South Africa: Regulatory Platitudes And International Agreements

Last Updated: 6 September 2011
Article by Happy Masondo

The introduction of a competitive pricing model is likely to cause independent producers of renewable energy to completely lose interest in the South African energy sector.

On 4 July 2011 the Government of South Africa - represented by the Department of Energy (DOE) - and the International Energy Agency (IEA) - represented by the Directorate of Global Energy Dialogue - signed a Memorandum of Understanding (MOU). The IEA is an autonomous agency of the organisation for Economic Co-operation and Development. The primary purpose of the MOU is for the parties to review South Africa's energy resources and to ensure their availability in the future.

Not so aligned

In order to achieve this primary purpose the DOE and the IEA will co-operate with each other and exchange information and expertise to ensure that the fundamental goals of energy security and economic growth are achieved. At the press conference for the signing of the MOU, the DOE Minister, Dipuo Peters, (the Minister) made the following remarks:

"Energy is the lifeblood of any economy and economical development is highly dependent on availability of energy resources. As we are looking at ways to diversify our energy mix and move to modern forms of generating and using energy, it is important that we are closely aligned with matured economies through well recognised and reputable organisations. The IEA is one such organisation and this cooperation will ensure that we are able to catch up and are not left behind in this important global space".1

These remarks are rather surprising given that the DOE has made it difficult if not near impossible for Independent Power Producers (IPPs) to introduce alternative energy sources and thus diversify sources of energy.

The renewable energy feed-in-tariffs (REFITS) model is a pricing structure designed to see IPPs sell their alternative energy to the state at a predetermined standard rate. The REFITS model is a model which has been implemented in many mature economies to which the Minister refers in her remarks above. However, far from aligning itself to these mature economies, the DOE has in fact taken steps to change the typical REFITS model adopted and applied in the mature economies of Europe.

Proposed changes to the REFIT model

From 2007, the National Energy Regulator of South Africa (NERSA) commissioned a study on REFITS to encourage the generation of renewable energies. In 2009 the REFITS guidelines were approved by NERSA for implementation and IPPs understood that predetermined and standard rates would be payable to them to supply electricity to the state through Eskom Limited (Eskom).

In October 2009 the approved REFITS were revised and reduced downwards by NERSA. This was an outrage for IPPs who had based their investment projections and business models on the existing and approved REFITS.

In March 2011, NERSA published a consultation paper and invited public comment to its proposed further reduction in the tariffs approved in 2009.

While the IPPs were waiting with bated breath for the announcement by NERSA on this, the DOE confirmed that price competition would be considered in the procurement process for the initial set of renewable energy projects. The DOE also stated that the existing REFITS would be the maximum price payable to IPPs for their supply of alternative energy to the state. It was made clear that the Minister had signed off on the bid documentation and was awaiting the agreement of NERSA.

When the South African renewable energy IPPs tender process was kicked off on 3 August 2011, competitive bidding on price was included as an additional criterion for qualification. NERSA had therefore concurred with the DOE on this fundamental policy change.

Regulators continue to equivocate

IPPs who had been lining up to provide South Africa with alternative energy produced from renewable sources of energy have all but lost all hope. They have been riddled with all manner of platitudes from 2007 when energy regulators passed a policy decision to regulate the generation, transmission and distribution of renewable energy. During 2007 they were shown the proverbial energy carrot: to produce alternative energy and be paid a standardised tariff under the REFITS model. The carrot no longer exists and the DOE would have us believe that the IPPs are not fazed by the introduction of an element of competitive pricing.

However, according to recent reports2 and contrary to the DOE's views, the South African Wind Energy Association, the South African Photovoltaic Industry Association and the Southern Africa Solar Thermal and Electricity Association put out a joint press statement in which they argued that abandoning the REFITS amounted to a "shifting of the goal posts" by the South African government.

Even with hope springing eternal it is hard to keep positive in the face of the equivocation manifested by regulators. As a result of all of the empty platitudes by NERSA and the DOE, from 2007 to date, not one IPP has negotiated and concluded a REFITS Power Purchase Agreement.

This is despite the fact that the Integrated Resource Plan 2010 (IRP 2010) makes it clear that IPPs are an integral part to the grand plan of the DOE to have 42% of all new electricity generation come from renewable sources in the next 20 years. South Africa's energy supply rules writ large come down to this simple fact, without IPPs South Africa cannot keep the lights on. This new policy change also appears to disregard the fact that most IPPs have made significant financial and other investments on the basis of the 2009 REFITS.

Conclusion

It is not only the uncertainty created by a failure to make any decisions at all and causing delay after delay which makes potential investors dither. More significant is the fact that there has been a policy change which forces the IPPs to compete on price in order to sell renewable energy to Eskom. IPPs simply have to grin and bear it. They are now competing on price. Gone are the incentives associated with being paid a standard pre-determined rate.

There is a lack of foresight on the part of regulators on the consequences of such a significant policy change to the nascent renewable energy industry. What should be of great concern to the DOE and NERSA is that being equivocal will increase the country's risk of being without sufficient power supply and energy security.

It is fast becoming doubtful whether the South African energy regulators are acutely aware of the energy shortage bedevilling the country as they should be. If they are aware of it they are certainly not doing enough in ameliorating the risk to the country and the economy. Further uncertainty is the last thing that the renewable energy sector needs.

It bears repeating that the REFITS model is the model that is tested in other jurisdictions and economies as being the most viable in incentivising investors to develop a nascent renewable energy market. Indeed it was the REFITS model that attracted IPPs to even consider South Africa as a potential renewable energy market.

Following the policy change and the introduction of a competitive price bidding process, it remains to be seen whether IPPs will continue in the South African renewable energy market with the same enthusiasm as they came in when the REFIT model offered them a predetermined standardised price.

IPPs cannot be blamed and will be excused for believing that perhaps the regulators' inability to make a final decision regarding the generation, transmission and distribution of renewable energy appears to be a disincentive and discourages them from entering the energy market. In order to be able to produce 42% of energy from renewable sources of energy in the next 20 years, IPPs have to know with some certainty how they will be regulated and compensated for their supply of power to Eskom.

Footnotes

1 The press statement by the Energy Minister, Dipuo Peters, at the press conference for the signing of the Memorandum of Understanding between the Department of Energy and the International Energy Association, 4 July 2011.

2 "Govt confirms inclusion of price competition in first renewables round", Creamer Media's Engineering News Online, 4 July 2011.

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