Energize RE: Renewable Energy Supplement - June 2015 - Page 9

REIPPPP Projects

The NDP requires the development of 10 000 MW of additional electricity generation capacity by 2020, against the 2013 baseline of 44 000 MW. The integrated resource plan 2010 (IRP 2010) identified the energy sources mix required over a 20 year planning horizon to 2030, of which 17 800 MW should be met from RE by 2030, with 5000 MW to be operational by 2019 and a further 2000 MW by 2020.

A significant share of the new electricity generation capacity will be from RE sources, constructed and produced by private sector independent power producers (IPPs). Enhancement of the private sector ’s role in electricity generation will diversify the supply and nature of electrical energy, improve energy security, introduce new skills and investment into the renewable energy technologies industry and enable the benchmarking of both performance and pricing.

The Department of Energy (DoE), National Treasury (NT) and Development Bank of southern Africa (DBSA) established the independent power producers procurement programme office (IPP Office) to coordinate the procurement of electricity from the private sector. The IPP office manages the IPPPP by focusing on the provision of professional advisory services, procurement management services and monitoring, evaluation and contract management services (with a project contracting period of typically 20 years).

The IPP Office has the primary mandate to secure electricity from renewable and non-renewable energy sources from the private sector. However, energy policy and supply is not only about technology, but also has a substantial influence on economic growth and socio-economic development. As such, the IPPPP has been designed to go beyond the procurement of energy to also contribute to broader national developmental objectives such as job creation, social upliftment and the broadening of economic ownership.

Economic, developmental and environmental importance

Economic growth and electricity consumption have outpaced power system capacity growth over the preceding two decades. As a result, since 2008 the country has experienced severe electricity capacity constraints with national demand frequently exceeding supply, despite electricity demand being suppressed by subdued economic growth conditions and requests to large electricity-intensive industrial users to reduce their consumption of electricity. The ageing generation fleet has also inhibited availability by requiring more frequent planned and unplanned maintenance. To maintain stability in the national grid, rolling load shedding has been instituted with negative implications for the stressed economy. Evidence confirms the strong correlation between energy availability and economic growth [1]. Sufficient and reliable electricity supply has a positive impact on economic growth and development, which in turn increases the demand for electricity. In such an instance this can be viewed as a "virtuous circle".

Iinsufficient supply of electricity can have a negative impact on economic growth, which in turn depresses demand for electrical energy, which can be viewed as a vicious circle. As demand for electrical energy declines, so does the revenue from electricity sales, which constrains a utility ’s ability to continue delivering services. However, this is under the assumption that alternative energy resource substitutes are not available in the short-term or that it is very costly to develop such short-term energy substitutes, and the outcome will still have negative economic implications. By enhancing the diversity of additional generation capacity at competitive prices, the REIPPP programme directly contributes to a more secure and environmentally sustainable electrical energy supply, and also directly contributes to economic growth and development crucial for social upliftment and poverty reduction.

Programme approach

The REIPPPP commenced as one of the interventions of government to address the generation capacity limitations of Eskom since 2009, its financial constraints and increased pressure on government coffers in a weak domestic and international growth environment. The REIPPPP launched its first bid submission phase on 4 November 2011 and has since been heralded as an international success story, with lessons for other developed and developing countries [2]. After investigating a renewable energy feed-in-tariff (REFIT) approach, the government favored a competitive tender approach that has proven to be very effective in attracting private sector expertise and investment in grid-connected RE energy at ever improving competitive prices.

The REIPPPP has been designed to achieve three main and overarching goals;

To procure 6925 MW of RE by 2020 from onshore wind (3500 MW), CSP (600 MW), solar PV (2700 MW) and small hydro, biomass, biogas and landfill gas (combined 125 MW)

To contribute toward socio-economic development and environmentally sustainable growth

to stimulate the RE industry in South Africa (including developers, contractors and local South African based manufacturing).

Internationally, the price of RE is becoming inc reas ing l y cos t compet i t i ve w i th conventional fossi l fuel based power generation sources [3]. Under the REIPPPP, tenders are structured as a rolling bid-window programme that allows for continued market interest and also for increased competitive pressure among bidders. This has been confirmed by decreasing average prices in every bid window. Electricity procured by the REIPPP programme is rapidly approaching a point where it is on parity with the wholesale pricing for new coal generated electricity.

An overview of the renewable energy independent power producers procurement programme (REIPPPP) by Deon Fourie, Lolette Kritzinger-van Niekerk and Marilize Nel, Department of Energy IPP Offi ce

The renewable energy independent power producer procurement programme (REIPPPP) has been established to enhance South Africa’s power generation capacity, reduce the country’s reliance on fossil fuels, stimulate an indigenous renewable energy industry and contribute to socio-economic development and environmentally sustainable growth. The programme supports the implementation of the national development plan (NDP) and is centered on the procurement of electricity produced by the private sector. The renewable energy (RE) technologies currently considered under the programme are onshore wind, concentrated solar power (CSP), solar photovoltaic (PV), small hydro, biomass, biogas, landfi ll gas and co-generation from agricultural waste or byproducts.

