Renewable Energy – Moving forward ? A cause for concern

SA’s renewable energy industry is moving forward on substantive terms – there is finally certainty around the request for proposals from independent power producers (IPP’s) and the procurement process will shortly be under way – but there is a real concern that it is moving backwards in other ways, particularly in terms of transparency issues.
This is the view given by Johan van den Berg, CEO of the South African Wind Energy Association, at a debate held by EE-publishers in Midrand last night.
There was agreement all round that renewable energy is on some sort of track that is moving forward. For one, a commitment has been shown in SA’s Integrated Resource Plan (IRP), which envisages 42% of all new generation to come from renewable energy. This includes 8.4GW from solar PV, 1GW from solar CSP, and 8.4 GW from wind. “The IRP is an impressive document, both the speed of the document’s promulgation and the transparency of the process,” said Standard Bank’s head of energy, utilities & infrastructure Paul Eardley-Taylor.
Van den Berg agreed that the IRP is a big leap forward for SA and in that sense the medium and long term outlooks look good, but there is a short term concern that may jeopardise these goals.
And this is the sudden change to a non-transparent process and the lack of confidence this may instill. A short look at the history is needed.
The plan to boost the industry – to kick start the IRP goals, so to speak – started with the renewable energy feed-in tariff process. The Refit tariff would offer developers fixed tariffs for their energy, a programme which was approved by the National Energy Regulator SA (Nersa) in 2009.
It is worth remembering, at this stage, that it is Nersa’s mandate to implement policy; and it is the department of energy’s mandate to make it.
So Nersa started implementing the policy. The legality of the Refit had been grounded in the Electricity Regulation Act 2006, which states that Nersa must design the rules to implement government’s energy policy. “That was how the Refit started” said Thembani Bukula, SA’s national energy regulator.

The Renewable Energy White paper of 2004 had set the government’s policy target at 10 000GWh of renewable energy by 2013. SA’s electricity pricing policy also states that Nersa may determine a framework for pricing, and that renewable energy could be priced at a premium. The new generation regulations of 2009 then said the Minister may chose that the Refit programme be used to meet new generation requirements, and that Nersa must be responsible for the tariff determination.

So far so good. Renewable energy developers had by this time invested heavily in projects, based on the Refit tariffs.

Then, just as the request for proposals was about to go out in March this year, Nersa announced the tariffs would have to be revised downwards because the cost assumptions had changed – an unexpected shock to the industry which was none the less accepted as needed, even if the timing was bad.

But the real shock came when the new generation regulations of May 2011 came out. “We had a public hearing; (Ompi) Aphane (deputy director general at the department of energy) issued the new regulations and they had no mention of the Refit,” says Bukula. Suddenly, the Refit programme was illegal.

From there, Nersa could only comply with the new policy and a new request for proposals, based on competitive price bidding, was released in August. Under this programme, projects will have to bid based on price as one of the deciding factors, and there will be a tariff cap in place for each of the renewable technologies. This has been dubbed the “Rebid” process.

On a substantive level there is not much that can shoot down the new IPP Procurements Programme (IPPPP). “We’re impressed with the request for proposals,” said Eardley-Taylor. “Although it’s been along time coming, it’s a solid 8 out of 10.”

It asks for 3,725MW of which 91% is made up of wind and solar. There is also a miraculous increase in the allocation for solar PV – up to 1450MW in the next two years.

Most importantly, the perception that a number of developers may leave the country seems to be false. “All our modeling shows they work within SA’s cost structure, and the tariff caps look fair,” said Eardley Taylor. “We don’t see any deal breakers.”

Brigette Baillie, partner and head of the project development and finance practice at Webber Wentzel (and whose client is the department of energy), told the audience that “there (had) been a need to retrace steps to have something that ticks all the boxes legally.”

The Public Finance Management act and the Preferential Procurement Policy Framework Act both say that the adjudication of the procurement process must be done according to either price or BEE. The new generation regulations and case law also confirm this.

Industry associations for wind and solar have legal opinions stating that the process is in fact legal, but van den Berg stated he accepted “we are where we are.”

Besides the legality issue, though, Baillie said the change to a competitive bidding process was needed to ensure the financial and economic sustainability of the programme. “(The new programme) will allow future renewable energy projects to be done after the programme is completed,” she said. Aphane also stressed that under the Refit programme “there would not be any certainty that at levels of 2009 tariffs we’d be able to have a second and third round.”

Generally, both the audience and the speakers accept the change in policy, and urge the department for energy to now get on with its implementation.

But it is not the change in policy that is a cause for concern – rather the way in which it has been done.

If we compare the Rebid to the Refit process, there are a couple of important differences, according to van den Berg. The Refit process was exhaustively work-shopped through a series of public consultations; the Rebid was unilaterally handed down to the industry. In that sense, the terms of the Refit were in the public domain, whereas the terms of the Rebid are secret: transparency is compromised. Complexity and compliance costs were lower for developers in the Refit, while investor certainty was higher.

So while the Rebid documents in themselves are not the problem, the trust and synthesis that was built up through the Refit process has been broken.

This shows up mostly notably (and shockingly) in the misalignment between the department of energy and Nersa. While Nersa went ahead holding public hearings and implementing the Refit programme, the department of energy was already working on Rebid. Nersa was only told about Refit’s “illegality” in May, while Baillie told the audience Webber Wenztel had been working on the Rebid documents since December 2010.

Aphane admits a mess up. “(Bukula) is right, we were not as careful, not as diligent, as we should have been. We messed up,” he said.

He explained the way forward is a two way procurement process to make sure people don’t bid a low base but don’t have a sustainable project. The department will then look at price once projects have been “pre-qualified” so to speak.

But the lack of transparency in this new programme should still send alert signals to the industry. The request for proposals and tender documents are confidential. Bidders must pay R15 000 to offer a bid, after which they must sign a confidentially agreement.

It seems that all the openness and consultation that the Refit process brought to the industry has been erased.

When Aphane was asked how the procurement process would work and how political it would be, he declined to comment. He stated that there would be a bidder’s selection conference on the 14th of September.

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