Article by Jurg van Dyke and Bianca Pollastrini

Without Prejudice October 2011

South Africa's electricity supply industry is still heavily reliant on coal-fired electricity production. Currently 88% of the country's supply of electricity is generated by coal-fired power stations. In terms of the Department of Energy's Integrated Resource Plan 2010 – 2030, the coal-fired generation capacity is to be reduced to 48% of the total production capacity by 2030. In order to achieve this, a significant increase in the production of electricity from renewable energy resources is required.

Various mechanisms are available to government to promote the generation of renewable energy. These mechanisms were recorded in the National Energy Regulator of South Africa's (Nersa) Regulatory Guidelines of 16 March 2009 (Refit Regulatory Guidelines) as follows:

  • Mandated targets – government may stipulate production targets for renewable energy generation;
  • Tendering systems – this is similar to a conventional tendering system where tenderers bid for either a power purchase agreement or for access to a renewable energy fund; and
  • Feed-in tariff – under this system renewable power producers are paid a pre-determined price for electricity generated.

The South African government opted to introduce a feed-in tariff programme, in the form of Nersa's Renewable Energy Feed-In Tariff (Refit). Refit is aimed at stimulating investment in the renewable energy market in order achieve the Department of Energy's targets set in the Integrated Resource Plan.

In terms of the Refit Regulatory Guidelines, electricity will be supplied by independent power producers to the national grid in terms of power purchase agreements at a fixed price, being the feed-in tariff. Nersa, in terms of the Refit Regulatory Guidelines, may impose an obligation on Eskom to purchase renewable energy from independent power producers in terms of the Refit programme. According to Nersa "the basic economic principle underpinning the feed-in tariffs is the establishment of a tariff that covers the cost of generation plus a reasonable profit to induce developers to invest." The Refit programme is based on the success that has been achieved worldwide with similar feed-in tariff programmes. Feed-in tariff systems have been implemented in over 36 countries worldwide, and have been proven to promote the generation of electricity using renewable resources.

Up to now the use of renewable energy on a large scale has been almost non-existent in South Africa, which is surprising given that South Africa has a plethora of renewable energy resources which could be exploited. The successful implementation of the Refit programme could establish an entire new industry in South Africa, which would create a significant number of opportunities locally.

For a country like South Africa in which the development of renewable technologies is still in its infancy, a feed-in tariff programme is ideal in that it creates certainty for investors. It ensures competition in the development of the specific technologies while the purchase price is fixed. The playing field is levelled in respect of off-take pricing and it is up to individual bidders to compete on the grounds of quality, innovation and technology.

Notwithstanding the existence of the Refit programme, and the proven successes of similar feed-in tariff programmes worldwide, the Department of Energy issued a Request for Qualification and Proposals (the DOE's Request) on 3 August 2011 for independent power producers to bid for the development of renewable energy power plants. The following energy producing technologies qualify as "renewable" for purposes of the DOE's Request:

  • Onshore wind
  • Concentrated solar power
  • Solar photovoltaic
  • Biomass
  • Biogas
  • Landfill gas
  • Small hydro (less than 10MW)

These technologies are the same as the technologies identified in Nersa's Regulatory Guidelines for purposes of Refit applications.

The DOE's Request clearly states that "This IPP procurement programme is not structured or intended to be a Refit procurement programme as contemplated in the Refit Consultation Paper." The DOE's Request sparked mass confusion in the industry as it was expected that the Refit programme would be utilised to procure renewable energy projects. The shock to the renewables industry caused by the DOE's Request was widespread. Various international companies have established local businesses in South Africa in the hope of tendering for the Refit programme. The Refit rates published have been the basis for renewable project planning since Refit's inception in 2009. The sporadic move from the Refit programme to a conventional procurement system has some serious implications for potential independent power producers.

Probably the most significant change that was brought about by the DOE's Request is that instead of utilising the rates established through the Refit programme, the DOE's Request requires bidders to tender on, as part of their bids, the pricing for the electricity off-take in terms of a power purchase agreement to be concluded. The bids will be evaluated on, inter alia, the price at which the renewable energy will be offered to the Department of Energy. The procurement process in terms of the DOE's Request is at odds with the procurement process contemplated in the Refit Regulatory Guidelines as the DOE's Request contemplates a competitive bidding process whereas the Refit programme contemplates an application process whereby potential independent power producers would apply to be qualified as renewable energy generators in terms of the Refit Regulatory Guidelines.

It is understandable that newly established enterprises planning to generate renewable energy under the Refit programme for on-sale to Eskom, and which compiled their financial models based on the Refit rates, were caught off-guard by this change in policy that was brought about by the DOE's Request. These newcomers to the market will have to ensure that the pricing that is offered to the Department of Energy for the electricity off-take is competitive as this will be a criterion for bid evaluation.

An objective of a feed-in tariff programme is to stimulate investment and create market certainty. By suddenly changing to a competitive bidding process, the DOE has changed the variables, leaving potential bidders in the dark.

Furthermore, the process in terms of the DOE's Request may inhibit growth as established and, more particularly, international enterprises would be in a better position to offer lower off-take pricing than newly established enterprises that want to enter the renewable energy market. Though a competitive bidding process is a good way to reduce the costs of any project through competition, it is worthwhile remembering that the major players in the renewable energy market are not South African enterprises. A result of this competitive bidding process may be that the development of local expertise in the renewable energy market will be hindered.

The process has now forced bidders to return to the drawing board in order to reassess their projects' viability. International bidders who have access to established renewable technologies may still be eager to invest in a country where 42% of the energy mix will be produced by renewable resources by 2030. It is, however, a pity that this will occur at the expense of smaller and predominantly local bidders. It is unfortunate that international bidders are most likely to be the frontrunners in the competitive bidding process, as they will be more familiar with the cost of renewable energy generation and, as such, will be able to produce a more competitive bid.

An alternative would have been for the DOE to consider procuring the first phase of renewable energy generation from independent power producers on the Refit programme. Once the renewable industry was established in South Africa, a competitive bidding process could have been introduced. Another option would be to provide a feed-in tariff which would be reduced by a percentage annually. Though the decreasing tariff would mean less profitability over time for investors, a degree of certainty would exist.

The DOE's Request left the industry wondering as to what the status of the Refit programme is. This confusion, however, came to an end on 10 August 2011 when Nersa issued a media statement stating that it concurred with the Minister of Energy regarding the "IPP Procurement Programme 2011 Determination". This effectively put the final nail in the coffin for Nersa's Refit programme. It was made clear that the first round of procurement for renewable energy projects will be conducted by means of a competitive bidding process, and further that prospective independent power producers would be required to tender on the pricing for the off-take of the renewable energy produced in terms of these projects.

For the moment, at least, the opportunities for developing enterprises wishing to enter the renewable energy market, as well as the certainty that would have been provided by the Refit programme, have gone with the wind.

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