Renewables seeks ways to lower deployment costs

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Anxiety levels among potential renewable-energy investors have ebbed somewhat in recent months. These surged during the first half of the year when government indicated, clumsily, that it would abandon the much-vaunted renewable- energy feed-in tariffs, or Refits, in favour of a competitive bidding process, which some have since dubbed ‘Rebid’.

The proposed change was deeply unsettling, particularly when set against a backdrop of serious global economic uncertainty and what was perceived to be an increasingly hostile domestic environment, fuelled by irresponsible nationalisation rhetoric and mixed messages surrounding Wal-Mart’s acquisition of a position in Massmart.

However, when the Department of Energy (DoE), supported by the National Treasury, eventually clarified the process and released a well-structured tender on August 3 for 3 725 MW of renewables capacity, tensions eased a little.

It soon emerged that interest had been sustained in the programme, as was demon-strated when more than 800 people converged on a Johannesburg conference centre in mid-September for a briefing from an impressive group of transaction advisers.

That said, some remain deeply unhappy with the fact that one could only have sight of the bid documentation once a fee of R15 000 was paid. An element of disquiet also remains over the fact that a bond of R100 000 would need to be raised for every megawatt of capacity eventually bid – the equivalent of R5-million for a 50 MW project.

There is also no question that the jury remains out as to whether the Rebid process will indeed lay the foundation for what government hopes will be a multidecade clean-energy investment programme – South Africa’s Integrated Resource Plan (IRP) for electricity envisages that independent power producers (IPPs) and State utility Eskom will build a combined renewables base of 17 800 MW by 2030.

What is currently not in doubt, though, is that South Africa is showing seriousness about pursuing a large-scale renewables plan and that the current tender represents an important milestone, notwithstanding the initial false starts and the serious communication breakdown between government and the potential investors.

Part of the Plan
Besides the IRP, the recently released National Development Plan (NDP), which represents the inaugural output of the 26-member National Planning Commission, is also strongly supportive of the renewables programme and its potential green-industry spin-offs.

The advisory document supports a managed transition to a low-carbon economy and envisages material investments into low- carbon infrastructure by 2030, backed by international financial aid.

The ink had hardly dried on the NDP document when the National Treasury issued a tender for a transaction adviser to help it establish a facility, currently termed a ‘Renewable Energy Fund’, that will channel international donor and commercial funding to support South Africa’s ambitious roll-out of renewables technologies.

Finance Minister Pravin Gordhan has been quoted as saying that R800-million has been made available and government is currently seeking private partners to manage the fund.

The implication is that the authorities are serious about renewables but remain concerned about the implications on the electricity price, if not managed.

Indeed, this was also the main motivation behind the decision to migrate from Refit to Rebid, as the initial price outlines under Refit were seen as unaffordable, particularly given the relative electricity intensity of key economic sectors, such as mining and minerals processing.

Further evidence of the desire to find ways to lower the cost of the renewables of the programme was Cabinet’s recent approval of the South African Renewables Initiative, or SARi, being launched during the upcoming seventeenth United Nations Framework Convention on Climate Change Conference of the Parties, or COP 17.

Green Industries
SARi is aimed at catalysing the growth of green industries through the financing of large-scale renewable generation capacity, and the COP 17 launch will reportedly be accom- panied by the announcement of partnerships between South Africa and other governments to explore enhanced financing arrangements for renewables. The initial design seeks to combine low-cost loans, insurance and other financial instruments with climate funding on a pay-for-performance basis.

Besides lowering the cost of deployment, the other objective is to stimulate industrial development around the investment programme, which is why Rebid has received exemption from the Preferential Procurement Policy Framework Act stipulation that price receives a 90% weighting in any government procurement process and nonprice elements only 10%.

The Rebid includes a 70:30 split, with the nonprice components comprising such issues as job creation, local content, management control, preferential procurement, socio- economic development and ownership – at least 40% of a project would need to be owned by South Africans to be considered compliant.

A two-envelope model is being used, and the price envelope, carrying the 70% weighting, will only be considered once the offer has complied with the nonprice stipulations.

