Farming dairy cows and energy all at the same time

3rd April 2009 By: Terence Creamer - Creamer Media Editor

When Mark Holliday took ownership eight years ago of the Sunnyside dairy farm, located some 5 km from Jeffreys Bay, he was struck not only by how windswept it was, but also that no one had thought to tap into this valuable resource.

He ‘rang around’ to find out whether there were any South African companies interested in assessing the renewable-energy potential of the 850-ha site, where 600 dairy cows graze and provide milk to a specialist dairy.

After a number of informal and formal discussions, Holliday, who has had farming interests and experience in the UK, met up with Genesis Eco-Energy and its operations director, Davin Chown, which eventually culminated in an agreement that opened the way for a feasibility study.

Wind monitoring masts were deployed to gather crucial wind conditions information, along with an environmental-impact assessment and a range of other regulatory and commercial negotiations.

The experience, Holliday says, has taught him “extreme patience”.

But he, like Chown, is growing increasingly confident that the 30-MW venture will be “construction ready” by early 2010.

In March, Chown’s company announced a joint venture with Irish wind-energy developer Mainstream Renewable Power, in which Barclays Capital has a position.

In fact, the Eastern Cape development, dubbed the Kouga wind-energy project, would be the South African-European alliance’s first South African project, and a key test case for its larger 500-MW ambitions for the country by 2014.

Mainstream, which has a growing international project pipeline spanning four continents, has taken 85% of the venture and will lend its experience, capital and fundraising muscle to Genesis’ local knowledge and an emerging portfolio of prospects in the Western, Eastern and Northern Cape provinces.

Should all the projects proceed across about 20 sites, the total investment, calculated on about R22-million a megawatt, would be about R11-billion.

During a recent visit to South Africa, Mainstream chief development officer Torben Andersen said that the South African projects would be financed through a combination of equity and debt.

He remained confident that there was sufficient appetite from domestic and foreign banks to enable an 80:20 debt-to-equity split, despite the credit crisis.

But the South African projects would also hinge materially on the outcome of the National Energy Regulator of South Africa’s (Nersa’s) deliberations regarding a so-called renewable-energy feed-in tariff, or Refit – a decision which was due as this publication went to print.

The joint venture has made a submission to Nersa indicating that wind-energy projects would require the Refit to be set at around R1/kWh, as opposed to the 65c/kWh proposed in Nersa’s consultation paper.

“We believe that the level proposed by the regulator was based on outdated capital-cost figures for the industry and we are hopeful that the final tariff will be adjusted to reflect current realities,” Chown avers.

Security in Diversity

The tariff structure is being pursued in support of government’s target of having 10 000 GWh of renewable-energy projects in place by 2013.

Andersen asserts that, while wind would require a higher tariff than a coal-fired station, its inclusion into South Africa’s energy mix would also lower the overall risk associated with primary-energy price volatility.

It would also reduce the need for peaking capacity, which is about three times more expensive than its Refit proposal.

But if the Refit is set at too high a level, it could also encourage suboptimal wind projects on sites where the wind resource blew at a rate of lower than 7 m/s.

Mainstream is pursuing similar roll-outs in other regions of strong demand and policy support.

It has already raised R1,27-billion in equity and mezzanine finance, including R260-million from Barclays Capital, which has taken a 14,6% position in the company.

Mainstream also recently concluded a R9,9-billion joint venture to build a 400-MW portfolio in Chile; a R6,6-billion joint venture deal in Alberta, Canada, to build over 400 MW of wind energy by 2013; and has been awarded the exclusive right to develop a R13-billion offshore wind farm in Scottish territorial waters, with a potential capacity of 360 MW.

Chown indicates that the R600-million Kouga prospect should receive its environmental approval soon and is likely to move into the construction phase early in 2010, with commissioning planned for late 2011.

An analysis of the site and its wind map indicates that it will be able to deliver into the grid at a consistent average of 10 MW as measured over a period of a year.

Genesis is also pursuing a 50-MW project in the southern Cape – a 65-MW facility in Lambert’s Bay – and is optimistic about reaching an agreement with local communities and landowners in the St Helena Bay area.

As with the case at Sunnyside, the wind facilities will coexist with farming activities, with farmers benefiting from long-term lease agreements.

The joint venture intends to employ turbines with capacities of between 2 MW and 2,5 MW, which it would secure from established vendors such as General Electric, Siemens and Vestas.

It is not overly concerned about the single-buyer model that has been proposed by government, whereby Eskom will establish power purchase agreements with all indepen- dent power producers, including renewable suppliers.

Further, Andersen is unfazed by the prospect of Eskom upscaling its own involvement in wind through the development of a 100-MW wind farm, saying it could provide the utility with a deeper insight into wind as an energy technology.

“There are a lot of benefits that could arise from having the main operator of the grid understanding the operation of a wind farm,” Andersen asserts, adding that he is in favour of the creation of both the market for wind energy, and for that market to be competitive.

Meanwhile, Holliday is growing increasingly excited about the prospects of diversifying beyond farming into energy.

He tells Engineering News that while he would like to take an equity position he is also satisfied with the lease arrangement, which will guarantee new revenues for the farm.

However, he also cautions other farmers to be careful about signing up with energy companies, and warns them against tying themselves into long-term, open-ended lease agreements.

“Be patient, but set timeframes,” Holliday counsels, but says he has no intention to leave his farm to act as a wind-energy consultant to other like-minded farmers.

“Every site is different. But in my case having a wind farm, with the revenue diversity it promises, while ensuring that my cattle can still graze freely, simply makes sense,” Holliday concludes.