Feed-in tariff jump-start

    By
    Oliver Gordon
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    The long-awaited integrated resource plan 20 10 (IRP20 10) sets out the government’s energy plans for the next 25 years, with the first renewable energy producers to be signed up in early 20 11.

    As South Africa moves towards finalising its renewable energy procurement policies and energy growth path during the next two months, the question is: Have we priced renewable energy correctly, or are we making it needlessly uncompetitive against coal-fired energy?

    Renewable energy will cost between two and three times more than power utility Eskom currently pays for fossil fuel-fired energy, according to the National Energy Regulator of South Africa’s (Nersa’s) renewable energy feed-in tariffs (Refits).

    The energy regulator published its Refits in two phases last year. The two biggest likely sources of renewable energy in the future — wind and solar — were set at R1,25/kWh for offshore wind and between R2,10 and R3,94/kWh for concentrated solar, depending on the methods of storage used.

    Although the price of renewable energy will make the electricity buyer (likely to be a subsidiary of Eskom) baulk, some analysts say it is necessary to incentivise the development of renewable energy given the high cost of the technology.

    “The high costs of producing renewable energy — sometimes up to 10 times what it costs to use fossil fuels — make Nersa’s feed-in tariffs necessary,” said an industry insider at the Industrial Development Corporation (IDC).

    “The tariffs are like an initial subsidy — a stimulus, if you like. It’s a difficult thing — price renewables too low, and you don’t get any takers; too high, and suddenly there’s too much interest.”

    Indeed, an indicator of the high levels of interest in Nersa’s Refits can be gauged from the fact that Eskom has received 156 applications from renewable energy project developers to connect to the national power grid. The developers have applied in anticipation of being selected as renewable energy suppliers by the government.

    The department of energy’s first integrated resources plan (IRP1) identified a need for 1 025MW of renewable energy from the private sector by 20 13. But, according to Riaan Smit, Eskom’s planning chief engineer, quoted in Engineering News Online last month, the 156 applications represent a combined potential energy-generating capacity of 15 154MW — nearly 15 times the government target.

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    This potential energy-generating capacity does not include projects that Eskom itself has in the pipeline, such as the World Bank-funded 100MW Sere Wind Farm Project on South Africa’s West Coast and another bank-funded 100MW concentrated solar power pilot project. 



    Furthermore, the 156 applications account only for those Eskom has received — there may be more potential producers, which have not yet applied to be connected to the grid, or which intend to produce energy for localised consumption.

    Potential supply clearly outstrips intended demand, so would cheaper Refits not allow the buyer to purchase more renewable energy?

    Yes and no, says Kannan Lakmeeharan, Eskom’s divisional executive responsible for systems operations and planning. “Nersa went through a very public process [to determine Refits] and the rates they came up with balances the competing demands of meeting costs and encouraging uptake. “But the intention is to review the Refits on a regular basis. The prices must come down over time, otherwise renewable energy will be too expensive an energy option in the long run,” he said.

    Lakmeeharan was echoed by the IDC insider, who said that “if you charge a higher Refit initially, the rate at which renewable energy will be purchased in years to come will not rise as steeply”.

    Good news for consumers is that the Refits are likely to be revised downwards from next year. They were determined more than a year ago and since then the interest rate has decreased by 350 basis points and the price of photovoltaic solar technology has halved, according to Lakmeeharan, who also predicted a major scramble among renewable energy project developers to “get in on the tariffs while they are still at their highest level”.

    One of the difficulties the government will face in determining who gets in on the tariffs is that the Refit system does not allow for one independent power producer (IPP) to be selected over another on the basis of price competitiveness.

    Instead, Nersa has proposed criteria such as financial status (equity-debt ratio), technical expertise, experience, deep connection costs, state of readiness with impact assessments and civil aviation approvals.

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