Plans to boost renewables have increased private sector participation

The Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) launched by the Department of Energy (DoE) in 2011 is key to achieving South Africa’s target of 42% renewable energy consumption by 2030. The scheme is bringing generation capacity, private sector participation and competition to a fossil fuel-reliant electricity market long dominated by a state-owned monopoly and facing major supply constraints. At time of press, 64 REIPPPP projects had been awarded contracts to generate over 3900 MW of electricity in the first three licensing rounds.

The “Climatescope 2014” report by Bloomberg New Energy Finance shows that South Africa accounted for almost 90% of clean energy investments in sub-Saharan Africa since 2012, garnering nearly $10bn worth. Solar accounted for the largest share of investments, with $6.7bn of the $9.4bn invested in South Africa since 2006. The study indicates that the REIPPPP has transformed the sector since its introduction, as prior to the auctions, only $600m had been invested in renewables.

High Interest

There were 28 projects licensed in the first round that will generate a total of 1450 MW of electricity. During the second round 19 projects that will generate 1200 MW were licensed. Each licensee signs a contract with Eskom’s single buyer office at a fixed price that is indexed slightly for inflation for a period of 20 years, and the government guarantees all payment obligations through the Treasury. Each bid is also required to have a 40% local shareholding.

Five licensing rounds will take place under the REIPPPP and R145bn ($13.7bn) in investment has been made so far during the first three, Wolsey Barnard, deputy director-general of energy programmes and projects at the DoE, told OBG. The quantity of power, generation technique, timeframe and tariff varies for different technologies according to each bid. So far, licensees will supply between 20 and 150 MW each to the grid and take a year to 18 months to begin generating electricity, depending on the technologies used, where they are situated and whether they have access to network infrastructure – some have had to build substations to feed into Eskom’s transmission network.

Up & Running

As of March 2014, seven of the projects licensed under the programme were generating a total of 320 MW of electricity, and two others were connected to the grid and doing trial runs, Barnard said. Most licences awarded in the first three rounds have been concentrated on solar photovoltaic (PV) and wind technologies. Biomass, hydro and landfill gas projects have also been included in the REIPPPP, but the allocations for these are smaller.

In April 2014 the DoE announced that it was allocating an unspecified amount of additional MW to the third window because more than 90 parties had submitted bids offering increasingly competitive pricing. The REIPPPP’s successes have been manifold and are likely to have a ripple effect across the economy.

Pricing

At the Green Energy Dialogue conference in November 2013, Anton Eberhard, who serves on the National Planning Commission, said all technologies had seen such a drastic reduction in prices over the course of the three bid rounds that certain renewable energy resources had reached grid parity, and in some cases were even less expensive than coal – though this could also be an effect of Eskom’s tariff hikes.

The average price offered by solar PV developers fell from R275 cents ($0.26) per kilowatt hour (c/KWh) to R165c/KWh ($0.16) between the first and second rounds, while wind prices dropped from R114c/KWh ($0.11) to R89c/KWh ($0.08). By the third round solar PV bids had dropped 68% from those offered in the first window to R88c/KWh ($0.08) and wind costs fell 42% to an average of R74c/KWh ($0.07), Eberhard said.

When the planned carbon tax takes effect in 2016, the cost of renewable power may become even more competitive, the DoE’s director-general, Nelisiwe Magubane, said. “Maybe coal at this point might sound cheaper, but carbon-intensive energy solutions in the future are going to be expensive. It might either be an indirect tax where we get penalised per carbon unit that we emit, or with the carbon tax itself.”

Local Content

Another tangible benefit of the REIPPPP has been the development of local manufacturing capacity. “That local economic development has moved from a minimum of about 20% local content up to 53% tells us that projects like this are going to yield economic development. We have also seen quite a lot of jobs being created,” Magubane said.

From an investment perspective, the programme has also demonstrated the commercial viability of renewable energy domestically and internationally. All four South African commercial banks have put up financing for the REIPPPP, which has rand-denominated funding requirements. Standard Bank, ABSA Capital and Ned Bank have the highest exposure, according to Rentia van Tonder, who was head of the green business unit of the Industrial Development Corporation to take a lead role in financing renewables projects for the scheme, and is now head of renewable energy, infrastructure and utilities at Standard Bank.

Standard Bank underwrote $890m in debt for wind and solar projects licensed during the first REIPPPP round and $606m in the second. Ned Bank provided 36% of the debt financing in the first and second rounds to 15 projects, and was the lead arranger for seven of the 17 projects in the third round. Absa Capital financed one-third of the total debt underwritten by banks in the third round for six of the preferred bidders.

“The whole drive of these programmes is to facilitate private sector participation through IPPs supplying electricity into the grid,” Van Tonder told OBG. “The fact that so many players in the market are trying to secure power purchase agreements (PPAs) through the programme demonstrates the viability of the projects. Government support is provided through bankable PPAs and a well-managed programme.”

The procurement programme was also conceived to be relatively impervious to legislative and regulatory uncertainty. To initiate a bidding round, the minister of energy only needs to sign a determination to procure a specific amount of megawatts.

Though most of the private sector investment in the REIPPPP has been local, some European and North American investors have participated. In the third bidding round, for example, a local consortium led by the Italian developer Enel Green Power won contracts to build four solar projects and two wind farms that will generate a total of 513 MW. Located in the Northern and Western Cape, Limpopo and the Free State, they are scheduled to come on-line in 2016 and represent a total of $857m in investment.

Balance

Despite the scheme’s successes, even its advocates warn that there is a need to maintain conventional energy sources in the national energy mix for the foreseeable future. Van Tonder maintains that the IRP’s current renewables target is too ambitious. “To take the country to 19 GW of renewable by 2030 is very aggressive,” Van Tonder told OBG. “Most of the solar projects will be in the Northern Cape and the wind projects will be in the Eastern Cape, so you will have to commit a lot of money to infrastructure. You also have to look at the growth of the country because there is a reduction in demand from the industrial sector.”