I am coming up for air after a crazy and intense year of maternity leave. Thanks to all who have kept in touch and apologies to those who were expecting the newsletters to continue.
My big news is that four months ago I started working for an engineering firm in Melbourne, in their renewable energy team. I am back in the world of consulting, working as technical advisor on a number of solar projects around Australia. It’s very similar to the work I was doing back in South Africa so it’s familiar ground.
This market is booming at the moment, and there are a lot of little interesting topics floating around that could use a bit of discussion. What’s of clear interest to me is the number of South Africans moving over here with experience in renewables. The slow down of the REIPPP programme in SA has had many people looking further afield for work. Not including myself I can think of five people who were consulting in Cape Town while I was there, who are now based in Australia. And that’s just within consulting. There will be a whole heap more working for the other project players.
I’m slowly getting my head around the grid connection space. It’s complicated, with uncertainties that seem to be driving developers around the bend. Marginal and Distributed Loss Factors deserve their own youtube channel, and the Generator Performance Standards are tying people in knots.
Each state has its own planning rules. The country is enormous with long tentacled electrical infrastructure. The politics is political and the leaders love to leave.
It’s a big mish mash and a bit wishy washy. And it’s a lot to get your head around.
So watch this space. Perhaps all that I can promise is that you learn along the way with me.
A few weekends ago I took a drive along the coast to the south east of Melbourne, towards Wilsons Promontory. It is such beautiful country out there, with rolling green hills and dramatic coastlines. There are two wind farms out that way, and I saw the first from across the bay, and the other up close and personal.
From Duck Point (just north of Wilsons Prom), you can see Toora Wind Farm across the bay. This is a 21MW facility, made up of 12 x 1.75MW turbines.
But from there it was back towards Melbourne, where the journey took me right past the foot of the Bald Hills turbines.
The Bald Hills Wind Farm [consists] of 52 wind turbines, each with an electricity generating capacity of 2.05 megawatts (MW) giving the project a total capacity of 106.6MW.
The Victorian government recently announced a policy to decisively increase the amount of renewable generation in Victoria. The rationale for this policy is that existing federal policies are failing to provide investment certainty in the expansion of renewable production capacity.
The government estimates that meeting its policy will require up to 5,400 MW of new renewable generation to be built over the next nine years. This is equivalent to about 60 per cent of Victoria’s peak demand on the power grid.
Assuming an all-in capital outlay per MW of $2.5 million, meeting this policy could require $13.5 billion of new money. Some significant investment in transmission infrastructure is also likely to be needed. After residential rooftop solar, this will be, by far, the largest investment in new generation capacity in Australia since the creation of the National Electricity Market.
Last month a consultation paper from the Department of Environment, Land, Water and Planning sought responses on various issues (identity of the counter-party, specification of the payment instrument, technology selection, treatment of other subsidies, contract duration and auction design). The Department is currently focusing on the preparation of enabling legislation with a view to conducting its first tender next year.
South Africa’s Renewable Energy IPP Procurement Program (REIPPPP) is an interesting point of reference, of comparable scale, to the Victorian policy. Though there are many differences, many of the important issues are similar and much can be learned from the South African experience. At the least, a quick look at their program we might give a sense of what lies in store for Victoria.
Under the REIPPPP program 6,327MW (of which 3,357 MW of wind in 34 projects, 2,292 of PV in 45 projects, 600 MW of concentrated solar in 7 projects and several much smaller biomass and small hydro projects) have been awarded PPAs. Total capital outlays of around $19bn are expected, to complete these projects. As a result of this, since 2012, South Africa has ranked among the top ten countries globally in terms of renewable energy independent power producer investment.
In the first tender in November 2011, 28 projects offering 1,416 MW in total were selected. In the second round in May 2013, 19 projects offering 1,040 MW were selected. A third round in August 2013 selected 15 projects for 1,321 MW. A fourth round in August 2014 selected 26 projects for 2,207 MW. A fifth round is expected to commence shortly.
The bidders offer prices for 20 year Power Purchase Agreements with Eskom, the government owned national power monopoly. Two additional agreements with the Government underwrite Eskom default risks, provided step-in rights to lenders in the case of default and ensure contractual obligations for delivery of up to 17 economic and social development obligations. Community ownership (at not less than 2.5% of the total project cost) is mandatory and the developer have to come up with ways, such as community trusts, to comply with this. Contract evaluation is based 70% on price and 30% on socio-economic factors.
The contracts are not negotiable and bidders are required to submit bank letters to the effect that financing is locked-in. This effectively outsources due diligence to the lenders. The lenders in turned passed this on to developers but in a way that ensured the duty of care was to lenders.
The 64 successful projects in the first three rounds involved over a 100 different shareholder entities, 46 of these in more than one project. Banks, insurers, development banks, international utilities and direct foreign investors have all participated in the program. The most common financing structure has been project finance, although about a third of the projects in the third round used corporate finance.
The majority of debt funding has been from commercial banks with the balance from development banks, pension and insurance funds. Eighty-six percent of debt has been raised from within South Africa on 15-17 year loans (from Commercial Date of Operation). Debt risk premia in bank loans have been around 450 basis points on top of the South African equivalent to Australia’s 90 day bank bill swap rate.
Forty-nine Engineering, Procurement and Construction (EPC) contractors have been involved in the 64 projects during the first three rounds, the majority in more than one project either as the primary or secondary contractor.
Prominent EPC contractors with three or more projects include Vestas (Danish), Acciona (Spanish), Consolidated Power Projects (South African), Group Five Construction (South African), Juwi Renewable Energies (German), Murray and Roberts (South African), Abengoa (Spanish), ACS Cobra (Spanish), Iberdrola Engineering and Construction (Spanish), Nordex Energy (Germany), Scatec (Norwegian), Suzlon (India), and Temi Energia (Italian). Many of these EPC contractors have set up subsidiary companies in South Africa.
