Africa’s biggest economy wants to be at the heart of the green tech revolution, but will industrial unrest outweigh the state’s support measures?

For years, South Africa’s talk of green energy was greeted with the same snorts of derision as BP’s ‘Beyond Petroleum’ re-brand. South Africa is, after all, a carbon-intensive economy and one of the world’s primary coal producers.

Yet when the annual UN Conference of the Parties, or COP, descended on Durban in 2011 to continue thrashing out a global climate deal, the government predicted a carbon-neutral economy by 2050. Minister of Economic Development at the time, Ebrahim Patel, said the green economy could deliver a much needed ‘growth spurt’ to the South African economy.

Since then, momentum has been sustained. Announcing South Africa’s 2013 budget, finance minister Pravin Gordhan argued that South Africa had “to adapt to a low-carbon economy, including mobilisation of our renewable energy potential”. The budget pledged to price carbon by way of a carbon tax at the rate of R120 ($11.8) per tonne of CO2 equivalent, effective from 1 January 2015. To soften the impact, a tax-free exemption threshold of 60 percent was set, with additional allowances for emissions-intensive and trade-exposed industries.

To ensure that South Africa produces fuel that is more environmentally friendly, support mechanisms for both biofuel production and upgrades of oil refineries to cleaner fuel standards are to be introduced. In addition, the government said it would continue to direct spending towards environmental programmes such as installing solar water geysers, procuring renewable energy, establishing low-carbon public transport, cleaning up derelict mines, addressing acid mine drainage and supporting national parks. A Green Fund was also set up, with R1.1bn ($108.4m) available. Through the budget, the government was sending a “signal to industry and consumers that we are living in an environmentally stressed world”.

Rejecting the often heard argument that green energy is a drag on growth, Rob Davies, South Africa’s trade and industry minister, believes government policy - including cash grants and production incentives - can help kill two birds with one stone by boosting South Africa’s green energy output while also engineering the industrial transformation the country sorely needs.

“We see the green economy as an opportunity. We need to make those changes in order to make our contribution to the global challenge of resisting catastrophic climate change. At the same time, we are trying to make it on a scale and in a way that supports local industrial development,” he says.

Powering procurement

Private investment will be critical to achieving a green transition, and the government has been focusing on incentives and public bid opportunities. A public tender for independent renewable power providers - launched in 2011 - is already delivering chunky investments, with a third round due to kick off in July.

Luck is on South Africa’s side. “For years, Europe has been subsidising renewable energy and got the price right down in terms of the technology. [It is] much more affordable than it was,” says Andrew Jones, a partner at Linklaters LLP, an adviser to the tender. “For emerging markets turning to renewable energy for the first time, this has turned out to be a form of accidental aid.”

German, Italian and Spanish subsidies, in particular, have made technologies affordable for Africa. And as European governments now switch off or reduce their subsidies, and European banks become less liquid, “disappointed Europeans are looking for more work elsewhere, just when South Africa launches its tender,” he says.

Those bidding for contracts - under which they would sell power to Eskom, South Africa’s public power utility, through joint ventures to meet empowerment criteria if they are foreign - include Denmark’s Vestas and Spain’s Acciona. Standard Bank and ICBC will provide debt financing for preferred bidder projects.

While South Africa’s public tendering process has been controversial in the past, with critics lambasting so-called ‘tenderpreneurs’ - officials who get rich handing out contracts to allies - the renewables tender is well regarded so far. “There was an astonishing effort from government to make sure the tender process was properly done. The evaluation process was conducted in a Fort Knox-style secure environment,” says Mr Jones.

The South African government has also launched a range of investment and production incentives to kick-start the green car industry.

Manufacturers can get a cash grant rebate of 20-30 percent of their investment - with higher proportions available to those meeting higher employment standards - and those in the business of electric vehicles can go as high as 35 percent. In addition, there is a production incentive, with a combination of duty credits and cash grants based on a minimum production volume. In the case of ordinary vehicles it is 50,000 units, and in the case of electric vehicles it will be 5,000.

“As automotive manufacturers begin to use energy efficient, less carbon-emitting vehicles, we must ensure this rollout starts to happen in South Africa,” says Mr Davies. “This is a technology at an early stage but we are going to try and position ourselves so that we attract automotive manufacturers. As we start to roll out electric vehicles in our economy, they will start to consider manufacturing them in South Africa.”

Missing the boat

The green transition presents a useful opportunity for emerging markets, but they must not miss the boat, argues Mr Davies. “We are conscious of the fact that in many respects the next wave of industrial development is probably being driven by green technologies. The last wave was the ICT revolution. Africa consumed ICT to its advantage, built a number of service sectors, used these as tools for small business development, and this is part of the growth story of Africa, but we didn’t manufacture any of these products. This time around what we are trying to say is: when the green technologies begin to develop, then Africa must have its role as a producer of those technologies.”

Development of this sector could further strengthen South Africa’s ties with China - now a major green energy investor - as well as established European economies, including Germany. “What we are saying to people is that, if you are involved in that technology, South Africa is a market - not just a market for you to put your wind towers on a boat and bring them over, and use carbon in the process, but to consider manufacturing those things in our country,” says Mr Davies.

But while South Africa’s independent power producers procurement programme looks impressive, Mr Davies’ dream of a burgeoning green car industry looks ambitious to say the least. Today, South Africa produces less than 1 percent of the world’s cars.

And the industrial woes of the last year cannot be ignored. Strikes starting in the mining industry soon hit car manufacturers. Japanese giant Toyota - South Africa’s biggest car producer - had to shut production in its Durban plant after an illegal strike in October. In May this year, Mercedes-Benz suffered wage-related strikes in its East London city plant in the Eastern Cape, pushing the rand to a four year low against the dollar. At the same time, strikers for the National union of Metal Workers of South Africa (NUMSA) called for a 20 percent wage hike across the board.

While production and investment incentives may help boost the sector, the tone of industrial relations - and wider cost considerations in a country that is far from resolving its labour relations crisis - may outweigh even the most generous state rebates.