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South African Journal of Economic and Management Sciences

On-line version ISSN 2222-3436
Print version ISSN 1015-8812

S. Afr. j. econ. manag. sci. vol.20 n.1 Pretoria  2017

http://dx.doi.org/10.4102/sajems.v20i1.1538 

ORIGINAL RESEARCH

 

Local content requirements and the impact on the South African renewable energy sector: A survey-based analysis

 

 

Christopher Ettmayr; Hendrik Lloyd

School of Economics, Development and Tourism, Nelson Mandela Metropolitan University, South Africa

Correspondence

 

 


ABSTRACT

BACKGROUND: Economies aim to grow over time, which usually implies the need for increased energy availability. Governments can use their procurement of energy to increase benefits in their economies via certain policy tools. One such tool is local content requirements (LCRs), where the purchase of goods prescribes that a certain value has to be sourced locally. The argument for this tool is that spending is localised and manufacturing, as well as job creation, can be stimulated because industry will need to establish in the host economy. However, this practice is distortionary in effect and does not create a fair playing ground for global trade. Furthermore, if the local content definition is weak, or open to manipulation, the goals of such a policy may not be achieved at all.
AIM: The objective of this study was to determine how LCRs would ultimately impact on the overall procurement programme.
SETTING: This study took place as South Africa commenced with large scale development of the renewable energy sector. This was largely achieved via the State run Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
METHOD: This study utilised opinion-based surveys to look into the LCRs of South Africa's REIPPPP and measure the impact of this policy on the renewable energy sector in general. The mixed method approach was utilised to analyse qualitative and quantitative data and this was then triangulated with an international peer group to arrive at certain conclusions. The Delphi Technique was then employed to achieve population consensus on the findings.
RESULTS AND CONCLUSION: It was found that, in order to implement a policy such as local content without any negative welfare effects, the host economy had to show certain pre-existing conditions. Because South Africa does not hold all supportive pre-conditions, the impact and effect of LCRs have not been optimal, and it has not been found to be a sustainable mechanism to continue using indefinitely. The pricing of renewable energy was also found to be higher due to local content and such pricing is passed on to the energy consumer. The welfare created for South Africa, which should be in a trade-off for the creation of jobs and manufacturing, is therefore diminished and coupled with unsustainability and potential manipulation of the system, the country does not seem to be benefitting as it should be from this specific application of a local content policy.


 

 

Introduction

Countries around the world are aiming to grow their economies, implying that the demand for energy from electricity sectors will increase. Because of the increasing development, there are larger and more demanding power users; if power is not readily available it could place serious constraints on the economy. To add further complexity to this matter is the notion of developing a green economy that involves, on the one hand, growing the economy and, on the other hand, reducing environmental impact and improving human social development. This has been a trend in developed countries, now evident in developing nations too.

The United Nations Environment Programme (UNEP) is in support of this notion and defines the green economy as 'one that results in improved human well-being and social equity, whilst significantly reducing environmental risks and ecological scarcities' (UNEP 2011:2). This concept provides a dichotomy for governments, whereby the demand for energy is rising, but generation costs need to be low enough to remain attractive for inward investments. In addition, the increased provision of energy must not negatively impact the environment or human well-being. Within the context of the green economy, governments are using green industrial policies to meet certain objectives, such as increased energy generation, higher employment and faster economic growth. This ultimately increases the associated energy costs (Kuntze & Moerenhout 2013:vi).

 

Local content requirements and the impact on economies

Local content in the South African renewable energy sector

South Africa has seen a similar trend as the scenario described above, whereby the economy has been growing and placing increased pressure on the electricity supply. To increase electrical supply in the country, renewable energy has been recognised as an essential part of a mix of energy carriers that offer a positive impact on environmental and human well-being (as compared to fossil fuel). The South African government announced that it was to procure renewable energy from independent power producers (IPPs), according to the requirements of the Integrated Resources Plan (IRP) 2010 - promulgated under the Electricity Regulation Act, 2006 (Act No. 4 of 2006). The IRP 2010 document committed government to having 17.8 GW of renewable energy installed by 2030 (Department of Energy 2011a:6).

