Localisation rules a hindrance to renewable energy

‘Although it may seem dark right now, SA is on the cusp of a really big opportunity – if we allow the capital and the private sector to start getting megawatts onto the grid’: RMB CEO James Formby.

RYK VAN NIEKERK: South Africa was hit with Stage 4 load shedding today [Tuesday, April 19], and it is foreseen that load shedding will continue to at least Friday. It follows after several generating units tripped, and nearly half of Eskom’s generating capacity was offline. Rand Merchant Bank [RMB] issued a relatively surprising statement today in which CEO James Formby called for the removal of local-content procurement rules and import tariffs on steel to reduce the cost of renewable energy.

He said South Africa urgently needs a megawatt-first policy, and that imported parts are up to 50% cheaper than locally manufactured parts. He also said that the manufacturing processes for these parts are largely automated and would lead to fewer job losses than one might anticipate.

James Formby is now on the line. James, thanks so much for joining me. Your position is actually quite aggressive and, as far as I’m aware, the first of its kind in the country. Was it a coincidence that you released this statement on the same day that Stage 4 load shedding hit us?

JAMES FORMBY: It was a coincidence. I actually had no idea that we would be at Stage 4 today. The announcement that Eskom made a little while ago, indicating that it was making land in Mpumalanga available for renewable energy projects, we actually thought was a really positive step in energy liberalisation and a really good move along the lines of the megawatts-first policy that you referred to in your intro.

So it was really along those lines to commend Eskom. And then also, I guess sometimes they do need some support, given, I guess, consumer frustration at the moment, but at the same time to highlight the importance of liberalising in a whole lot of ways in order to try and get megawatts to the grid urgently.

So it wasn’t meant to be an aggressive statement, Ryk, but really just an endorsement of liberalisation, which we actually saw as really positive, coming through just in the last little while, along with Bid Window 6 [of the Department of Mineral Resources and Energy’s Renewable Energy Independent Power Producers (Reippp) Programme] coming up too.

Read: Renewable procurement picks up steam with opening of new bid window

RYK VAN NIEKERK: This is not a new debate – it’s a question of protecting the local industry to the detriment of consumers. What are the benefits to your proposal, relative to the potential negatives?

JAMES FORMBY: It’s difficult to truly estimate what and how big these benefits are. And there’s really quite a complex range of protections or localisation rules plus tariffs that add to the cost. So it actually would require quite a detailed study to come to the bottom of it and to be able to precisely estimate. We do believe it would have a fairly significant impact, just from what we can see on both of those.

The flip side is – and I’m certainly not trying to talk against building an industry in South Africa that supports renewable energy; in fact, I think it’s going to be required – the point here, Ryk, is really that it shouldn’t be built on the back of lots of complex rules that make our energy more expensive.

I think that if one provides a very clear pipeline of renewable projects, the support for the industry, where we can scale it and where economic forces allow for it, will enable it to happen and we will end up having a renewable sector that’s not supported by complex rules, which add cost, but supported by commercial realities. Renewable bidders would actually want local procurement and local capabilities. That’s the flip side.

It’s not to advocate against a local industry, but rather to say liberalising; don’t try to protect something and create lots of complexity and rules when there’s some very special equipment which will probably never be able to be made in South Africa cost-effectively.

RYK VAN NIEKERK: Rand Merchant Bank is involved with the financing of many of these projects. In your experience what are the major bottlenecks for the approval or the construction of these renewable projects? Is it the cost of components, or perhaps the regulatory processes?

JAMES FORMBY: I think that obviously the bid rounds are happening. Renewable Bid Window 5 is now fairly far advanced and there are many large companies in South Africa that are looking to produce power privately. We see that as major theme over the coming years where large mining houses and other energy users want to try to produce cost-effective, renewable energy for their purposes.

The increase of the threshold [for companies to produce their own electricity without a licence] from one megawatt to 100MW is hugely positive.

A number of these projects are starting to enter the stage where they need regulatory approval. So we will see quite quickly how easily they get through approval processes but we are really hoping, given some of the pressures on the grid, that these are now expedited and move forward quite quickly.

RYK VAN NIEKERK: Do you think the private sector in general is vocal enough [to] criticise government publicly to address some of the problems, including the availability of electricity?

JAMES FORMBY: I think it’s not about criticising. We all know where we are now. It’s much more about how we partner to solve this for South Africa as a whole.

I really do believe that there’s the capital within the private sector that can enable an enormous, if you like, boom in renewable energy construction over the coming years and enable this just transition away from coal-fired power stations.

I think we really are, as South Africa, although it may seem dark right now, on the cusp of a really big opportunity if we can just make sure that we liberalise the approach here, and allow the capital and the private sector to start getting megawatts onto the grid, which is why that megawatts-first construct is the most important.

Government often is laudable in that it wants to achieve many social objectives, but sometimes having too many objectives confuses the issue. So really this message is about ‘Just let’s all focus on one thing. Let’s get megawatts onto the grid and let’s make it simple and easy for bidders to do that’. The less complexity we add in terms of any of the other rules and requirements will really aid this process.

RYK VAN NIEKERK: James Formby is the CEO of RMB. James, thank you so much for your participation tonight.

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