By Saliem Fakir · 1 Feb 2012
The Western Cape branch of COSATU recently called for protest action in front of parliament to push government to promote localisation in the solar industry, as jobs are being destroyed because of foreign imports. It’s the right kind of noise, but a little late.
The green economy is not only about sustainability; it’s also about the protection of future jobs.
South Africa is not the only country in the world banking on the green economy to increase jobs and uplift the quality of life for the poor. Many countries seek to boost green economy development using the strength of their domestic markets and government support to boost exports in green technologies.
The solar water heating crisis is a good window into the world of the green economy and the challenges of making it work. Lessons learnt here will apply to other green economy sectors, as we proceed to grow this industry.
Solar water heaters (SWHs) have the largest job creation and poverty alleviation potential of all renewable technologies because they are easy to make, can be fitted directly by households onto their roofs and, the user benefits through lower electricity bills.
Users of SWHs can save between 30-50% on their electricity bills depending on the quality of the system being used. For the poor, SWHs are a fantastic option to offset high electricity costs if the units are supplied cheaply.
While the COSATU statement was speaking broadly about the solar industry, it was mainly referring to the SWH sector where three Western Cape companies are already closing shop because of foreign competition.
In a survey done by Eskom in 2007, about 21 companies were supplying SWHs in the South African market. By 2009 that number jumped to 100 companies. This number is probably far larger now given the fact that the survey was last done in 2009.
Experts contend that as many as 200 or more companies may have saturated the SWH market in South Africa. The availability of government subsidies has driven this frenzy. And, in 2009 Eskom was aiming for a rollout of a million solar water heaters in five years.
Foreign companies supply close to 50% or more of the domestic SWH market. Most foreign companies that seek to exploit the expected local boom in SWHs come from Europe, China, Greece, Turkey and Israel. China on the back of its domestic market and heavy state subsidies for its manufacturers is the leading producer of SWHs in the world. It has 70% of the world’s capacity.
But foreign companies are effectively using the South African SWH scheme to subsidise their own market expansion into Southern Africa through re-exportation. This may indicate that current customs and tariffs make South Africa ideal for import and re-exportation. It’s a situation that must be reviewed as it hinders the growth of local exports.
Given that we have a market of 11 million homes, we should all be concerned if public funds are being used to destroy local jobs in a sector, which is yet to realise its full potential. This is notwithstanding the vast fleet of commercial premises that can be kitted with SWHs.
Most jobs come from expanding installation rather than manufacturing, which means that growth in domestic demand is crucial.
Domestic demand is expected to receive a further boost as government, last year, passed a new building regulation, which stipulates that 50% of water heating for new buildings should be met through SWHs or heat pumps.
However, South Africa’s SWH troubles won’t be addressed if we keep pointing fingers at foreign culprits only.
Many overseas suppliers supplying the local market have black economic empowerment (BEE) partners. Foreign suppliers are aided by local entities that are interested in profit taking rather than making the concerted effort to establish local manufacturing.
It is far cheaper to import than put up a manufacturing plant, given the sluggish growth in the South African market.
To further illustrate the contradictions in the local market that belie the promise of assisting local manufacturing, most SWHs for low cost housing projects have involved prestigious government launches where the SWHs are imported from abroad.
This only begs more questions about our government’s seriousness to see local production reach maturity.
In effect, Eskom’s poorly designed subsidy scheme and the government’s own procurement policies for low cost SWHs are killing off the local industry. Despite the Eskom subsidy scheme, only about 110 000 sold units, have accessed the subsidy.
Consumers are eager to adopt SWHs, but will not purchase in a market where SWH prices are still high. A normal electric geyser is still three to four times cheaper than a SWH.
The SWH industry is a reflection of the complex interplay between bureaucratic inertia and the lack of policy and implementation co-ordination. This is all against the backdrop of the challenge of local industries having to survive against fierce foreign competition where domestic demand is still low and government support complicated by red-tape and contradictory procurement strategies.
The two ends of supply and demand have to tie up if high levels of localisation and job creation are to materialise. If domestic users grow significantly, existing manufacturing has to grow very fast. If it is unable to do so - under the current regime for importation - surplus demand will simply be met by overseas imports.
Government is in the best position to ensure proper co-ordination between the demand and supply ends of the market and would be wise to consider the following solutions.
Firstly, users should have easier access to a grant or tax incentive when considering the installation of SWHs. Decisions around which SWH to choose would be improved through better public information as the SWH market is saturated with diverse products that seem to confuse consumers and in turn dissuade them from purchasing the product.
Secondly, the uptake of SWHs can be assisted if consumers have access to soft loans. There may be a case to consider a switch from the current Eskom administered subsidy model to a more efficient soft-loan scheme. International experience in the application of a soft loan schemes versus an administered subsidy system needs to be looked at with fresh eyes.
Thirdly, government should explore the option that low cost systems aimed at poorer households be procured and manufactured by a state entity rather than the private market. In this way, all low cost housing developments financed by government achieve alignment between housing and energy efficiency programmes as the cost of third party fees and costs, that tend to creep in through a market-based approach, are lowered.
Fourthly, given the purchasing power within their own sectors, governments and unions should consider a joint SWH programme to promote the uptake of SWHs amongst their own employees and members. Very little is being done to promote SWHs within government itself.
Finally, the problem of foreign competition can’t be annihilated, but can be better managed than is presently the case by examining closely “who” and “what” the incentive schemes favour. The priority should be given to local production in the design and application of the scheme. All government facilities and infrastructure programmes should insist on local products. Subsidies should not be given to foreign imports.
Solar Water Heating Subsidy
While I agree that local manufacturing needs to be encouraged I think it is important to note what the point of the subsidised funding is. The money for the subsidy for Solar Water Heating (SWH) comes from the Eskom DSM (Demand Side Management) budget. This budget is specifically designed to subsidise projects that will reduce the demand on the South African grid with the aim of reducing the likelihood of power shortages resulting in rolling blackouts. And this needs to be done as quickly as possible. Social upliftment and local manufacturing stimulation are not the primary goals of the DSM scheme. The costs of rolling blackouts could well do a lot more damage to the economy that the offset of locally made SWHs. The most efficient and cost effective low cost solar water heaters use ‘evacuated tube’ or ‘vacuum tube’ technology. South Africa does not currently have any facilities to manufacture these. And while this could be done in the short term the aim to reduce demand on the grid needs to be the primary focus. Eskom would be entitled under its mandate of Demand Side Management to avoid low cost housing all together as generally low cost solar water heaters are being installed on houses that did not have hot water cylinders at all thus making the reduction in demand negligible and the funds allocated from Demand Side Management pointless. I attended a meeting in December to discuss Eskom’s plans to increase the subsidy on locally manufactured SWHs and reduce those on imported products. At this stage the definitions proposed by Eskom to determine ‘locally manufactured’ would pretty much have excluded all local manufacturers in any regard. There is no doubt that Solar Water Heating offers great opportunity to grow the Green Economy, save the general public money on their energy bill and reduce the strain on the South African grid. Let’s just hope that Eskom can sort out the subsidy scheme as currently both the SWH and Heat pump rebate schemes are doing more damage to the industry than good.