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REIPPP comes of age

14 May 2019

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The Renewable Energy Independent Power Producer Procurement (REIPPP) Programme was born in 2011 out of a need and desire to procure alternative, sustainable energy, while simultaneously contributing to social and economic development in South Africa. The programme continues to grow and is now, more than ever, in a position to play a pivotal role in the provision of power and the general economic growth in the country.

WRTTEN BY: LUZUKO NOMJANA, INVESTMENT ANALYST

Birth of REIPPP

The need to diversify South Africa’s energy mix was first articulated in the 1998 White Paper on Energy Policy in South Africa. When the paper was updated in 2003, it crystallised the need for both diversification and cleaner energy sources, in line with South Africa’s commitments to the Paris Accord. After several years of policy proposals, analytical and market enablement work, and engagement with the private sector, the 2010 Integrated Resource Plan (IRP 2010) was developed, setting out various technology targets over a 20-year horizon to 2030.

In 2011, South Africa launched its REIPPP programme, a locally honed plan designed to roll out a significant amount of power in a very short amount of time, using a transparent procurement and implementation framework, and with key risks mitigated. It allows Independent Power Producers (IPPs) to submit competitive bids to design, develop and operate large-scale renewable energy power plants across South Africa. The REIPPP programme effectively implements the vision of IRP 2010, with the target of producing 17 800 megawatts (MW) of electricity from renewable energy sources by 2030, and is driven and overseen by the Independent Power Producer office. Renewable energy IPPs are cost neutral to Eskom, as the full associated costs will ultimately be recovered from the consumer.

In addition to the supply of clean energy, the REIPPP programme is designed to contribute to various developmental objectives, including job creation, social upliftment and economic transformation, primarily through broader economic ownership. The IPP office measures and monitors the performance of each project against these objectives on a monthly basis. If the objectives are not met over time, the power purchase agreement (PPA) could be terminated. When bids are assessed, price receives a 70% weighting and other development factors 30% (this weighting is updated each bid window).

Growth of REIPPP


Figure 1
Source: Power Futures Lab, UCT

To date, 102 IPP projects have been procured from four bidding round windows, with further windows expected to be announced in the future. The projects are spread across the country (as shown in Figure 1), using various technologies (see Figure 2). The geographical locations are driven by the strength of the resource used. That is why there is a concentration of solar photovoltaic (Solar PV) and concentrated solar power (CSP) plants in the Northern Cape (where there is plenty of sunshine) and, likewise, a strong presence of wind farms along the windswept Eastern Cape and Western Cape coastlines.


Figure 2

Source: The Energy Blog

A total of 6 329 MW of renewable energy has been procured to date (See Figure 3). Of this, 4 065 MW are currently connected to the grid. 

Figure 3 Source: Department of Energy 
Figure 3
Source: Department of Energy 

The REIPPP programme’s contribution to the environment has meant that South Africa’s carbon emission is reduced by about 33.2 million tons of carbon dioxide, and water savings of 39.2 million kilolitres were achieved by 31 December 2018.

Developmental goals surpassed

In a short, eight-year period REIPPP has attracted R209.4 billion in committed private sector investment (24% of which is foreign direct investment), resulting in much-needed alleviation of fiscal pressure.

More than 38 000 fulltime jobs (for one year) have been created for youth and women from surrounding communities. Local communities have also benefited from over R1 billion spent by IPPs on education by upskilling teachers, providing extra teachers and classrooms, as well as awarding over 600 bursaries to students from disadvantaged communities. Likewise, the programme has provided health facilities, while contributing to social development through feeding schemes, supporting old age homes and early childhood development. Furthermore, it has helped to establish more than 1 000 small enterprises.

Notably, Black South African equity shareholding in the REIPPP programme has increased with each bidding round. On average, South Africans own 48% equity in all IPPs while black South Africans own, on average, 31% of project equity. Broad-based Black participation is also secured across the value chain through community participation in engineering, procurement, construction, operations and maintenance, where overall Black ownership amounts to 21%. Local community ownership is structured through the establishment of community trusts. Qualifying communities will receive R27.1 billion net income through the dividends from their shareholding over the 20-year life of the committed projects.

