Renewables procurement process may be extended beyond first phase

The South African government is considering converting the process established for the procurement of 3 725 MW of renewable-energy capacity from independent power producers (IPPs) into a rolling programme for the procurement of additional capacity sought under the current version of the Integrated Resource Plan (IRP) for electricity.

The National Treasury’s Karen Breytenbach, who has been part of a government team supporting the Department of Energy (DoE) with what is being termed the ‘Rebid’ process, said it was premature to say with certainty that the process would be sus- tained.

However, she has indicated that the initiative, which has been lauded for its professionalism, could be extended into future phases and beyond the five bid windows that will be opened for the first phase.

Technical, financial and legal professionals evaluated the first tenders (submitted on November 4) at a secure location in Gauteng during November and December. Every effort has reportedly been made to ensure that this evaluation is not “contaminated”, including the use of video surveillance and private security firms. The entire process has also been subjected to a process audit, conducted by Ernst & Young. The next windows for the IPP bidders will close on March 5 and August 20, with two more planned for 2013.

Extending Rebid to further phases will depend, though, on ensuring there is sufficient funding in the ‘kitty’ – funding which will have to be secured through the next tariff round, as well as from development finance institutions and global funds.

Government is also currently working on the architecture for funding options to help provide a cost cushion during the transition from the current coal-based system to one that includes the introduction of some 17 800 MW of renewables by 2030.

Incremental Costs
President Jacob Zuma has warned that renewable-energy targets outlined in South Africa’s IRP will add an average incremental cost of around $660-million to South Africa’s yearly electricity bill up to the year 2044 unless financial instruments are found to offset those costs.

Speaking at a business summit on the sidelines of the climate negotiations in Durban, Zuma stressed that the biggest barriers to developing renewables in Africa, ahead of conventional energy sources, were financial rather than technological.

An initiative, dubbed the South African Renewables Initiative, or SARi, has therefore been launched with global donors and foreign governments to extend inno- vative funding solutions to lower the renewables deployment costs. The initial partners are the UK, Germany, Denmark, Switzerland, Norway and the European Investment Bank.

“The SARi model will enable us to deal with the high cost through low-cost loans and other financial instruments combined with time-limited pay-for-performance grants,” Zuma said.

It is currently estimated that, even with favourable loans and the savings expected to arise from the competitive procurement process being used by government, an incremental cost gap of $3.5-billion could arise by 2044.

A number of potential funding sources are being explored to close this gap, with emphasis being given to international pay- for-performance grants.

SARi proponents calculate that by securing funding at a rate of $10/t for carbon dioxide-equivalent reductions, a present value contribution of $1.9-billion towards the incremental cost of the current IRP could be gained, leveraging a residual domestic contribution of $1.6-billion.

Should the combination of low-cost loans and pay-for-performance grants prove successful, it may also enable renewables to play a bigger role in future IRP iterations, which could offer green energy and manufacturing jobs benefits while offsetting the potential risks to growth.

A newly published ‘Green Jobs’ report, coauthored by the Development Bank of Southern Africa and the Industrial Development Corporation, estimates that some 130 023 direct jobs could be created by South Africa’s renewable-energy sector by 2025 if the renewables allocation outlined in the IRP were expanded from 17 800 MW to 26 520 MW.

SARi will be specifically tailored to the challenge of funding for renewable grid- based energy. But it will not cover the broad range of clean-energy technologies, such as off-grid renewables, low-carbon cogene- ration processes and energy efficiency initiatives, microgrids and industrial self-generation, gaseous and liquid fuels, clean-coal technologies, or fuel cells.

All funding arrangement will be agreed by the National Treasury to ensure alignment with South African policy and legislation. The National Treasury recently 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.

Meanwhile, Breytenbach has also confirmed that the simplified bid document, together with a term sheet, for small-scale renewable projects of between 1 MW and 5 MW would be released during the first quarter of 2012. Initially, this documentation was expected to be released during the Durban conference, but scaling back and simplifying the tender have proved challenging.

Efforts will be made to align the small programme with a Development Bank of Southern Africa funding facility to support the smaller projects.
It is also likely that a Department of Water Affairs plan to exploit the hydropower potential of 21 dams across South Africa will be packaged for IPP bidders during the second quarter of 2012. A study has indicated that there is an opportunity for the projects to yield a combined nameplate capacity of 40 MW.

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