South Africa: The Bid For Private Power: An Overview Of SA’s Renewable Energy Bid Process

Last Updated: 26 October 2011
Article by Greg Nott and Happy Masondo

On about 3 August 2011 the Department of Energy (DOE) issued a Request for Qualification and Proposals (RFP) for new generation capacity under the Independent Power Producers (IPP) procurement programme.

The RFP invited interested parties with the relevant experience, resources and know how to submit proposals for the finance, construction, operation and maintenance of renewable energy generation facilities.

Industry representatives and potential players had all but lost hope that there ever would be such a process prior to the RFP being issued. However, according to some commentators: "While changes in South Africa's renewable energy IPP process had some observers leery, others have noted that a strong interest is still present for the first round of the bidding process. Recently Windaba 2011 was held in Cape Town and Frost & Sullivan said that although there remained a few obstacles, a 'broad satisfaction' was present among potential investors." 1

Flawlessly impressive briefing session

On 14 September 2011, multitudes of IPPs, investors and financiers from various parts of the world, including South Africa, converged at Gallagher Estate to listen to the drafters of the RFP documents explain the qualification and other requirements under the RFP.

The sheer number of stakeholders in attendance is indicative of the intense interest that pervades the renewable energy sector in South Africa. The DOE put up a highly impressive show in the manner in which the submission of the bidding documents was handled and the way that stakeholder enquiries were co-ordinated.

An extremely complex bidding process was deconstructed and analysed for the benefit of all bidders. The technologically advanced manner in which bidders submitted questions for consideration was a reflection of the state agencies' competencies. The turn around time in answering questions posed by bidders confirmed to all concerned that they came prepared.

The procurement programme is the initial step towards achieving security of energy supply and stimulating the nascent renewable energy industry in South Africa, by inviting the private sector into an area hitherto the preserve of the national utility.

The DOE and the Department of Trade and Industry (DTI), through the National Treasury (Treasury) officials, made it clear that if bidders were not ready to submit their bids by the first phase submission date of 4 November 2011, they should refrain from submitting their bids completely because they would be immediately disqualified.

In this regard, Treasury advised that it would be prudent for bidders to make their bid submissions in the four subsequent bidding phases, being during March and August 2012 and 2013 respectively. The DOE also informed all attendees that the announcement of the successful bidders would be made at the 17th United Nations Framework Convention on Climate Change (COP 17). Prior to this announcement, bidders will have to grapple with a highly complex procurement process.

Procurement process stages

"The procurement programme for independent power producers (IPPs), a two-phase tender system, requires bidders to meet a range of requirements before being evaluated on bid price and economic-development objectives."2

In the first instance, bidders are expected to establish a special purpose vehicle, (the Project Company) which entity will enter into project agreements with counter parties. These counter parties include, but are not limited to, the national utility and the DOE as the transmission and implementation agencies, respectively.

The bidders have to provide details regarding stakeholders (including the lenders, equity participants, contractors, equipment suppliers, black economic empowerment partners as well as the local community members) involved in their bids. Each of these persons has to provide written confirmation that they approve the structure of the Project Company.

The bidders also have to provide a fully developed shareholders' agreement, agreed to by all of the equity participants, with confirmation that the shareholders agreement will be concluded with the Project Company and its shareholders.

The RFP is equally prescriptive about the provisions of the shareholders' agreement such as: voting rights, shareholder contributions, rights to appoint directors, conflicts of interests, dividends and distributions.

Bidders have to make a full and complete disclosure on pending or threatened litigation; any failure to comply with any obligations of any contract; and any non-compliance with the competition laws. In addition, bidders have to make a declaration that they have the knowledge of and are experienced in South African laws.

There is an intense focus on the land acquisition, land use and environmental consents. In this regard bidders have to provide proof that they either own the land that will be used (by producing the title deeds), or that they have full rights to use leased land (by providing a copy of a registered notarial lease).

If the land on which the renewable energy facility will be located is yet to be purchased, then bidders have to produce an unconditional option to purchase such a project site. If there are any servitudes, proof of same has to be provided to the DOE as well.

The bidders have to provide all necessary environmental consents required for the proposed facility to be lawfully developed, constructed, commissioned and operated. In the absence of any of these requirements, bidders are urged to refrain from submitting their bids. If they do, such bids will be disqualified.

The key to the procurement process is the assessment and evaluation of whether bidders have complied with all of the economic development and pricing requirements in the procurement process.

There are any number of requirements that bidders have to comply with including, but not limited to, providing an economic development plan setting out details on the percentage of equity in the hands of black people, at a minimum of 20% and a maximum of 40%. Local communities must have a minimum of 2.5% shareholding in the Project Company and a maximum of 5%. A maximum of 80% of South African citizens based in South Africa is recommended and a minimum of 50% is required.

The financial criteria and evaluation requires that the bidders provide their prices per megawatt for the energy output to be generated through the applicable technology.

The erstwhile Renewable Energy Feed-in-Tariff (Refit), has since been revised downwards and it is now used as the upper cap of the price offered in the bid submission.

In addition, bidders have to submit two prices, one subject to the full consumer price index (CPI) and the other based on the bidders' proposed CPI, which will invariably be less than actual CPI. The combined requirements of the procurement process are extremely stringent by all accounts. There is no doubt that it is the established and experienced renewable energy companies who will successfully comply.

Foreign Direct Investment (FDI)

The DOE's compulsory briefing session saw local developers, financiers, investors and equipment suppliers (and companies from China, Germany, Israel and Spain, among others) all lining up for a slice of the renewable energy pie.

The initial stage of the renewable energy programme is the first indication to investors and developers in the sector that South Africa has turned on the switch for the rapid development of the renewable energy sector.

COP 17 follows closely on the heels of the inception of the renewable energy programme. This summit will also be the platform from which the DOE will announce the preferred bidders after the 4 November 2011 first phase submission date.

The success of FDI is depended on whether, "and to what extent the FDI achieves beneficial consequences".3

Conclusion

There is a great deal of enthusiasm around the introduction of private power production in South Africa. This was seen at the DOE briefing session and the continued scramble by bidders to ensure that they comply with all the stringent requirements under this programme.

The country does not have enough environmental specialists to process all of the necessary environmental impact analyses and / or basic assessments. There is in fact an over subscription of the environmental specialists at this stage.

The current 3725MW on offer will be filled at a click of a switch. If this enthusiasm is anything to go by, a much more aggressive and larger megawatt offering is necessary to cater for all the renewable energy developers.

Footnotes

1 So far, so good for South Africa's renewable energy bidding programme, Alternative Energy Africa, 6 October 2011

2 Steyn, Lisa: Eskom flicks the green power switch, Mail and Guardian Online, 30 September 2011

3 Inadomi, Henrik M: Independent Power Projects in Developing Countries, Legal Investment Protection and Consequences for Development, Wolters Kluwer, Vol 7, 2010

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