In an effort to meet the targets presented in the IRP 2010 document, the Minister of Energy released a determination in 2011, stating that a total of 3725 MW would be procured by 2016 through one or more tendering processes. The energy to be procured from renewable sources would include wind, concentrated solar power (CSP), solar photovoltaic (PV), biogas, biomass, landfill gas, small hydro and small (under 5 MW) projects (Department of Energy 2011b:118-119). Then, in December 2012 an announcement of an additional 3200 MW of renewable energy to be purchased through the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) was made by the DOE, pushing the programme's expected completion date from 2016 to 2020 [Department of Trade and Industry (DTI) 2015:xi]. The DOE made further allocations of 1000 MW in round 4 of the REIPPPP, plus another 200 MW was allocated to CSP projects. In addition, a request for further proposals was put forward by the Minister of Energy for 1800 MW, which would be allocated to bidders previously unsuccessful but able to revise their tenders and re-submit. The minister went further to announce that an additional 6300 MW was applied for through the National Energy Regulator of South Africa (NERSA), in accordance with provisions in the IRP 2010-2030 (DOE 2014b, 2015; Engineering News Article 2014a).

The REIPPPP also included a portion of projects termed 'small scale' that was designed to include those between 1 MW and 5 MW. During the first small scale window application period, 102 projects were submitted with the potential for generating 450 MW. However, only 78 projects were successful, totalling 345 MW (Engineering News Article 2014b). The implications of such a large tender were significant to countries such as South Africa. At the time of writing this paper, four rounds of the REIPPPP had been concluded: 92 projects were approved with a combined nameplate capacity of 5243 MW. This resulted in an investment value of R193 billion (bn) (Engineering News Article 2015). The DOE noted that of this investment value, R53.4bn was from foreign sources that increased South Africa's inward foreign direct investment (FDI) in 2015 by just more than double with the other total FDI for the same period being R22.6bn (DOE 2016:27).

The DTI created an industrial policy that complies with the South African laws but sets certain prerequisites for the use of policy tools such as local content. The DOE identified key features of the REIPPPP that they felt would be catalytic for achieving economic development objectives, whilst aligning with the DTI policies. These are as follows:

  • develop projects that lead to new opportunities for local communities

  • create job opportunities in certain technologies and especially in construction

  • opportunity for procurement to be structured by government, emphasising certain economic development objectives

  • formation of new companies combining emerging black enterprises with experienced, well-resourced companies (in terms of equity share and project management)

  • promotion of Broad Based Black Economic Empowerment (BBBEE) potential via subcontracting and procurement to include large, medium and small enterprises, bringing benefit to target groups of people

  • involvement of black equity and management skills through the extended time-frame IPPs would operate in (DOE 2011:92-93).

Based on the objectives above, the DOE developed a table of socio-economic outputs that had to be met, or exceeded, in order for tenderers to become a 'preferred bidder' in the REIPPPP. The tender adjudication was based on the 70-30 principle where 70% would be evaluated on price and 30% would make up the socio-economic criteria. From the latter, there was a further breakdown (see Table 1 in which certain points were obtainable based on the objectives provided in the bulleted points above).

 

 

Each renewable energy project required a minimum of 40% participation by a South African entity, a minimum ownership by black South Africans of 12% (with the target set at 20%) and a minimum ownership of a local community of 2.5%, where the community lived within a 50-km radius of the project (Baker & Wlokas 2014:10). Local content requirements (LCRs) featured in the economic development criteria and the government used this specific tool in an attempt to commit to industrial development. The National Development Plan (NDP) and the New Growth Plan (NGP) utilise local content as a policy tool to stimulate development and to try and maximise benefits for the immediate economy; this programme from the DOE was aimed at doing the same (DOE 2011). The term local content has been defined by the South African Bureau of Standards (SABS) as:

that portion of goods, works and services that have been generated and produced in South Africa. Companies that import raw material and convert this raw material in South Africa also contribute to local content to the extent that the South African value-add processes and additional inputs count as local content. (GIZ 2013a:27)

The calculation of local content is illustrated in Box 1.

 

 

In Table 2, the levels required from the REIPPPP per technology are summarised. It is important to note that the levels generally increase with each round of bid submissions.

