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Cablegate: South Africa Taking Steps to Boost

VZCZCXRO5842
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #1762/01 2440900
ZNR UUUUU ZZH
R 010900Z SEP 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 9478
INFO RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEHBJ/AMEMBASSY BEIJING 1022
RUEHBY/AMEMBASSY CANBERRA 0877
RUEHLO/AMEMBASSY LONDON 1784
RUEHMO/AMEMBASSY MOSCOW 1026
RUEHNE/AMEMBASSY NEW DELHI 0623
RUEHOT/AMEMBASSY OTTAWA 0836
RUEHFR/AMEMBASSY PARIS 1624
RUEHSG/AMEMBASSY SANTIAGO 0292
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 03 PRETORIA 001762

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
Qwind energy project (100 MW), and a pumped-storage
hydro project (1500 MW), owing to current economic
conditions.

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

PRETORIA 00001762 002 OF 003

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
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 Q 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 Q 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
Qdemand. 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

PRETORIA 00001762 003 OF 003


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 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 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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