An invitation to invest in South Africa’s energy sector



The minister of energy invites all investors in the energy sector to consider South Africa as a developing nation with huge potential to grow in a politically stable environment. The country is open for business and welcomes foreign direct investments.

Jeff Radebe

Addressing ministers, senior government officials, company CEOs and other dignitaries from Kenya, Togo, Benin, Sao Tome and Principe, and Republic of Congo at the Africa Oil and Power Conference, which was held at Cape Town’s International Conference Centre recently, Jeff Radebe, the minister energy, said that South Africa’s energy sector’s Renewable Energy Independent Power Producer Programme (REIPPP) offers investors an opportunity to participate in and contribute to the country’s growth.

South Africa’s economy has been growing at an average growth rate of 1,5% for the past five years, Radebe said. The country’s government wishes to attract $100-billion of investment to boost its economy. Since all industries are intrinsically linked to energy consumption, such a target needs to be supported by investment in energy development. We believe that energy should contribute a minimum of $25-billion of this targeted investment, he said.

At present, almost 95% of South Africa’s electrical power requirements is supplied by Eskom, the state-owned power utility. Within the current fleet of its operational base-load plants, ten power stations are in the province of Mpumalanga. This amounts to 80% of total power generated by Eskom, excluding the newly built Medupi and Kusile. The Mpumalanga province is host to many coal mining companies which supply the bulk of Eskom’s coal-fired power stations with primary fuel.

According to Radebe, Eskom operates 23 power stations with a total name-plate capacity of 42 090 MW, comprising 36 000 MW of coal-fired power, 1800 MW of nuclear power, 2400 MW of gas-fired power, 600 MW hydro-electricity and 1400 MW pumped storage, plus the recently commissioned 100 MW Sere Wind Farm.

Electricity is transported across the country along 368 000 km of power lines. The load centres, being distant from the points of generation, depend upon the transmission and distribution networks for reliable power. The country also buys and sells electricity within the Southern African Development Community (SADC). This regional buying and selling is managed by the Southern African Power Pool (SAPP), the offices of which are located in Harare, Zimbabwe.

Renewable energy sector

The minister said that the South African Renewable Energy Independent Power Producer Programme (REIPPP) is a competitive tender process which has been designed to facilitate private sector investment into grid-connected renewable energy (RE) generation in South Africa.

Independent power producers (IPPs) are invited to submit bids for onshore wind, solar photovoltaic (PV), concentrated solar power (CSP), small hydro, biomass, biogas and landfill gas projects. The qualification process is designed in two-stages: firstly, an evaluation stage which requires bidders to meet minimum compliance requirements such as technical specification, financial/lending requirement and local shareholding. Thereafter bidders are evaluated based on price (bid tariff) and economic development criteria in the second stage.

Between 2011 and 2015 four such bidding rounds, known as bid windows (BW), have been completed. By 2015, 390 bids had been submitted, of which 92 were selected for the procurement of 6328 MW amounting to R193-billion (US$20,5-billion) in investment, he said.

Such investment is mix of local funding and foreign direct investment. Additionally, an expedited bid window (EBW) was run in 2015. This was primarily designed to provide bid projects which had been unsuccessful during prior rounds with a second opportunity to bid. 1800 MW was made available for tender under this EBW, with bid submissions in November 2015. Since inception, the REIPPPP bids have shown a declining trend in bid prices resulting from investor confidence and fierce competition among bidders.

Overview of the REIPPP procurement process

Radebe said that the REIPPPP has been designed as a series of tenders or auctions which are initiated by the issue of a combined request for qualification (RFQ) and proposal (RFP). Each auction makes available a total amount of MWs in specific technology categories. Bids are generally due within three months of the RFP and are screened initially for compliance with general requirements and qualification criteria.

Compliant bids are then evaluated on a comparative basis and the preferred bidder is awarded to the highest ranked projects within the total MW allocation and within each technology. Financial close (FC) and the signing of contracts is generally done within six to nine months from the preferred bidder status award and commercial operation dates (CODs) generally within 18 to 24 months of FC. These timelines are indicative and improve with each successful BW. Bidders are required to sign standardised, non-negotiable, rand denominated 20-year power purchase agreements (PPAs) with Eskom. Prices are indexed to inflation.