Price trends

Encouragingly for consumers – due to the competitive bidding process, innovation and cost reductions - bid window prices have recorded steep decreases with every cycle, resulting in South Africa getting the benefit of renewable energy at some of the lowest tariffs in the world. Wind technology has decreased from an average bid price of 151c/kWh in Round 1 to 68c/kWh in Round 4. Likewise, solar PV bid prices decreased from 329c/kWh to 82c/kWh in Round 4. Notably, more than 60% of the total procured power thus far has been from the cheaper last two bid windows.


The next chapter for REIPPP

Problems encountered by REIPPP projects are rare. One developer reports only one such occurrence in his case: when a bird dropped a tortoise on a solar panel, smashing the glass. Such issues, while upsetting for tortoises, are minor compared with those faced by Eskom, the state-owned utility that supplies 95% of South Africa’s electricity. Generally, at least one-third of its power stations are broken or shut for maintenance.

Eskom’s woes

Over recent months, the talk of the country has been of “load-shedding”: a euphemism for blackouts because Eskom cannot meet demand. March was the worst-ever month for load-shedding, when Eskom regularly took 4 000 MW off the grid, about one-eleventh of its total capacity (45 561 MW), or enough to power 3 million homes. It is frightening to imagine how much capacity would have been taken off the grid if not for REIPPP.

In February this year, Energy Minister Jeff Radebe reiterated that, after the first renewable energy projects came on-stream in 2013, Eskom’s financial problems were mostly related to cost increases, including increased interest during construction and associated with the delay of the new-build projects, Medupi, Kusile, and Ingula. “It is therefore clear that the financial losses of Eskom cannot be attributable to the introduction of the renewable energy programme,” he said. He also pointed out that, although coal jobs are at risk, this is not as a result of the REIPPP programme. As early as in the IRP 2010, Eskom had reported that it would be decommissioning some of the older coal-fired power stations which were reaching the end of their commercial and operational life, and that 13 000 MW of coal-fired capacity was scheduled for decommissioning by 2030.

Eskom unbundling

The utility is currently “vertically integrated”, meaning that it has a critical role in the three parts of electricity supply: generation (power plants), transmission (the national grid) and distribution (the final power lines). Most rich countries have ditched this monolithic model, as it blocks competition, reduces transparency and deflects accountability.

In his State of the Nation Address earlier this year, President Ramaphosa announced that Eskom would be unbundled into three separate state-owned entities, representing the three parts mentioned above. According to the President, this was done to allow each entity to source funding on its own merits. While it is clear that this is in response to Eskom’s dire financial position, the practical implications of this unbundling will be clarified in the near future.

Nonetheless, some conceivable advantages come to mind. As most of the inefficiencies reside with the generation business unit, such as the construction of the Kusile and Medupi power stations, unbundling might isolate this business unit while allowing the other entities to attract funding at market-related costs. In addition, if the new distribution entity was allowed to buy electricity at the most cost-effective prices, and from both Eskom and other suppliers, it would be able to pass these savings on to the consumers, thereby reducing the overall cost of electricity. A distribution entity that is able to buy electricity from whomever offers the most reliable and cost-effective prices would also open the market for smaller producers that are otherwise unable to attract funding without the benefit of Eskom-backed PPAs.

Bilateral supply transactions

Eskom’s capacity to service the country’s energy needs has deteriorated over the past few years and will likely become worse as more coal-fired power stations reach the end of their lifespans between 2023 and 2030. The struggle to complete the Medupi and Kusile power stations is ongoing. While the draft 2019 Integrated Resource Plan schedules the Thabametsi and Khanyisa coal-fired IPPs for 2023, completion remains uncertain in light of the continuing funding challenges.

As a result, several private sector companies are investigating opportunities to enter into bilateral supply transactions with IPPs to ensure security of energy supply. For example, PowerX was granted a license as an electricity trader in 2009, as a “proof of concept” following a prolonged period of national load-shedding during which Eskom had asked large energy users in Nelson Mandela Bay to reduce their demand. PowerX procures (mainly renewable) energy from IPPs outside of the REIPPP and sells it directly to consumers in Nelson Mandela Bay at discounted rates. The company is able to procure energy from generators located anywhere in the country through a “Use of Systems/Wheeling arrangement” which allows it to use the respective municipalities’ or Eskom’s distribution network, for a fee. In addition to discounted tariffs, customers benefit from a more reliable supply of energy and are able to more accurately forecast tariff escalation rates. Further, customers are able to claim “Renewable Energy Certificates” which provide proof that the power is indeed from a renewable source.

