Economic Development Obligations: Unintended Consequences

The message from the South African Department of Energy at the Windaba Conference in Cape Town last week could not have been clearer. In his address during the opening session of the conference, Dr. Wolsley Barnard (Deputy Director General: Energy Programs and Project at the DOE) forced home the point that the South African authorities ""¦will be enforcing penalties"¦" for breaches of the mandatory economic development obligations under the South African Government's Renewable Energy IPP Procurement Programme.

Listening to Dr. Barnard's address got me thinking. Three years on from its launch has the REIPPP Programme made a real difference to South Africa's manufacturing and service sectors? The answer quite clearly has to be a yes. The development of the R300-million wind turbine tower factory at the Coega IDZ, the recent announcement by SunPower of the construction of a new 160MW solar panel manufacturing facility in Cape Town and the DOE's job creation forecasts for construction and operational posts in the renewable energy sector make this apparent. But it did occur to me that there may be some unexpected side effects to the approach being taken by the DOE to this point.

Firstly, might the general trend of increasing local content requirements in each successive round of the REIPPP Programme actually have an adverse effect on competition in the renewables sector? In my view this is a risk, as the manufacturing and service capabilities in the South African market struggle to provide the different technology suppliers sufficient access to the facilities and technical skills needed to maintain a truly competitive marketplace. The natural consequence being that there are a limited number of suppliers on whom developers can rely to meet the local content requirements submitted as part of the bid process. Or worse still, suppliers may be tempted to overcommit to requirements that they simply cannot meet and consequently factor this into their pricing. In turn this could well lead to stagnation in what has so far been a steadily decreasing electricity tariff, and ultimately see a higher electricity price to end users than would otherwise be achievable.

The second issue is whether the DOE's focus on measuring local content levels in value terms has the effect of maximising job creation. The concern here is that the highest value components of a renewable energy development are rarely those whose manufacture brings with them the highest number of new jobs. Therefore, measuring local content levels by reference to another criteria could well have a greater effect on job creation. In addition, given the DOE's aim of achieving socio-economic development in the local communities within a 50 km radius of each project site, construction of remote manufacturing facilities to produce high value components seems to counter this aim. Whereas, a focus on locally manufactured components and longer term operation and maintenance roles would seem to better address this goal.

In short there is no easy answer for governments when trying to implement economic development requirements such as those under the REIPPP Programme. There will likely always be unintended consequences of the ways in which policies are structured and implemented. However, careful consideration of the way in which such schemes are put in place, and the speed at which requirements are increased or changed, can help to maximise the benefits of what is one of the most critical issues when governments invite overseas investment.