Youth will help fulfil potential hidden in renewable energy
My company, Mainstream Renewable Power, has supported this initiative for the four years because we believe SA needs young engineers who will help build a new sustainable future for the country. This is increasingly important as SA, like many countries, faces a long period of economic slowdown, described as secular stagnation.
Former US treasury secretary Larry Summers has revived this economic theory, which was first articulated in the 1930s, to describe the extended slump that followed the US’s great crash, where the difficulty of "maintaining sufficient demand to permit normal levels of output" was addressed only by Franklin Roosevelt’s New Deal and the very significant stimulus to the US economy that occurred through the country’s mobilisation for the Second World War.
A recent report from the International Monetary Fund has analysed the effect of secular stagnation on economies such as SA’s, where "serial disappointments in growth have led to a ratcheting down of medium-term growth forecasts". Its remedy for this cycle of weak demand and anaemic output is to develop infrastructure, both to stimulate demand, and to create the framework for a more robust economy. Infrastructure investment boosts demand, says the report, "through the short-term fiscal multiplier, similar to other government spending, and by crowding in private investment…".
In a report written in 2012 economic analysts at the Centre for Economics and Business Research argued that investment in renewable energy in the UK would have a larger than normal multiplier effect due to the stagnation of the economy. I suspect that this effect would apply in SA as well.
It was the opportunity to develop new infrastructure with the government and other partners that enabled us to create Mainstream SA. The government’s Renewable Energy Independent Power Producer Procurement Programme has delivered 1,400MW of operational plant with an immediate further pipeline of 3,700MW of new electrical infrastructure, which is providing additional electricity to the national grid to help relieve unserved demand, and bringing economic activity to many economically marginalised rural areas of the country. It stands as a successful global model of the benefits of delivering infrastructure in a weakened economy, both in terms of stimulating demand and attracting investment.
It is important not to underestimate the programme’s effect of "crowding in private investment". In only three years the programme has attracted $14bn of private sector capital, which has in itself acted as a significant stimulus to the local economy. It is quite probable that these projects will be self-financing for the public purse — although the government provides a fixed price for the electricity produced, the cost of doing so will be paid back through general economic growth, and a reduction in the country’s debt-to-gross domestic product ratio.
Companies such as mine have grown in SA as we seek to develop and build new infrastructure under the programme. As the government looks to review its medium-term energy strategy I would urge it to extend this programme, and procure a consistent amount of new renewable energy every year for the next 20 years.
At present more than 40% of the capital expenditure necessary to build wind and solar power plant in the country is used to acquire goods and services supplied from SA. This figure could be much higher if the government were to commit to the programme over the next 20 years. I have made the point with the government on a number of occasions that no matter which boilers are chosen for a coal plant, or which steam or gas turbines are deployed, they are unlikely to be manufactured locally. However, with wind and solar photovoltaic, broadly everything can be manufactured here, given sufficient demand.
This month’s opening of the GRI wind turbine tower plant at Atlantis, Cape Town, is a clear example of this developing trend. Not only will equipment be manufactured for the domestic market but the rest of sub-Saharan Africa could also be supplied from here.
In addition, the renewable energy producer programme has delivered new generation plant to the grid on time and on budget, with a levelised cost (the net cost to install a renewable energy system divided by its expected lifetime energy output) of energy less than that forecast for a new coal plant. This is a remarkable achievement for the government, and is indicative of the extensive solar and wind resources available in SA.
Why is all of this important to the 60 Kimberley graduates? In a powerful analysis of the effects of secular stagnation on SA’s economy Sanlam group economist Jac Laubscher wrote last week that one of the dangers was the potential for this stagnation to reduce the contribution of education to the development of human capital.
His remedy lies in structural reforms that would include improving the education system, investing in physical infrastructure and increasing incentives for low-skilled workers to enter the labour market.
I agree. That is why Mainstream is backing the Kimberley Academy and investing in new national infrastructure. The academy’s stated vision is to provide support and opportunities to foster success and ultimately increase the number of future scientists, engineers and leaders of the calibre needed for the growth of SA’s economy. That is an ambition that we, and the other supporting partners across government and the private sector, fully endorse.
I anticipate that the Kimberley graduates will have a huge part to play in helping to design and build the new infrastructure that will return this country to a period of significant growth.
There is another factor at work, which gives rise to optimism that we are headed in the right direction, and that there is a route out of secular stagnation. It is the effects of new technology, such as renewable energy, on the economies of developed and developing nations.
In a book published this year, The Second Machine Age, the authors argue that it can take some time for breakthroughs in technology to fully affect productivity. Though US factories first used electricity in the 1890s, productivity growth didn’t accelerate until the 1920s. This, they argue, was because electric motors at first just replaced steam ones. It was only when staff accustomed to the steam era retired, to be replaced by younger colleagues familiar with electricity’s potential, that plant was reorganised to take advantage of electricity.
In a recent review, a commentator asked, in the context of secular stagnation, whether behind the apparent global slowdown, we may also be seeing a pause as we adjust to new technology. That is certainly the case in SA, as we shift from old and dirty fossil fuels to the sustainable renewable resources of the future. It will be our Kimberley graduates who will deliver this future for us.
• O’Connor is CEO of Mainstream Renewable Power.