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

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.