should be developed as the real estate market was also under pressure.  Renewable energy was a recent innovation in South Africa.  Reliable products and substitutes if equipment broke down had to be available.  He agreed that BASA, the IDC and other funding institutions needed to be in the same forum and needed to work together to develop solutions.  SMME’s and start-up enterprises were a higher risk.  He agreed that a toolkit for SMME’s would be useful.  The banking sector could consider developing products aimed at the SMME sector.  He agreed that BASA could do more to mitigate the risks associated with SMME’s and start-ups.

Ms Teri Kruger, Director: Stakeholder Relations, Juwi Renewable Energy had a history of engaging with the DOE on the use of paraffin by poor households and the associated dangers of paraffin.  She stressed the need to balance the cost of death and injury caused by the use of dangerous energy sources to the cost of renewable energy.  She urged Government to stop talking and focus more on implementation of the renewable energy programme.

Mr Wido Schnabel, Managing Director, Condor Renewable Energy commented on the need to get more small-scale producers involved.  He asked why the tests and certification of products of other countries could not be accepted.  The SABS processes were costly and time-consuming.  He agreed that there should be less talk and more action.

Mr Justin Burnett, Managing Director – South Africa, Obelisk Group said that there needed to be more clarity on what the market demand would be in the next ten years.  He would like to know what seed capital was available to fund start-up enterprises and encourage innovation.  He anticipated the development of an ancillary maintenance and support services sector but this aspect had not been given much attention.

Mr Theo Lötter, Executive, Actom Group advised that the industry had reported that the expected orders had not materialised.  The purpose of the local content requirements was to create jobs.  Existing businesses should consider expanding their operations to supply the contractors.  He disagreed with the statement made by BASA that locally manufactured products were more expensive than imported products.

Mr Venter said that there was a difference between job creation and core competency requirements.  For example, the regulations required a qualified electrician to install a geyser.  It was necessary to be more innovative when promulgating regulations.

Mr Habib advised that the IDC administered a Government-sponsored programme to encourage innovation.  The IDC also had a venture capital programme to assist SMME’s and start-up enterprises with funding.  The major consideration was whether the product was commercially viable.  The reasons for SMME’s being regarded as high-risk included the higher marketing risk, limited access to big companies and the unwillingness of large corporations to listen to start-up enterprises with no track record.  Start-ups and SMME’s wanted to play with the big players but lacked the necessary experience and financial backing.  The BBBEE scorecard promoted skills development and access to big companies by SMME’s.  An example was a client of the IDC who manufactured solar water heaters and who had established a training center to train people to install solar geysers.

Prof S Mayathula (ANC) complained that the solar water heater he had installed did not consistently provide hot water.  He wondered if the problem was faulty product or faulty installation.

The Chairperson recalled that the Committee had visited a company based in Atlantis that was experiencing financial difficulties.  The Committee’s intervention had been too late to save the company.  He suggested that SAREC engaged with BASA, the IDC and other financing entities as well as the SABS to explore solutions faced by the renewable energy sector.  The sector had the potential for significant growth.  He noted the point made about the development of ancillary industries.  He suggested that SAREC engaged with the National Treasury, the DOE and COGTA to explore ways of resolving the issue of local government authorities being prevented from purchasing energy from IPP’s.  More engagement with Further Education and Training (FET) institutions was necessary to address the issue of skills development.  Although the sector had not generated a great number of jobs to date, he anticipated that the future demand by the manufacturing, installation and maintenance sectors would result in more job opportunities.  The stakeholder meetings arranged by the Committee was a platform for engagement and participants were encouraged to raise issues beyond the topics set for the agenda.  He thanked the participants for the input provided.

The meeting was adjourned.