Dear Minister Patel, Minister of Economic Development
RE: REQUEST FOR INTERVENTION: RENEWABLE ENERGY SECTOR CHALLENGES IN THE EASTERN CAPE
The abovementioned matter has reference.
Thank you for the interest you have shown on this matter.
This letter highlights some of the challenges faced by renewable energy investors, whose projects are situated in former Homeland areas of the Eastern Cape.
I had intended to bring some of these issues to your attention during the Economic Development Budget Vote Debate, but due to time constraints (3 minutes speaking time) I could not do so.
While some of the issues here fall under the mandate of the Department of Energy and, to a less extent, the Department of Rural Development and Land Reform, I have decided to include them in an attempt to give you a comprehensive picture – and primarily because they all have a negative impact on the economic development of the aforementioned areas.
Please find hereunder the details of the issues I would like to bring to your attention.
1. REIPP Procurement Programme
In 2011, the Department of Energy launched the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) consisting of 5 bidding rounds taking place over a five year period. The first 4 rounds saw 79 renewable energy projects being selected amounting to R170 billions of investment by the private sector nation-wide.
The Eastern Cape Province was only awarded 1 solar project and 15 wind energy projects by the Department of Energy (DOE). The total Rand value amount of this investment is approximately R26 billion.
However, regrettably none of these projects is located in former Homelands, despite these areas representing 40 per cent of the Province’s land mass and 60 per cent of its population.
I therefore appeal to you Mr Minister to influence the DOE to spread the benefit of these projects as wide as possible.
2. Socio-Economic Impact of the REIPP Procurement Programme
Apart from its primary objective of procuring energy, the DOE has commendably designed the REIPP Procurement Programme as a tool to foster long term rural development within a 50km radius of each project location. The social benefits of this are massive. Each successful renewable energy project is compelled and has to commit to spend between 1 to 2.1 per cent of its turnover on Socio-Economic Development (SED) contributions and Enterprise Development (ED) contributions over the 20 year life cycle of its project.
In addition to the job opportunities created during the construction and operation phase, each renewable energy project has to set up a community trust that owns between 5 and 40 per cent of the project’s equity shares and the dividends should be spent on community upliftment projects. The long term benefits are substantial, and will definitely change the face of rural South Africa in the medium to long term.
2.1 Over-concentration of Projects
While these policies have massive socio-economic benefits, several challenges about the overconcentration of projects in certain areas of the Province remain. For instance, the majority of Wind Farms in the Eastern Cape are situated in two areas, Jeffrey’s Bay and Cookhouse, and together they have a combined investment value of R26 billion. In other words, the entire R26 billion that has been invested on renewable energy in the Eastern Cape thus far has gone to the two “previously advantaged” areas. Needless to say, this creates a long term imbalance with regard to development in the Province.
It is often argued that the Northern Cape also suffers from the same over-concentration of projects in some areas.
This over-concentration results in a situation, where a few communities that happen to fall the same within the 50km radius experience massive development, while leaving those who fall outside largely depending on the limited resources of the municipality for development. If left unchanged, this will become a major source of future intra-community inequality, which would lead to major community tensions and instability in future.
To balance development in the Eastern Cape and other Provinces, I would like to propose that 30 per cent of the 1 and 2.1 per cent of the turnover companies have to spend on socio-economic development and enterprise development over the 20 year life cycle of the project be channelled to municipal coffers for service delivery across the municipality.
Government should also take active steps to address the over-concentration of projects in a few areas. In particular, there should be deliberate focus on projects that are situated in previously disadvantaged communities.
3. Complex Land Tenure Systems: Former Homelands at a Competitive Disadvantage
A private investor has to secure land rights before participating in the REIPP Procurement Programme. To acquire such rights on communal land, an investor must follow a lengthy and complicated administrative procedure with the Department of Rural Development and Land Reform, which takes anything between 3 to 4 years to complete.
In contrast it takes a couple of months to achieve the same result when land is acquired from a private landowner.
Government has to streamline this process if it has to level the playing field.
4. High Community Ownership and the Role of Development Finance Institutions (IDC)
In former Homelands, communities are the landowners, meaning that in rural areas instead of dealing with a few farmers as landlords; a developer has to negotiate with several communities and therefore has to ensure that the project will meaningfully benefit tens of thousands of people, who live on the land earmarked for development.
However, when the community is the landlord, most developers will back-end the payment of dividends from the community trust as a way to increase the competitiveness of the project. In other words, developers delay the payment of dividends to the surrounding communities by 10 years. This enables a developer to secure much more favourable financing terms for the community trust, which has a direct impact on the improvement of the project’s finances.
But the downside of it is that communities have to wait for ten years to get dividends.
Again the playing field is not level, as high community ownership stakes and favourable financing terms are required for projects that have thousands of community members as landlords, but there are currently no incentive schemes or reward mechanisms built into the DOE’s selection criteria to reflect the positive long term socio-economic impacts of rural projects.
Moreover, development finance institutions do not provide projects located on communal land in Former Homelands any preferential financing terms for community stakes. For instance, the Industrial Development Corporation (IDC) has been very active in financing community stakes for projects located on privately owned land in the renewable energy hotspots with 50km radius overlap between projects. The terms offered by the IDC to project’s located in former Homelands are less competitive than commercial banks. For instance, one of the Wind Farms in Motherwell had to acquire finance from commercial banks in order to finance the community stake due to the IDC’s unfavourable loan conditions.
Clearly, IDC failed to play its developmental role of bridging the inequality gap in our economy in this example.
It is estimated that in order to finance a 30 per cent community ownership stake for the 400MW of renewable energy projects that are currently being developed in Former Homelands, about R600 million would be required at competitive rates.
The amount of R600 million might seem like a lot of money. But it is not out of reach when one considers that the Department of Economic Development has set aside R23 billion to assist black industrialists out a R100 billion rand package earmarked for industrial development.
Currently, lack of funding and other challenges force developers, who are located in former Homelands, to reduce community stakes, back-end the distribution of dividends and reduce the percentage of ED and SED contributions in order to stand a slim chance of winning in the REIPP Procurement Programme.
In summary, to level the playing field, I propose that two actions be taken by Government:
• The DOE gives more credit in its score card to projects located on communal land in the former Homelands.
• Development Finance Institutions provide very competitive financial terms for community stakes in order to beat commercial banks and allow projects to be more competitive.
5. Underutilisation of Electricity Infrastructure.
Since 1994, the ANC government has successfully built brand new electricity substations in former Homelands in order to give access to electricity rural communities. This new infrastructure represents cheap and rapid means of connecting renewable energy projects to the grid, while placing no additional financial burden on Eskom.
However, the large majority of projects selected to date by the DOE require substantial network investment with the associated timing implications, while the country is in the middle of an energy crisis.
The DOE has not taken into account the advantages former Homelands offer in terms of rapid, cheap and decentralized energy generation capacity they bring to the Eskom grid.
In other words, it is easier to connect the small wind farm projects to the substations that are in rural areas than it is to connect big renewable farms to the same substations for reasons mentioned above.
Again, the playing field is not level, as these advantages which have a financial implication for the country are not taken into account.
I look forward to hearing from you.
Mr Nqabayomzi Kwankwa, MP
Copied to: Honourable Elsie Mmathulare Coleman, Chair PC on Economic Development