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Cablegate: South Africa Taking Steps to Boost Renewable Energy; Major

VZCZCXRO5837
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #1761/01 2440900
ZNR UUUUU ZZH
R 010900Z SEP 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 9475
INFO RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEHBJ/AMEMBASSY BEIJING 1019
RUEHBY/AMEMBASSY CANBERRA 0874
RUEHLO/AMEMBASSY LONDON 1781
RUEHMO/AMEMBASSY MOSCOW 1023
RUEHNE/AMEMBASSY NEW DELHI 0620
RUEHOT/AMEMBASSY OTTAWA 0833
RUEHFR/AMEMBASSY PARIS 1621
RUEHSG/AMEMBASSY SANTIAGO 0289
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 03 PRETORIA 001761

SIPDIS
SENSITIVE

STATE PLEASE PASS USAID
STATE PLEASE PASS USGS
DEPT FOR AF/S, OES/EGC, EEB/ESC AND CBA
DOE FOR SPERL AND PERSON
DOC FOR ITA/DIEMOND

E.O. 12958: N/A
TAGS: ENRG EPET EMIN EINV ETRD SENV SF
SUBJECT: SOUTH AFRICA TAKING STEPS TO BOOST RENEWABLE ENERGY; MAJOR
OBSTACLES REMAIN

REF: Pretoria 810

This cable is not for Internet distribution.

1. (SBU) Summary. Participants at a recent conference on climate
change and development in Pretoria reviewed the status of renewable
energy in South Africa, including regulatory and market barriers to
development of the renewables sector. Industry insiders were
skeptical that the government's target of 4 percent renewable energy
generation by 2013 could be reached, citing little progress since
the government's energy policy was announced in 2003. The
government reaffirmed its commitment to renewable energy, outlining
a new set of financial instruments to promote its development.
These include a Renewable Energy Feed-In Tariff (REFIT) program that
will enable the state power utility Eskom to purchase renewable
energy from independent power producers (IPPs). However, serious
institutional and market barriers remain to South Africa's
transition to more renewable energy. End Summary.

--------------------------------------------- ----
Conference on Climate Change and Renewable Energy
--------------------------------------------- ----

2. (SBU) Environment, Science and Technology Officer and Energy
Specialist attended a conference on "Climate Change and Development:
driving an alternative energy future for Southern Africa?" hosted
by the Institute for Global Dialogue (IGD) in Pretoria August 17-18,
2009. The aim of the conference was to review the status of
renewable energy in Southern Africa and to address regulatory and
market barriers to the integration of renewables in the region.
(NOTE: although the conference title refers to "Southern Africa",
the primary focus of the conference was South Africa's renewable
energy policies. END NOTE.) This cable updates reftel on the state
of renewable energy in South Africa.

--------------------------------------------- ------
Ambitious Goals but Industry Insiders are Skeptical
--------------------------------------------- ------

3. (SBU) The South African government (SAG) has set a target of 4
percent, or about 10,000 gigawatt hours (GWh) of electricity to be
produced from renewable sources by 2013. Stated policy drivers
behind the push for renewables include the need to diversify the
energy mix, improve energy security, reduce greenhouse gas (GHG)
emissions, create jobs, and promote rural development. Many
conference delegates expressed skepticism that the targets could be
met. "A deep cynicism exists about the government's commitment to
renewable energy," explained World Wide Fund for Nature's Living
Planet Division head, Saliem Fakir. In fact, to date less than 1
percent of the 10,000 GWh goal is provided by renewables and 2013 is
approaching fast. In a further setback, state-controlled power
utility Eskom recently announced it was delaying development of a
concentrating solar power plant (100 MW), a wind energy project (100
MW), and a pumped-storage hydro project (1500 MW), owing to current
QMW), and a pumped-storage hydro project (1500 MW), owing to current
economic conditions.

