IDC hopes to salvage wind-tower plant, but warns liquidation can’t be ruled out

8th February 2017

By: Terence Creamer

Creamer Media Editor

     

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The Industrial Development Corporation (IDC) is hoping to salvage the domestic manufacturing capability established to produce wind-tower sections in the Eastern Cape that was set up in response to government’s demand for higher levels of local content in the renewable-energy sector. However, it has also indicated that liquidation of DCD Wind Towers cannot be ruled out.

The factory, which is located in the Coega Industrial Development Zone (IDZ), completed its last tower section in October and operations were suspended in December, when the plant’s orders were depleted.

DCD Wind Towers attributes this depletion directly to Eskom’s refusal to sign new power purchase agreements (PPAs) with renewables independent power producers (IPPs).

More than 30 projects selected as preferred bids during the most recent bid windows of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) have been affected by the impasse, with Eskom arguing that it requires guidance from government before signing new PPAs, owing to its assertion that electricity supply will exceed demand for the coming five years. In the wind sector, the projects collectively represent about 480 towers.

IDC divisional executive for mining and metals Abel Malinga tells Engineering News Online that talks with a possible international buyer are at a “sensitive stage”, but that he is optimistic that it could be consummated in the not-too-distant future.

He is also hopeful of resolution to the standoff between Eskom and the IPPs, which he says is a source of “uncertainty” for both current and future investors in the sector. An inter-Ministerial committee comprising Public Enterprises Minister Lynne Brown, Energy Minister Tina Joemat-Pettersson and Finance Minister Pravin Gordhan is expected to meet this month to deliberate on possible solutions.

Malinga says it is premature to name the potential buyer, but indicates that the firm’s international exposure could open up export opportunities for the Coega plant, which could enable a resumption of some operations despite the absence of local demand.

Should the transaction fail, however, the other options include either liquidation, or placing the facility on care and maintenance until domestic market prospects improve.

The R536-million DCD Wind Towers investment proceeded on the basis of an energy policy that calls for the diversification of South Africa’s coal-heavy electricity mix, as well as an industrial policy that seeks to entice green-industrial investment on the back of the demand created by the REIPPPP.

The policies, and the security of demand they implied, were compelling enough for no less than two State-owned entities, the IDC and the Coega Development Corporation (CDC), to offer engineering group DCD Group material support to establish the facility in 2013.

In fact, CDC spokesperson Dr Ayanda Vilakazi makes the point that its support was premised primarily on government’s energy and industrial policies. “In the process of diversification of the energy mix towards a greater contribution of clean energy, the Coega IDZ provides a platform to localise the manufacturing of industrial components.”

Likewise, Malinga says the IDC took its lead from government policy, which he notes has not changed. Although, he concedes that Eskom is not adhering to the policy currently. “This had created uncertainty not only for DCD Wind Towers, but also for the other potential investors we have been talking to about establishing manufacturing capacity to support our renewables roll-out.”

DCD strategic business manager Dirk Els is even more forthright in his assessment: “What I can’t understand is how government policy can be sabotaged by a State-owned entity, where government, as shareholder, is within its rights to instruct that government policy be implemented.”

To facilitate the investment, the CDC invested R183.4-million in the 20 000 m3 factory “top structure”, within which tower sections of up to 90 m in length are made.

The IDC, meanwhile, has a R220-million debt and equity exposure to DCD Wind Towers and, together with DCD, invested in plant and equipment such as heavy-duty cranes, plasma cutters, bevelling equipment, a large roll, submerged-arc welding booms, driven and non-driven rollers on which the sections are welded, shot-blast booths and painting booths, all required to produce the sections.

The choice of the Coega IDZ as a location was based largely on the view that many of the proposed wind farms would be developed in the coastal provinces, where the wind resources are of a high quality. The site, it was felt, would reduce travel distances and logistics costs, which are a major component of any wind-farm investment.

However, with the anticipated security of demand envisaged when the investment was made not materialising, despite strong orders arising from bid windows two and three, all 140 permanent employees have been placed on short time and the factory has been standing idle since December.

Els tells Engineering News Online that a decision about the future of the business will have to be made in the coming weeks, with a trade sale preferred but also that liquidation or a mothballed operation were also under consideration.

However, he cautions that the prospect of a protracted delay in the signing of further PPAs could undermine the proposed trade sale, as it constrains the immediate outlook for orders.

There is also a risk that the renewables capacity that has been developed in South Africa since 2011 could be “destroyed”.

“The IPP developers and the original equipment manufacturers that supply these  have developed expensive organisations to support their operations and their anticipated project pipelines, which they will soon no longer be able to afford to carry. Front-end suppliers like us are folding, but there is also a knock-on effect on to construction companies and the transport and logistics firms that have emerged as a result of the renewables programme.”

Edited by Creamer Media Reporter

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