The difference between the threshold levels (above) and the target levels were defined in the REIPPPP tender documentation. Bidders had to achieve the minimum requirement threshold levels to be compliant; they were, however, encouraged to attempt to reach target levels as the intention of the DOE (in alignment with the DTI industrial policies) was to maximise local benefits. The percentages were evaluated on a sliding scale where no points were allocated to bidders achieving threshold level. As higher percentages were achieved, more points were awarded until the maximum points were gained by those bidders able to reach target in their submission.

Local content impact on investment

Certain key drivers are needed to create a climate conducive to encouraging investment in the renewable energy sector and although LCRs create a drawcard for manufacturers to consider establishing in a new economy, there are additional drivers to support this move. Abrahams (2012) argues that the drivers necessary for establishing a renewable energy manufacturing hub in South Africa would include:

  • a sustainable renewable energy market with growth prospects

  • a strong supply-side support that would include established supplier relationships and manufacturer capabilities

  • the presence of skilled labour

  • physical location and infrastructure availability

  • research and development (R&D) presence that is accessible

  • the existence of incentives for manufacturers

  • a supportive government. (p. iv)

The first key driver to be tested in this research would be the market strength and potential growth of the sector. South Africa has committed to a renewable energy programme that holds predetermined levels of energy to be purchased per technology. Therefore, the market for IPPs and manufacturers has been established, and demand has been shown to be present, with potential for future expansion. Because a strong supplier support was listed as a key driver, the existence of local manufacturers and suppliers of renewable energy technologies, components and ancillary items would be conducive to investment attraction.

Domestic skilled labour is required for sector support, as there is currently criticism about the large influx of foreign labour used to erect and develop renewable energy projects in South Africa. IPPs have, however, indicated through media releases that the required skilled labour is not present in the country, and this represents challenges to IPPs wanting to maximise their local content spend. There are studies, at the time of writing, which are testing the market in terms of being able to supply suitably qualified labour for work in renewable energy by original equipment manufacturers (OEMs).

Physical location of renewable energy projects is also important since IPPs need to locate in areas with optimal renewable energy resources, and manufacturers need to be close to their customers so as to minimise logistical costs (these can be quite high for the larger and abnormal loads that characterise some technologies, e.g. large wind turbine blades and towers). Electrical transmission infrastructure is equally important as this is needed to ensure grid connectivity and the ability of the system to evacuate and distribute the power generated on-site.

Manufacturing also relies largely on supportive infrastructure being present. The ability of South Africa's logistical and electrical infrastructure to support local manufacturers of renewable energy technologies and components was tested during the survey process. The fact of whether local suppliers are able to produce such manufactured goods at the right quality levels and price was also questioned in the survey.

R&D is important to IPPs and manufacturers alike as it can lower costs and improve efficiencies. However, due to technologies already tested and proven internationally, the IPPs in South Africa are generally installing and developing projects with very little R&D investment. R&D is more relevant to the manufacturing of renewable energy components and it is usually found that the country of origin of a particular technology will tend to keep this intellectual property and R&D local, whilst only allowing some manufacturing of the most basic subcomponents to be outsourced.

The existence of incentives for IPPs is important and South Africa currently uses such for investment attraction. However, with the IPPs looking to tender in the REIPPPP, the tender itself could be viewed as an incentive since it is a guaranteed take-off for energy to be produced over a 20-year period.

Lastly, a supportive government is important for manufacturers and IPPs alike. Government can indicate support via the procurement of renewable energy and can set targets and goals that show future demand continuing for the supply of such energy. National projects via South Africa's National State utility, Eskom, as well as through the DOE - previously done in South Africa - send out positive signals of support.

Ultimately, throughout the conflicting debate on the impact of LCRs it is acknowledged that local content will have an impact on investment attraction, although this has not been determined in the case of the South African renewable energy sector. An increase in investment, especially from FDI, does have a positive association with economic growth and, therefore, benefit to the local economy. From literature and research based on econometric techniques and case studies, Veloso (2001) refers to the impact of FDI where all indicators point to the fact that it contributes to economic growth and reinforces the learning processes of industrialising nations. There was also evidence that there was a spill-over effect from FDI, providing an increase in the economic growth rate (Veloso 2001:21-23).