Category: South Africa

Victoria’s new renewables policy, and why it could learn from South Africa

Original article posted on

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.

Bald Hills wind farm, Victoria, Australia

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.

Rand:dollar fluctuations – in the context of REIPPP projects

One of the conditions set out in the South African Power Purchase Agreements (PPA’s) under the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) is that the project owner will not be protected from foreign exchange rate fluctuations.  Prices are set out in South African Rands, with no linking to any foreign currencies.

The owner has the time between being announced as a preferred bidder until financial close to adjust their quoted prices by any fluctuations in the exchange rates that may have occurred during that time, but once the contracts are concluded, all of the South African government’s liabilities will be in Rand.

Given the Rand’s volatile history, this has largely kept foreign lenders out of the programme, but there have been foreign investors who have entered the market and accepted these terms.

This week’s events in South Africa, which has seen another marked drop in the Rand’s strength on the global stage, would naturally have affected the returns being seen by parties largely transacting in foreign currency.  The Rand’s value against the US dollar has effectively halved since November 2011 (when the preferred bidders in the first bidding window were announced).  [graphic source – OANDA]


At the same, a reminder as to what has been happening in the tariff prices in each bidding window, as competition has been increasing:

(you can see the full article by Arup on what has been happening in each bidding window, and where prices are projected to go here)

PV_Wind_Ave Tariffs

This means that, over the course of this week, any operational project sitting on a foreign party’s books will have seen a sharp drop in revenue, and this trend has been present over the last few years, as the Rand weakens and competition becomes more fierce.

Given the performance of the Rand, the conditions of the PPA, and the uncertainty regarding South African politics and policies going forward, it is not unreasonable to think that the prices we’ve seen under REIPPPP may be as low as foreign investors are willing to go.  Particularly if contracting strategies continue to favour fully wrapped EPC contracts, with the price tag that comes along with them.

Green Cape supporting green tech in the Western Cape, South Africa

Something that has been an interesting lesson for me is how people have the ability to turn really big ideas into really big reality, and how this can be a slow, tedious, tense, frustrating and yet rewarding experience.  The timeline for changing how things work is not for the impatient (or maybe it is for the impatient, with stamina.)

It was when I was at the City of Cape Town, working in the Energy & Climate Change unit in 2010, I think, that the discussions between the CCT and the Western Cape Provincial Government first started in earnest, around the creation of a green tech sector development agency, Green Cape.  This would sit outside of government, but parallel to it.  Reporting to both the WC and City governments, with an aim of helping to promote green technologies and to ensure that the province benefited from ‘green’ initiatives taking off.

I watched as Green Cape went from a few people from province’s Econ Dev department, effectively seconded in, to having its own CEO, to growing too big for province’s buildings, to hiring so many staff that I couldn’t keep tabs on who they all were.  I watched as they bashed heads with the government, with industry, with themselves.  I watched as they took small tentative steps, figuring out what their role was, and where they’d be able to make the most impact.  I watched as they grew from energy (renewables and efficiency) projects, to waste, to water, to setting up an entire green economic hub in Atlantis.  I watched them set up networking events which helped share information in the renewables sector and allowed people access to agencies who would otherwise be sitting behind closed doors.  I watched them be the annoying voice asking the tough questions of Eskom and NERSA and feeding back on what they’d discovered to the private sector.  I also watched them play football against my Arup team in a five aside tournament.  They were annoyingly good.

Yesterday I received an email from someone there, sharing with me news about how the wind turbine towers, newly manufactured in the Atlantis Special Economic Zone, were being used on Noupoort Wind Farm and were helping the project to exceed the local content requirements set out under REIPPP.  You can read about this here.  It’s a big thing that South Africa is manufacturing major, technical components being used in these facilities.  Long may it continue.

I know this has been the culmination of hard work on the part of various parties; from government for supporting the development of the SEZ, from the private sector (in this case Gestamp) for buying into the project and committing to manufacturing in Atlantis, from developers (Mainstream and others) providing the demand, and from various organisations along the way helping with planning.  But to Green Cape, for keeping on, for holding the bit between your teeth through all the little and big hurdles that you’ve encountered along the way, a big congratulations.  It’s made me feel very proud.  Long may you continue.

You can read up on Green Cape here.

IPP Projects page – call for comments on REIPPP RfP

The South African Department of Energy has called for comments on the REIPPP RfP documentation, ahead of the release of the next bidding window RfP’s in 2016.  The call for comments can be found on the IPP website’s press centre.  Comments can be submitted between the 3rd August and the 2nd September 2015.  The DoE aims to issue the RfP for REIPPP Bidding window 5 early 2016.

There is more useful information on this website and I recommend having if a look, if you were not previously aware of it.  Some things that are of interest:

  • a list of all projects awarded under window 4, along with the project price and ED score
  • information on the other IPP procurement programmes being run alongside REIPPP (e.g. coal, SPIPPs etc)
  • IPP programme overview and status reports
  • ALL of the window 4 RfP documentation.  This means all the parts, all the volumes and all the appendices.   You have to register on the site to access these.

The registered section of the site is also comments can be submitted.

Here’s a graphic that the DoE put together in their press release calling for comments.  Interesting numbers in there.