DONG to invest in South African clean energy

On April 1st Danish energy giant, Dong Energy, signed an agreement with the Royal Danish Embassy in South Africa for assistance in entering the Kyoto carbon offset (Clean Development Mechanism or CDM) market in South Africa.

Dong Energy head of carbon dioxide funds and purchases Cilla Harpsoe Clausen explains that realistically the company, which is a CDM compliance buyer on the European emission trading scheme, would like to start doing business in South Africa by investigating three to four projects.

“We have quite ambitious reduction targets, and we are buying quite a lot of credits. We are buying about 12 million credits up to 2012, and I think we have a target of about 10 million credits post-2012”, she says.

Dong believes that there is strong CDM project potential in South Africa. No other country on the planet relies as heavily on coal for electricity generation as South Africa, meaning that the country should offer significant emissions reduction potential.

However, South Africa and much of the rest of Africa has been slow to take advantage of the benefits that the Kyoto Clean Development Mechanism offers. There are only 11 projects in South Africa, 29 on the entire African continent. By comparison South America has 412 and the Asia-Pacific region 1091 projects.

Barriers

Industrial engineer Mark Wells, who has worked in the field, argues that the biggest barrier to low carbon projects getting support from the CDM is the enormous investment requirement in costly documentations, validation and verification which usually exceeds Euros 100 000.

John Ledger, Chairman of the Sustainable Energy Society of South Africa (SESSA) agrees, arguing that although the process appears to have been streamlined, most project proponents are still deterred by the high up-front costs and length of the registration process – which can take up to two years.

Lack of auditors

A further complication is that South Africa does not appear to have local verification auditors (DoEs) who by charging local rates and being on site could expedite and cheapen the process.

“None of the consulting companies traditionally active in this field at a global level have been able to make a business case for the establishment of such capacity, because most of the expertise would be imported", says the head of one the Big 4 consulting firms sustainability unit, who prefers to be remain anonymous.

A more fundamental problem is that until 2007, the South African government’s regulatory framework provided no special dispensation for the proponents of renewable energy projects. Eskom, the national utility, which gets 95% of its electricity from burning coal, has been reluctant to agree to paying higher rates for electricity from renewable sources.

Although the National Energy Regulator (NERSA) has twice forced an energy price hike, industry observers such as consultancy Frost & Sullivan’s Cornelius van der Waal, generally believe that there are not enough fiscal incentives for renewable power projects. Thus even with the revenue stream of CDM added in, there is often no business case for investors. SA’s coal-based electricity being the cheapest in the world, renewables in the country have a steep hurdle to deal with.

Nevertheless, Eskom, which internally talks about carbon credits as “cheap green money” has managed to secure foreign funding from French sources for one of its renewable projects; a 150MW wind farm in the arid northern Cape province which is expected to be on-line 2010 or 2011.

CDM controversy

Meanwhile, more controversial CDM applications in Africa are receiving criticism from environmentalists. A CDM project by Sasol, South Africa’s petro-chemical giant was recently rejected the UNFCC’s CDM board. The company had tried to register a 645 km long natural gas pipeline running from Mozambique to its Secunda plant in SA. Environment groups had protested against the registration of the project, arguing that it lacked additional carbon savings.

Of the project proposals registered with South Africa’s designated national authority; two-thirds are sponsored either by big corporates, such as Sasol, a variety of ferrochrome smelter owners, fertiliser giant Omnia, or municipalities.

Smaller players lack the capacity to risk 100,000 Euros worth of money and time on registering their projects. Often their projects simply would not generate the scale of emission reduction that would warrant risking such an investment.

South Africa’s municipalities are waking up to the potential of CDM as a revenue steam, however. With plans to install up to 900 000 solar water heaters on South African residences over five years, Dong Energy may see potential in investing in such large scale community projects.

Virtually all of the municipalities lack the capacity to go through the CDM process and the resources to manage these initiatives which is why, despite promises of subsidies from Eskom for the mass installation of solar water heaters, little progress has been made to date.