In other words, the compliance burden is high, which has made it a process likely to be favoured by larger bidders. Government, it seems, is seeking to attract established market participants, which are more likely to be able to deliver bankable projects within the tight timeframes required.

Given these high barriers to entry, it was not immediately clear how many projects would be submitted on November 4, the closing date for the first of what could be five bidding windows.

Bids Received
In the end, 53 bids, representing some 2 100 MW of potential capacity, were received by the DoE. Director-general Nelisiwe Magubane says government is pleased with the response, and indicates that there is strong interest in the second window, which is currently due to close on March 5, 2012.

However, she also indicates that discussions are under way with the Department of Environmental Affairs, which is having some difficulty in processing all the environmental authorisations required for the next round. Therefore, the date may be adjusted, as the absence of environmental approvals was seen as an immediate “deal breaker”.

Deputy director-general Ompi Aphane says half of the offers related to wind projects, while 48% were for solar developments, both photovoltaic and concentrating.

The balance of the bids related to small hydropower plants, and it is anticipated that the other technologies (such as biogas, biomass and landfill gas) might feature more strongly when the so-called small- projects tender is released later this year. This tender would have lower thresholds, but would only cater for projects that had capacities of less than 5 MW.

Currently, the DoE aims to procure 1 850 MW of onshore wind, 1 450 MW of solar photovoltaic capacity, 200 MW of concentrating solar power, 75 MW of small hydro capacity, 25 MW of landfill gas and 12.5 MW apiece of biomass and biogas capacity.

Should all the capacity currently on offer be developed, it could involve combined investments of around R7-billion, Aphane indicates, with more than half of the capital likely to flow from foreign direct investors.

The projects on offer are reported to be sited across all nine provinces, except Mpumalanga, with most of the interest arising for developments in the Northern Cape, the Eastern Cape and the Western Cape.

Secure Location
The evaluation process is under way in a “secure” location and is being conducted by technical specialists with no direct asso- ciation with the DoE and its officials. Once this evaluation is complete, documents will be handed over to the department for adjudication.

The adjudication process itself will be subjected to an internal audit, as well as a review, which will be conducted by an independent, global auditing firm.

Preferred bidders should be identified by the end of November, or before the end of COP 17.

A six-month period has been allowed for developers to reach financial closure, which will include the signing of a power purchase agreement with Eskom.

Aphane believes the first capacity could even start entering the grid during 2012, with most of the capacity from the first bid window being introduced by the end of 2013.

Utility Scale
But the Rebid is not the only renewables game in town. Earlier this month, South Africa and the World Bank signed a $250-million loan agreement for the two utility-scale Eskom projects.

The Eskom package has been secured through the Clean Technology Fund and will help finance a 100 MW concentrating solar power plant in Upington, in the Northern Cape, and a further 100 MW wind power project known as Sere, in the Western Cape.

The ‘soft loan’ had a 40-year tenor, a ten-year grace period and a 0.25% yearly service on disbursed amounts.

The loan complements the $260-million provided to Eskom for the Upington and Sere projects as part of the $3.75-billion World Bank loan approved in April 2010, which mainly supported the funding of the Medupi and Kusile power projects.

Eskom has also secured $100-million of Clean Technology Fund assistance through the African Development Bank, which has also provided direct support of $265-million. In addition, Agençe Francaise de Développement had also extended $151-million in support.

Therefore, the funding phase for the Sere wind farm project has been completed and processes are now under way to procure the key components for the development. Funding is still being finalised for solar development, which Eskom also plans to source mainly from development finance agencies.

The main takeaway is that coal-heavy South Africa is becoming increasingly serious about placing green energy and green industry on a strong footing.

It aims to do this by attracting the world’s leading renewables developers, while allowing space for Eskom to run with parallel programmes.

The key, however, to Rebid success is building momentum and following that up with further phases, as well as a process that allows smaller entrepreneurs to play a role.

If the bidding process is tainted by corruption, or even if it is found that the compliance hurdles are simply too high for developers to actually implement their projects, it will deal a serious blow to what, for the moment, appears to be a promising industry.


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