Vote of confidence for South African FIT U-turn?

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The South African Department of Energy’s controversial u-turn on its feed-in tariff scheme has stimulated much debate over whether it has delivered the kiss of death, or breathed life, into SA’s solar sector.
South Africa's planned Solar Corridor
By Annabel Eaton, South Africa correspondent
Under a feed-in tariff, eligible renewable energy generators are paid a cost-based price for the energy they produce, depending on the type of technology they use.  This renewable energy of course includes Concentrated Solar Power (CSP).  The DoE and the National Energy Regulator of South Africa (Nersa) had for several years been working on the details and promulgation of South Africa’s Refit framework, which was completed last year.
But the competitive bidding process will now be the basis on which the South African government’s procurement process for renewable energy will proceed. It is a procurement method in which bids from competing contractors are invited, in order to obtain goods and services at the lowest cost.
Legalities
A fundamental reason for the change revolves around uncertainty regarding the legality of the Refit programme.  This uncertainty was initiated by a statement made by the National Treasury that the Electricity Regulations Act determines that Nersa cannot ‘pre-determine a tariff’, and Nersa can only consider applications at the licensing stage on a ‘project application by project application’ basis.
A great deal of discussion on the legalities has therefore taken place between the different parties involved – Nersa, the National Treasury and the DoE.  
The DoE explains that since it become apparent that the legal framework governing the electricity sector in South Africa does not allow Refit in the guise that had been anticipated, a revised procurement process in line with the existing regime had to be developed.   
“It was only prudent for the department to take a responsible decision and implement another programme outside of the Refit programme,” says Nelisiwe Magubane, DoE Director General.  “It was essential for the department to proceed with the implementation of renewable energy initiatives to maintain the credibility of our country.”    
Commenting further on the legal situation, Ompi Aphane, DoE Deputy Director General, was recently quoted by the Financial Mail as saying that the parties involved “were not as careful, not as diligent as [we] should have been.” 
The DoE also aims to increase its original target of 10 000 GWh by 2013, and believes that the competitive bidding process, in the form of the Independent Power Producers (IPP) Procurement programme, which invites private sector participation, will help achieve this. 
Aphane expands on this: “As South Africa has a high potential to generate renewable energy, we felt we needed to at least triple the original allocation to 3725 MW.  We believe that a procurement programme of the magnitude of the IPP Procurement programme will properly address energy needs and provide sustainable growth for the renewable energy industry.”
Solid business case for bidding process
Cornelis van der Waal, Energy & Power Systems business unit leader for Frost & Sullivan, business research and consulting firm, believes that competitive bidding does, in the long term, make sound business sense.  He explains: “The Refit programme is not necessarily viable in the long run.  This has been demonstrated overseas, in Spain for example.”
This lack of long-term viability could well have contributed to the DoE’s decision to replace the Refit programme with the IPP Procurement programme.
“Refit, with its guaranteed purchase prices, could have successfully been implemented for a few years to proactively stimulate investment in renewable energy technologies.  Its implementation during this time would also have provided sufficient space for learning from mistakes without significant commercial prejudice,” Van der Waal continues. 
“However, in the long term competitive bidding is the most attractive option for the consumer, as it ensures the end user obtains electricity at the lowest possible rate.”  
Feed-in tariffs, where implemented, have after all often included ‘tariff degression’, a mechanism by which the tariff ratchets down over time.
When asked about the impact this policy shift to competitive bidding has had on investor confidence, Van der Waal says: “The Refit programme set industry expectations that project developers investing in it would make significant returns, and the change has naturally led to some disappointment.” 
He believes however that damage is limited and any negative impact is manageable. “The fact that 400 bidders have already registered demonstrates the massive appetite that private industries have to get involved in the new procurement programme.”  
The way forward
The first Submission Date is 4 November this year.  The DoE will announce Preferred Bidders by COP 17, the UN’s climate summit, which takes place in Durban from 28 November 2011. 
In a nutshell, it appears that the industry in general, despite its initial concerns, now accepts the change in policy, and exhorts the DoE and related players to get on with the implementation of the new IPP programme as a matter of urgency.
To respond to this article, please write to the Editor: Rikki Stancich
Image credit: Potential solar park target areas in the Northern Cape. Image courtesy of NCPG and CCI, 2010
Related Event:

CSP Today South Africa 2012, 7-8 February, Johannesburg

South Africa’s solar horizon: Navigate the IPP market to build a successful & productive CSP business in South Africa

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