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REIPPPP Projects

IPP bidders are required to comply with six specified minimum requirements; namely, environment impact assessments, land ownership, commercial and legal, economic development, financial and technical. Compliant bidders are then selected on a 70/30 split, where bid prices (tariff charged) account for 70% of the total score and economic development for the remaining 30%. Economic development, in turn, is evaluated according to job creation, local content, black economic empowerment ownership structures and management control, preferential procurement, enterprise deve lopment and soc io-economic development.

National benefit

A study conducted by the CSIR [4] found that the REIPPPP has already made a contribution to South Africa’s economic well-being by reducing the national electricity supply constraint, the frequency and size of load shedding required, and the costs associated with fuel purchases required in coal and diesel based power generation. Given that renewable energy IPPs were paid R4,5-billion in 2014, the financial benefit to South Africa from the electricity generated from wind and solar PV during the year is estimated to have been around R800-million. These national economic benefits will increase as

more renewable electrical energy reaches commercial operation and feeds electricity into the national grid.

Progress made by 31 March 2015

As of 31 March 2015, under the REIPPPP:

4122 MW of electr ic i ty has been successfully procured from 66 IPPs in bidding windows 1 to 3.5 (i.e. a total 59,5% of the target 6925 MW renewable energy)

Of this, 1709 MW of electrical generation capacity from 35 projects has been connected to the national grid, which has generated 3225 GWh of electricity

15% of the generated capacity has been delivered to the power system during peak demand periods and has consequently alleviated the constrained domestic power supply

Average tariffs have declined substantially through the competitive procurement approach for electricity generated by each technology type

IPPs have commit ted a tota l o f R145,5-billion in investment (total debt and equity investment up to project commercial operation) to the South African economy of which South Africans own the majority stake

48% of IPP construction spend has been procured from local suppliers against a contractual commitment of 44%

50% of IPP ownership has been placed in the hands of South African citizens and 31% has been placed in the hands of black South Africans as part of broadening black economic empowerment

As indicated above, approximately R800-million in financial benefit for South Africa in excess of costs has been achieved in 2014 alone (in fuel savings and avoiding power cuts) [4]

17 079 job-years of employment opportunities have been created for South African citizens during construction, which is 46% more than originally projected by project developers

3,3-million t of carbon dioxide (Mt CO2) equivalent reduction has been achieved

The majority of IPP projects have reached commercial operation earlier than initially envisioned

The REIPPPP has led to South Africa’s inclusion into solar power world’s top ten with respect to established utility scale capacity (i.e. solar installations of 5 MW and larger) and has placed South Africa amongst the top ten renewable energy investing countries in 2014 [5].

Tariff reductions resulting from the REIPPPP

The competitive procurement approach has encouraged potential IPPs to continue offering lower tariffs. Table 1 illustrates bid window 1 to 3.5 average electricity bid price reductions in 2013 R/kWh per technology

By bid window 3.5, the average kWh tariff for onshore wind had declined by 42,2% to R0,74/kWh, solar PV by 68,1% to R0,99/kWh and CSP by 49,3% to R1,53/kWh. Landfill gas, biomass and small hydroelectricity bid prices can also be expected to decline further with competitive bidding. Electricity produced from CSP comes at a relatively higher price due to the ability of CSP to store solar power during the day and dispatch it during evening peaks.

Pr ices cont racted under the RE IPPP programme for all technologies are well below the original REFIT prices. The REIPPP progrmme has effectively translated policy and planning to deliver RE at very competitive prices, and contributes to economic growth and development, energy access and security and environmental sustainability.

Technology type Bid Window 1 Bid Window 2 Bid Window 3Bid Window

3.5

Average price per

technology

Onshore wind 1,28 1,01 0,74 - 1,01

Solar PV 3,10 1,85 0,99 - 1,98

Solar CSP 3,02 2,82 1,64 1,53 2,25

Landfill gas - - 0,94 - 0,94

Biomass - - 1,40 - 1,40

Small hydro - 1.16 - - 1,16

Weighted average RE bid price

2,15 1,42 1,14 1,53

Table 1: Bid price (R/kWh) for each technology (fully indexed 2013 base rate). Where (–) indicates no bid price submitted, and weighted average RE bid price means contracted price per IPP

weighted according to projected annual contribution per technology.