The new IRP

After years of debate around the updated plan, in August 2018 the department of energy published the integrated resource plan 2018 for comment. IPPs will be looking to see whether the commissioning date for new renewables will be brought forward from 2025 and whether the annual allocation for large scale corporate power purchase agreements will be increased. Municipalities are also lobbying to be allowed to procure power directly from IPPs.

Once the updated integrated resource plan has been published, the investor community will be keenly awaiting the request for proposals for round 5 of REIPPP. Round 5 is set to include higher transformation, localisation and community upliftment requirements than previous rounds.

Government, meanwhile, says it remains committed to expanding the availability of renewable power to enhance the country’s energy mix. “Energy is a key enabler in South Africa’s trajectory towards socio-economic growth and development. The National Development Plan states that South Africa needs at least 20 000 megawatts of renewable energy by 2030” Cabinet said in a recent statement.

There have some expressions of opposition to renewable energy IPPs from various quarters in SA. However, the need for a flourishing IPP sector is underpinned by the latest round of rolling Eskom power black-outs, the prospects of further supply-side constraints and the decommissioning of Eskom’s coal-fired power plants. In addition, more than ever, SA needs to consider its commitment to the reduction of greenhouse gas and carbon emissions.

Minister Radebe states, "As South Africans, and as stipulated and agreed in the Green Economy Accord, we have to ensure a responsible just transition to a cleaner future by finding ways to mitigate and addressing the risks to coal miners and their families, as well as the communities surrounding these coal-fired power stations.” The minister pointed out that the World Bank and other international development finance institutions, as well as commercial banks, have also instituted a no-coal policy. "China, India, the US and others have indicated that they are also downscaling their coal-fired fleets. This, however, does not mean we shall not procure cleaner coal-fired technologies in the future," he said. "Coal is part of the energy mix and due to the abundance thereof, South Africa would be hard-pressed should we abandon coal-fired generation. Our policy will become clearer with the imminent finalisation of the IRP update," he stressed.

President Cyril Ramaphosa has stated that he aims to create $100bn of inward investment during his term of office, and energy minister Jeff Radebe aims for a quarter of that to be in the energy sector. These are powerful and positive signals to international investors in the programme and in SA.

“I acknowledge the REIPPP programme is not perfect and can be improved in specific areas. However, we need to embrace the programme that has done so much for the country and has received international acknowledgement,” Radebe said. “The energy sector is at the cusp of an exciting period, reminiscent of the huge changes brought about by rapid technological advancement in the mobile telephony industry in recent years. We need to be prepared for the disruptive times that the fourth industrial revolution will bring and adjust in a responsible way.” To achieve prosperity for all, Radebe concluded that government and all stakeholders involved have to take hands and become a driving force for transformation and change.

Coming of age

It is becoming increasingly evident that Eskom, in its current structure, is not only outdated but also unsustainable. While key questions remain around the funding of new coal plants and the challenges experienced at Medupi and Kusile, it is inevitable that renewable energy forms a core part of the country’s current and future energy mix. Procurement of additional renewable energy capacity is thus urgent and should be treated as such if the country is to come anywhere close to achieving expected economic growth targets.

The restructuring of Eskom will need to be carefully addressed, with a well thought-out and widely adopted strategy to achieve a fair transition from a coal-intensive economy to a low-carbon, climate-resilient economy and society. This means adopting policies, possibly involving financial and tax incentives and coordinated education and training programmes that will meaningfully protect the livelihoods of workers through the transition.

At this point, there needs to be a continued effort to build partnerships between corporates and governments, as we have been doing, so that renewable energy solutions will continue to grow for businesses and ultimately change the way that we consume energy as a whole.

The REIPPP programme is making a significant impact on the economy, job creation, community upliftment, economic transformation and climate change. It has illustrated how socio-economic and enterprise development benefits can be delivered to local and often marginalised communities across South Africa while also generating new renewable energy supplies.

REIPPP is the future for South Africa, and continues to complement (rather than compete with) Eskom and Coal.

 

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