----------------------------------------
New Financial Instruments for Renewables
----------------------------------------

4. (SBU) The South African Department of Energy's (SADOE) Clean
Energy Division Director, David Mahuma, responded that the
government recognized the barriers faced by renewable energy project
developers, and accepted that the uptake of renewable technologies
would not "come cheaply." However, he underlined the SAG commitment
to renewable energy and outlined a package of new financial
instruments to promote its development. These initiatives include
creation of the Renewable Energy Finance and Subsidy Office (REFSO),
the Renewable Energy Market Transformation project (REMT), and the
recently published Renewable Energy Feed-In Tariff (REFIT)
guidelines. In its 2009/2010 budget, REFSO has a 10 million Rand
(approx. 1.25 million dollars) financing capability for renewable

PRETORIA 00001761 002 OF 003


energy projects, and has already funded hydro power, biogas, and
landfill gas projects. REMT has approximately $6 million in donor
funds to assist developers in bringing projects to bankability
through assistance with feasibility studies and environmental impact
assessments.

---------------------------------------
Renewable Energy Feed-In Tariff (REFIT)
---------------------------------------

5. (SBU) In March 2009, the National Energy Regulator of South
Africa (NERSA) approved the REFIT guidelines to enable Eskom to
purchase renewable energy from Independent Power Producers (IPP).
Four renewable technologies are included in Phase 1 - wind, small
hydro, landfill gas, and concentrating solar - with others to be
considered in later phases. IPPs must produce a minimum of 1 MW of
power to be eligible. REFIT tariffs are set to provide a fair
return to investors and to cover the costs of electricity
generation, but are approximately 3 - 7 times higher than Eskom's
conventional tariffs for coal-based electricity. For the program to
be successful, Eskom will need to ensure that it has adequate funds
to purchase the more expensive renewable electricity, thus
electricity price hikes will be required. Eskom estimates that the
cost of purchasing the power to meet the 4 percent renewable target
by 2013 will be 3 billion Rand per year (approximately 375 million
dollars).

6. (SBU) Yousuf Haffejee, Eskom's Market Development Manager, said
the challenges of connecting IPPs to the grid should not be
underestimated. Those challenges include grid connection costs,
grid stability, installation and downtime impacts and a host of
other technical, legal and administrative issues. One element that
is often overlooked is the question of "land servitude", i.e.,
property rights and easements associated with development of new IPP
projects and transmission corridors. Haffejee observed that
renewable energy is often produced in rural areas where demand for
electricity is not high, and therefore connection to the grid and
transmission to urban centers will be vital to match supply with
demand. The selection criteria for IPPs will include a preference
for plant locations that contribute to grid stabilization and
minimize transmission losses.

--------------------------------------------- -
Comment: Significant Institutional and Market Obstacles
--------------------------------------------- -

7. (SBU) South Africa has enormous potential for renewable energy,
with a favorable latitude, abundant uninterrupted sunshine, and
significant wind potential on both the east and west coasts.
However, serious structural, institutional, and market barriers will
hinder a quick uptake of renewable technologies. First, South
Africa is a coal-based economy, and the abundance of cheap coal
feeds an "energy/industrial complex" that is highly sensitive to
increases in the price of electricity. South Africa is facing a
Qincreases in the price of electricity. South Africa is facing a
critical power shortage, with reserve margins of only 5-8 percent,
and must quickly develop new generation capacity to meet the demands
of economic growth and avoid repeating the rolling blackouts of
January, 2008. Eskom's capital expansion program will require 385
billion Rand (approximately 48 billion dollars) over the next five
years, and will include two large coal-fired plants.


8. (SBU) Second, Eskom controls more than 95% of the electricity
market. In this monopolistic market structure, under the REFIT
program, Eskom is designated as the single buyer of renewable energy
from IPPs. Negotiating Power Production Agreements (PPAs) with the
producers can be a time-consuming and bureaucratic process. South
Africa's grid code and structure was designed for a small number of
large power plants, making the transition to decentralized power
generation difficult. The REFIT program will accommodate IPPs, but
they must generate a minimum of 1 MW of power. Under the REFIT
program there are currently no plans for introducing residential or

PRETORIA 00001761 003 OF 003


other smaller scale renewable energy feed-in capabilities in the
near future. Most industry observers believe that the full
integration of renewable energy into South Africa's economy is a
long-term project.

GIPS

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