Item Bid WindowRequest for proposal

sent

Bid submission

close

Bid announcement

Financial close

IPP commercial operation

1 1 03/08/2011 04/11/2011 06/12/2011 05/11/201292% COD, 96% GC

2 2 03/08/2011 05/03/2012 05/03/2012 09/05/201347% COD, 63% GC

3 3 03/05/2013 19/08/2013 29/10/2013 Q1 2015/16 -

4 3.5 03/05/2013 31/03/2014 15/12/2014 Q2 2015/16 -

Table 2: Progress made with bid windows Where COD indicates commercial operation date has been reached ; GC shows % of COD connected to national grid, and Q: Calendar year quarter.

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REIPPPP Projects

Technology Bid Window 1 Bid Window 2 Bid Window 3 Bid Window 3.5 Total

MW Nr % MW Nr % MW Nr % MW Nr % MW Nr %

Onshore wind 649 8 46 559 7 54 787 7 54 1994 22 48

Solar PV 627 18 44 417 9 40 435 6 30 1479 33 36

Solar CSP 150 2 11 50 1 5 200 2 14 200 2 100 600 7 15

Landfill gas 18 1 1 18 1 0.4

Biomass 17 1 1 17 1 0.4

Small hydro 14 2 1 14 2 0.3

Total 1425 28 100 1040 19 100 1457 17 100 200 2 100 4122 66 100

Table 3: Capacity allocated per technology in bid windows, where % indicates the share of technology generation capacity of total generating capacity procured in each bid window.

Progress made in REIPP procurement bid windows by 31 March 2015

Four bid windows (bid windows 1 to 3.5) are in various stages of implementation toward the attainment of supplying 6925 MW of renewable energy. The progress made with bid windows 1 to 3.5 as at 31 March 2015 are summarised in Table 2.

In a limited number of cases, grid connection delays have prevented IPPs from supplying electricity into the national grid. This has largely been the result of financial and physical difficulties associated with grid infrastructure extension to more isolated areas where IPPs are located. The alignment between generation and transmission planning and implementation is a challenge encountered by the IPPPP.

Bid Window 1

A total of 1425 MW of RE capacity has been procured from 28 projects in bid window 1. Of this, 649 MW is from onshore wind (eight projects), 627 MW from solar PV (18 projects) and 150 MW from CSP (two projects). Twenty-seven of the 28 projects procured in bid window 1 have been connected to the grid.

Of these, 26 have achieved commercial operation and are supplying a total capacity of 1360 MW into the grid.

Bid Window 2

A total of 1040 MW of RE capacity has been procured from 19 projects in bid window 2. Of this, 559 MW is from onshore wind (seven projects), 417 MW from solar PV (nine projects), 50 MW from CSP (one project) and 14 MW from small scale hydroelectricity (two projects). Twelve of the 19 projects procured in bid window 2 have been connected to the grid. Of these, nine have achieved commercial operation and are supplying a total capacity of 349 MW into the grid.

Bid Window 3

A total of 1457 MW of RE capacity has been procured from 17 projects in bid window 3, which is only expected to start delivering power to the national grid from late 2015. Of this, 787 MW is from onshore wind (seven projects), 435 MW from solar PV (six projects), 200 MW from CSP (two projects), 18 MW from landfill gas (one project) and 17 MW from biomass (one project).

Bid Window 3.5

A total of 200 MW of RE capacity has been procured under bid window 3.5, which consists entirely of two CSP projects. It is expected that both CSP IPPs will supply power to the national grid from mid-2017.

Table 3 indicates the renewable energy procured per technology type under the REIPPPP as at 31 March 2015:

Fig. 1 shows the progress made per technology type as at 31 March 2015, by plotting RE generating capacity from IPPs that are already operational against procured generation capacity (i.e. some IPPs are still undergoing construction) and the target to be achieved by 2020 under the REIPPP programme.

Provincial distribution

The geographic spread of different IPP technologies varies throughout the country according to relevant energy source (e.g. solar, wind and water) potential. Solar PV and CSP IPPs are concentrated in the Northern Cape where the solar radiation intensity is the highest. Similarly, wind IPPs are largely located along the coastal regions of the Eastern Cape and Western Cape due to the high wind resource.

Of the 35 operational IPPs as at 31 March 2015, 19 projects (54,3%) are located in the Northern Cape (100 MW from one CSP, 74 MW from one onshore wind, 651 MW from 16 solar PV and 10 MW from one small hydro), six projects (17,14%) in the Eastern Cape (473 MW from five onshore wind and 70 MW from one solar PV), two projects (5,7%) in the Free State (121 MW from two solar PV), two projects (5,7%) in Limpopo (58 MW from two solar PV), one project (2,9%) in the North West (7 MW from one solar PV) and five projects (14,3%) in the Western Cape (92 MW from two onshore wind and 54 MW from three solar PV). Gauteng and KwaZulu Natal contain landfill gas and biomass IPPs, which were procured under bid window 3, but are not yet operational.