According to Radebe, the PPAs are supported by an implementation agreement (IA) between the IPP and the Department of Energy (DoE), which, along with a government support framework agreement, effectively guarantees Eskom’s payments for the duration of the PPA, subject to IPP plant availability.

There are also other standard documents which form part of the REIPPP programme such as the direct agreement (DA) between the IPP, Eskom, the DoE and lenders, which provides the lenders with step-in rights in the event of default. Grid connection agreements (CAs) are also required to manage in the IPP plant and grid interface.

IPPs are responsible for the costs of shallow grid connections (such as from the power generating plant to the nearest substation), while Eskom is responsible for deep grid connection costs (such as those related to strengthening its transmission/distribution system as necessary). IPPs are expected to comply with provisions of the IA throughout the duration of the Power Purchase Agreement. Critical to the IA are the commitments to empower local businesses and communities. This is critical for the development of the local renewable energy industry, he said.

Government acknowledges that monitoring of compliance with IA provisions needs urgent strengthening as it has proven to be a challenge. Urgent work needs to be undertaken by our government to ensure compliance.

Review of ongoing renewable energy projects

On 4 April 2018, an additional 27 projects, procured under BW 3.5 and 4, were confirmed. These  projects are located in the different provinces and employ solar photovoltaic (PV), wind, concentrating solar power (CSP), biomass and small hydro-electric technologies.

The procurement of these 27 new projects was the biggest IPP procurement to date, representing a total of R56-billion of investment and about 2300 MW of generation capacity to be added to the grid over the next five years, Radebe said.

This investment is injected by private investors into the economy, with no contribution from the government other than support to the state utility, Eskom, in the event of a default by the buyer. We expect that this will have a positive impact on the economy and competition in the energy sector will certainly benefit the consumer in the long run.

New foreign and local direct investment, expected from these projects, should provide a strong economic growth impetus in support of South Africa’s economy. Furthermore, it is expected that this investment will have a positive effect and contribute to much-needed jobs in the rural areas where these projects are located.

With the signing of the agreements, the government not only re-confirmed its commitment to renewable energy, but also to a solid partnership with the private sector in the generation of electricity, while pursuing its energy transition objectives for the future. It is expected that these projects will reach FC by end of the current calendar year and commence construction. These projects are expected to offset 8,1-million t of CO2 per annum.

Over and above the expected economic benefits of this programme, the RE programme also confirms South Africa’s commitment to the Paris Agreement for the reduction of CO2 emissions worldwide. It also makes South Africa part of the ever and fast changing global world of renewable energy.

Legislative regime, licensing and market entry

South Africa has a centrally controlled electricity generation planning and procurement system. The Electricity Regulation Act of 2006 and associated Electricity Regulations on New Generation Capacity, issued in November 2010 and May 2011, assign responsibility to the minister of energy to develop an integrated resource plan.

Furthermore, the minister is empowered through section 34 of the Electricity Regulation Act to make procurement determinations in consultation with the national energy regulator (Nersa) on what new generation capacity is needed, from which sources, and who should develop it. Either Eskom or an IPP can be declared as the intended developer.

Nersa is mandated to issue electricity generation licenses for any generator wishing to connect to the transmission or distribution grid, Radebe said. In issuing generation licenses, it is bound by determinations issued by the minister of energy. Other legislative requirements include compliance with local environmental laws. Project developers are expected to apply for an environmental approval licenses through an environmental impact assessment process.

Competitive pricing, compliance with project’s technical requirements as well as environmental laws are key to market entry in South Africa. The government provides revenue certainty to these projects by guaranteeing future revenue streams for the duration of the PPA. This guarantee is subject to plant availability.

Contact Maropeng Ramokgobathi, Department of Energy, Tel 012 406-7300, maropeng.ramokgobathi@energy.gov.za

 

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