The main suppliers of wind turbines and PV equipment include Vestas, Siemens, Nordex, ABB, Guodian, Suzlon, Siemens, SMA Solar Tech, BYD Shanghai, Hanwha Solar, 3 Sun, AEG and ABB. A local wind tower manufacturing facility and at least five PV panel assembly plants have been established in South Africa.
Over the period of the four bidding rounds, offered prices per MWh halved for wind and concentrated solar and declined by 75% for solar PV. Global technology development, local economies of scale, improving investor confidence and lower transaction costs explain this stunning progress.
As the volume of renewable capacity has increased, transmission connection has been become an increasing concern. Bidders are responsible for connection to the nearest major substation, but augmentation of the shared network is lagging behind and this has become a particular issue for the most recently awarded projects.
The World Bank suggests the most important lesson to transfer from the REIPPPP is the benefits of a well-designed and transparent procurement process. They say that the Department of Energy recognised that it had little capacity to run a sophisticated multibillion-dollar competitive bidding process for renewable energy.
As a consequence, it sought the assistance of the National Treasury’s Public-Private Partnership (PPP) Unit to manage the process. A small team of technical staff from DOE and the PPP Unit established a project office which functioned effectively outside of the formal departmental structure of national government. It was led by a senior manager from the National Treasury PPP Unit and other legal and technical experts were brought on board to form a tightknit team.
This was viewed favorably by both the public and private sector as a professional unit with considerable expertise in closing PPP contracts and a reputation as problem solvers and facilitators rather than regulators. The credibility of this team with the bankers, lawyers, and consultants involved in such projects in South Africa generated enthusiastic participation by private sector players.
The World Bank reports that high standards were set and maintained throughout the bidding process, including security arrangements and transparent procurement procedures. Documentation was extensive, high quality, and readily available. Domestic and international advisers were extensively involved in the design and management of the program, in reviewing bids, and in incorporating lessons learned into the program as it progressed through the bid rounds.
To fund the procurement process, in 2011 the National Treasury provided R100 million (around $10m). The World Bank provided a further US$6m and various bi-lateral donor agencies from Denmark, Germany, Spain and the UK contributed funding for technical assistance. This funding saw the program through the first round and part of the second. Subsequent to that, the program relied on bidder registration fees and fees paid by successful IPP project companies.
Successful project companies must pay a project development fee of one percent of total project costs to a Project Development Fund for Renewable Energy projects managed by the Department of Energy. The fund covers current and future costs associated with procurement of renewable energy and oversight of the program. These funding arrangements have helped the program remain off the formal government budget in subsequent bidding rounds.
Coming back home again, the Victorian Government’s policy marks a major departure in the state’s energy policy. Since privatising the industry a little under twenty years ago, the Government has had a watching brief with some intervention around the edges – most significantly in smart meters. The Government is now getting back into the business of electricity production.
Even if it does not intend to own or operate generators, it is the Victorian Government that will under-write what will be a massive investment program. Surely every large new renewable generator developed in Victoria for the next nine years will be part of its program. If the Government legislates its policy as expected, the Victorian Government will become the most important player in the Victoria’s electricity generation sector.
We all, including the Government, have yet to discover how its policy will unfold in practice.
The South African experience can provide some feeling for what goes into the competitive procurement and development of 6,000 MW of renewable capacity. Their apparent success in this endeavor is encouraging. It would be good to learn from this what we can.
Bruce Mountain is an energy economist and Director of consultancy, CME. Vivienne Roberts is an engineer and accountant and was a technical advisor on a number of projects in South Africa.
Last weekend a friend took me to CERES, a community- based sustainability centre, located in Brunswick, Melbourne. It’s located next to the Merri Creek, and was a place of cultural significance for thousands of years to the Wurundjeri people. Then this little piece of paradise became a quarry, and then a dumping site (*insert slow clap here*). CERES was established in 1982 to try to rehabilitate the site, and it’s now a beautiful and productive community project that was lovely to visit.
“We are a not-for-loss community business. We run extensive environmental education programs, urban agriculture projects, green technology demonstrations and a number of social enterprises including a market, grocery, café, community kitchen, organic online supermarket and a permaculture and bushfood nursery.” – ceres.org.au
There is a lot to it. Most of the land that I saw was dedicated to urban farming initiatives and they run various farming, gardening, cooking and sustainability courses (including a permaculture training course that is supposed to be among the leading courses in Australia). It’s beautifully done. The vegetables are grown on site, and sold in the grocery store, also onsite. There is a nursery, a restaurant, various play areas, a pavilion, a place where they host festivals and parties and a dam. There is also a bike shed where people donate bicycles and you can go and help yourself to parts and get some advice and assistance from people in the know on bike mechanics.
What really drew my attention, naturally, was all the onsite renewables. There’s a lot of solar PV installed. They have an EV or electric bike charging station, what looks like a (massive) solar cooker, and a range of different types of micro-wind turbines dotted around the place.
In the bottom picture, you can see a series of boards with posters on them. Visitors are invited to walk through this exercise which challenges them to consider the impact that their lifestyle choices have on Australia’s future. It’s an empowering exercise, because it links consumer habits, transport habits and opinions on family size and migration policy (amongst other things) directly with various future scenarios. Consumer habits are cross referenced with population impact values, and your future is determined on a small matrix.
Here are some (poorly taken) photos to show how the exercise works.
Excuse the quality of the photos – I was in a bit of a rush. The exercise has clearly been there for a while, and is showing signs of ageing. But it’s an interest concept, and it is valuable to link individual decisions to a greater future vision.
It’s a lovely place to visit, and if you’re in the area I do recommend popping by.