Fig. 2 demonstrates the national distribution of IPP projects procured in bidding windows 1 to 3.5 (4122 MW).Fig. 1: Operational vs. procured vs. target generation capacity under the REIPPPP.

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REIPPPP Projects

Small Projects REIPPPP

The REIPPPP has been extended to offer opportunities for small-scale RE producers to participate. The small projects procurement approach i s des igned to p romote partnerships between large experienced developers and smaller local entities to facilitate skills transfer and risk sharing. Under the small REIPPP programme, projects with the capacity to deliver between 1 and 5 MW of generation are considered to contribute a total of 200 MW. The RE energy included under the small REIPPP programme will be derived from onshore wind, biomass, biogas, landfill gas and small hydro technologies. As at 31 March 2015, 29 bids have been received totalling 140 MW and procurement of the first 50 MW under this programme is in process.

Socio-economic development (SED)

The REIPPP programme has made significant contributions to communities located in the vicinity of IPP projects, with the majority of spending by IPPs for SED concentrated in areas such as education, skills development, health care, infrastructure and social housing improvements.

However, outcomes indicate that the financing committed by IPPs for socio-economic development can be improved. This is mainly as a result of:

Deficient coordination and alignment of IPP socio-economic development plans with other IPPs in the same localities and broader government development s t rategies potent ia l l y leading to

duplication, fragmentation and inefficient SED spend.

Sparsely populated areas have limited community absorption capacity.

E q u a l i t y c o n s i d e r a t i o n s a c r o s s geog raph ica l a reas ( i . e. some communities benefit more than others).

Timing of community benefit flows due to the relatively long gestation and repayment periods of projects.

As a result, the IPP Office is currently considering alternative socio-economic institutional and financial models to optimise IPP programme benefits to both to the local and broader South African economy.

Summary and looking ahead

Bid Window 4 was announced on 16 April 2015, and will procure an additional 1121 MW from 13 preferred bidders. In this bid window, the price of onshore wind further declined to an average of R0,62/kWh and the price of solar PV to R0,79/kWh (in 2014 terms). The preferred bidders in bid window 4 also increased the total capital investment under the REIPPPP to R170-billion. Due to the large number of favourable price and economic development proposals received under bid window 4, the window will be extended. The appointment of additional preferred bidders from bid window 4 is due to be announced in June 2015.

Moreover, a further acceleration of REIPPP is planned as was announced by the Minister of Energy on 16 April 2015.

To accommodate additional RE generation

capacity, the DoE has requested NERSA to approve an additional 6300 MW for the REIPPPP. The positive impacts made under the REIPPPP to date are expected to grow as the programme evolves.

Imported hydro

Whilst not part of the REIPPP programme, work is ongoing between South Africa and the Democratic Republic of Congo (DRC) in support of developing the Inga 3 Basse Chute hydropower project for which South Africa will be the anchor off-taker for electrical power generated. The IPPPP is targeting the procurement of 2609 MW of imported hydropower as specified in the IRP 2010.

Procurement of other energy sources

In support of the evolution of the domestic electricity supply, the DoE has expanded the mandate of the IPP Office beyond renewable energy IPPs to also include the procurement of electrical energy from coal (2500 MW), natural gas (3126 MW) and co-generation (800 MW) in alignment with the IRP 2010 requirements. This will further assist in accelerating private sector participation in (and the diversification of) national electrical power generation capacity.

Acknowledgements

The authors would like to thank Martin Cameron and Dr. Clinton Carter-Brown for their inputs to the article.

References[1] D Stern: "The Role of Energy in Economic

Growth’’, Centre for climate economics and policy (CCEP), Working paper, Crawford school of economics and government, The Australian national university, Canberra, pp. 3-38, October 2010.

[2] A Eberhard, J Kolker and J Leighland: "South Africa’s renewable energy IPP procurement programme: success factors and lessons’’, World Bank, Washington, May 2014.

[3] M Taylor, K Daniel, A Ilas and E Young So: "Renewable Power Generation Costs in 2014’’, International renewable energy agency (IRENA), Germany, pp. 27-46, January 2015.

[4] CSIR: "Financial Benefits of Renewables in South Africa in 2014: Actual Diesel- and Coal-Fuel Savings and Avoided ‘Unserved Energy’from the first approximately 1.6 GW of Wind and PV Projects in a constrained South African Power System’’, Council for Science and Industrial Research (CSIR), February 2015.

[5] “Global Trends in Renewable Energy Investment 2015” Frankfurt school and united nations environment programme c o l l a b o r a t i n g c e n t r e f o r c l i m a t e & sustainable energy f inance. 2015. Frankfurt School: Frankfurt. www.southafrica.info/business/success/energy-080714.

htm#VVGyMfmqozt.

Fig. 2: Geographic distribution of procured IPPs in South Africa (Bid Windows 1 to 3.5).