South Africa: The Genesis Of The Renewable Energy Procurement Programme

Last Updated: 29 September 2011
Article by Happy Masondo

It has finally come to pass. There is a new dawn and the lay of the renewable energy landscape has drastically changed. Independent Power Producers (IPPs) are over the shock of the complete abandonment of the Renewable Energy Feed-in-Tariffs (REFITs) policy in favour of a competitive bidding process.

According to the Director General (DG) of the Department of Energy (DOE), Nelisiwe Magubane, "independent electricity producers can gear up to bid for the energy department's renewable energy programme, which will open for bidding in November 2011".1

Despite the anticipated negative outcome of the introduction of a competitive pricing model, the DOE is inviting the private sector to participate in the renewable energy programme. In this regard, the DOE seeks, "to demonstrate the potential the country has in securing a cleaner future for ourselves and future generations".2

A greener and brighter renewable energy landscape

The maxim that the sky is at its darkest just before the break of dawn, is very much apt in the context of the renewable energy industry. The period between April to August 2011 was indeed the darkest period for the industry and its stakeholders.

There appeared to be a lack of leadership and direction on the part of the DOE and the National Energy Regulator of South Africa (NERSA). Indeed there were a number of false dawns prior to the final pronouncement that the REFITs policy, as we have always known it, was to be replaced by the competitive bidding process.

Notwithstanding this marked departure from the REFITs policy as it had been accepted, the DOE has reiterated its commitment to the Integrated Resource Plan (IRP) 2010. In this regard the DOE has asserted that it is to pursue the 20 year projection plan on electricity supply and demand in the country.

In so reiterating its commitment, the DOE wants to achieve the aspirations set out in IRP 2010 to reduce South Africa's total reliance on fossil energy. There is a clear recognition that renewable energy programmes may stimulate economic development and achieve the various other criteria set out in the IRP 2010.

Fundamental amongst these criteria is the development of a sustainable renewable energy industry and the eventual production of forty two percent (42%) or seventeen thousand eight hundred megawatt (17 800 MW) of South Africa's new generation capacity by 2030.

After many false dawns as alluded to above, it came as a heartening surprise to IPPs and other stakeholders when the request for proposals issued by the DOE and the National Treasury, through the Department of Trade and Industry (DTI) increased the energy capacity requirements from the initial one thousand and twenty five megawatts (1 025 MW) to more than three times the capacity originally contemplated.

The request for proposals now sets out that a total of three thousand seven hundred and twenty five megawatts (3 725MW) of capacity to be generated by IPPs by 2016. The DOE is particularly pleased in that, despite the drastic change in the REFIT policy which caused a great deal of uncertainty amongst IPPs, over four hundred (400) companies paid the application fee in the amount of fifteen thousand rand (R15 000) to receive the bid documents. These companies seek to participate in the renewable energy programme to procure the first three thousand seven hundred and twenty five megawatts (3 725MW) of capacity by 2016. At the compulsory briefing session arranged by the DOE over 300 bidders were present, which according to Eskom translated into over 27 000MW of potential renewable energy.

According to the Deputy Director General (DDG) of the DOE, Ompi Aphane, "only about two hundred and seventy of those could be considered to be potential IPP developers".3 The remaining one hundred and thirty (130) companies are apparently from potential financiers and equipment suppliers.

The DDG stated that the enlarged procurement programme is, "pursued to make the programme more attractive to those original equipment manufacturers considering localisation options".4 The DOE has taken the view that this renewable energy programme is designed to contribute towards socio-economic and environmentally sustainable growth while stimulating the renewable energy industry in South Africa.

The role of NERSA

Even as IPPs have taken the abandonment of the REFITs policy in their stride and are preparing to participate in the renewable energy programme, it is still unpalatable that the prices payable for each of the renewable energy technologies have been reduced and capped.

NERSA now appears to be left in a position where it has to accept what the DOE and the National Treasury assert in deviating from NERSA's REFITs policy. To this end NERSA's Thembani Bukula said, "The issue was really to ensure that South Africa gets the best price hence REFITs will be used as a ceiling price". He added that "in the end, I think the two processes will yield similar results".5

While the renewable energy industry appears to be gaining speed in the race to increase the energy capacity and security, the role of NERSA appears to be at best ambivalent. Commentators have stated that, "there is a real concern that it is moving backwards in other ways, particularly in terms of transparency issues.6

This sentiment emanates from the view that when NERSA was actively formulating the REFITs policy it engaged with all stakeholders and was transparent in doing so. While there are many positive aspects to this request for proposal bidding process, the role of NERSA is diminished.

The buyer of renewable energy from IPPs

In a Werksmans Legal Brief titled: What light is at the end of the renewable energy tunnel? (published in June 2011), the author expressed the view that there was a glimmer of hope that the hitherto coveted policy of a single buyer office would be replaced by an independent system and market operator.

The author was brought to this hopeful place following the circulation for comments of the Bill7 contemplated to establish an independent system and market operator (ISMO). The last that all South Africans heard of this ISMO Bill was that it was in circulation for public comment by no later than 13 June 2011.

What is clear at this stage is that, at least for the purposes of this initial renewable energy programme, Eskom Holdings (Pty) Ltd (Eskom) will be the sole buyer of the energy to be produced by IPPs in terms of Regulation 6(3).8

The designation of Eskom as the single buyer of the renewable energy generated by IPPs in respect of the initial procurement process does not raise the concerns typically raised about single buyer offices. In this instance, it has been confirmed that Eskom is specifically excluded from participating in the current bidding process under its own renewable energy projects. The role of Eskom in this process is confined to that of buyer of the renewable energy generated by IPPs and to connecting such IPPs to the Eskom grid.

Successful and preferred bidders will have to enter into Power Purchase Agreements (PPAs) with Eskom, amongst other agreements with other entities such as municipalities and the DOE.

Conclusion

At the dawn of the renewable energy programme, IPPs have a lot be grateful for in the threefold increased capacity open to them to bid for. In addition, the fears of an anti-competitive environment borne out by a single buyer office have been allayed by the preclusion of Eskom from participating in this initial stage.

In the entire quagmire that besets the electricity industry, and in particular the renewable energy industry, all that the ordinary consumer wants to know is that the costs of electricity will be cheaper.

The DTI Minister, Rob Davies, has indicated that the government of South Africa is in discussion with international funders to invest in the implementation of the renewable energy industry in order for such funding to "be used to offset any possible spike in the electricity price path that could otherwise arise from the large-scale adoption of renewables".9

Hope springs eternal that the lights will be kept on.

Footnotes

1 Shonisani Tshifhiwa, Bids open for independent power producers, The Citizen, 1 September 2011.

2 Ibid.

3 Creamer Terence, SA reports big interest in DoE's renewables tender, Creamer Media's Engineering News Online, 1 September 2011.

4 Creamer, Terence, Glitches and pleasant surprises as renewables tender gets under way, Creamer Media's Engineering News Online, 3 August 2011.

5 Cause and Effect of SA's Feed-in-Tariff, Alternative Energy Africa, 16 August 2011.

6 Pretorius, Lise, Renewable Energy Moving Forward – A cause for concern, Financial Mail, 24 August 2011.

7 Independent System and Market Operator Establishment Bill, General Notice 290 of 2011, Government Gazette No 34289, 13 May 2011.

8 Electricity Regulations on New Generation Capacity, issued under the Electricity Regulation Act 4 of 2006, Government Notice No. R. 399 Government Gazette 34262, 4 May 2011.

9 Supra 4.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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