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

Original article posted on reneweconomy.com.au.

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_6
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]

ZAR_USD_Forex

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.

REIPPP Stats_DOE

CSIR study update – benefits of renewable energy to the South African economy

Last year the CSIR released a report which investigated the total cost or benefit that renewables had had on the South African economy in 2014.  This was conducted in light of a) a number of REIPPP Round 1 projects coming online in 2014 and being in operation for the first time and b) capacity constraints currently being experienced in SA (aka load shedding).

The study has been widely referenced by the renewables industry, because of its findings, as it calculated that the presence of renewables had benefitted the economy to the tune of around R800m.  I went to a talk given by CSIR, hosted by SANEA, earlier this year where Dr Tobias Bischof-Niemz from the CSIR described the methodology, the assumptions and the resulting findings from this 2014 report.

In short (very short), the study considers three main inputs:

  1. the cost of fuel avoided by renewables replacing traditional generation sources
  2. the cost payable to renewable IPP’s for electricity exported to the grid
  3. the effective burden that would have been felt by the economy during constrained intervals, where, if not for the presence of the renewables projects, Eskom would have been unable to meet demand (unserved energy)

The picture below shows how these three inputs were added together (or subtracted…) to determine the total benefit to the economy.

CSIR_costs

 

Some things to note:

  1. the cost of unserved energy was based on the DoE’s IRP
  2. projects online were mostly for Round 1 – where tariffs were a lot higher than in subsequent rounds (see previous post on this here)
  3. projects came online throughout 2014, and were gradually commissioned throughout the year

At the time this report was issued, South Africa was aware that it was heading into an extended period of loadshedding and I know that load shedding intervals and levels have increased since I’ve been away.  With this in mind, and considering that 30% of the cost savings to the economy realised by renewables was as a result of RE projects being able to assist with capacity constraints, there was a lot of interest in continuing with this study into 2015.

Yesterday, the CSIR released a press statement indicating that the study has been updated for the first half of 2015.  I found this on the SAWEA site, which you can download here.  The same methodology was used, and some of the finding announced include:

  1. Fuel savings realised from renewables offsetting coal and diesel amount to around R3.6billion
  2. cash spent on renewables for the period comes to R4.3billion
  3. 203 hours of ‘unserved energy’ avoided equates to a benefit to the economy of R4.6billion.

The total benefit to the economy resulting from renewables is therefore around R4billion (R3.6b+R4.6b-R4.3b).

This is fantastic news for the renewables industry in South Africa.  A very positive message to come out of years of hard work and perseverance by all involved.

It is simultaneously a very sad indicator of the extent of load shedding being experienced that the value of renewables in avoiding unserved energy is now nearly 60% of the total benefit; double that from 2014.

REIPPPP Expedited Bid Submission RFP Part A, B & C key changes

This has probably being doing the rounds in South Africa since late last week, but for those that have not yet seen it:

Part A:

  • Expedited Bid Submission date 6 October 2015
  • “Returning Compliant Bidder” are exempt from submitting Land & Environmental sections:
    • if compliant in previous submissions
    • if using same Technology (i.e Onshore Wind)
    • same Contracted Capacity
    • intends to locate its Project on substantially the same Project Site
    • includes in its Bid Response, a completed Project Site scale drawing for its Project
    • submits a complete Appendix AA (Returning Compliant Bidder Declaration)
    • the Project layout may be different to what was previously submitted
  • Of the new 6300MW Third Determination that is due shortly, anticipated allocation:
    • Onshore Wind: 3000MW
    • CSP: 600MW
    • PV: 2200MW
    • Small hydro: 60MW
    • Biomass: 150MW
    • Biogas: 50MW
    • Landfill Gas: 40MW
    • Small projects: 200MW
  • MWs available for Expedited Bid Submission:
    • Onshore Wind: 650MW
    • CSP: 450MW
    • PV: 520MW
    • Small hydro: 40MW
    • Biomass: 100MW
    • Biogas: 25MW
    • Landfill Gas: 15MW
    • Small projects: 200MW
  • Following Expedited Bid Submission, if all MWs are allocated,  4700MW of the Third Determination will be available for future bid windows
  • Projects must be capable of beginning commercial operation before the end of 2019
  • Must be based on an estimated Financial Close date of mid-2016.
  • Price caps for onshore wind and solar photovoltaic have been re-introduced for the Expedited Bid Submission Phase.
    • Onshore Wind: R760/MWh (using a base date for CPI adjustment of 1 April 2015)
    • PV: R870/MWh
    • Only fully indexed price to be submitted.
  • Timetable
    • Last date for Registration of Interest (as per Briefing Note 23): 10 July 2015
    • Bid Registration Date: 08 September 2015
    • Last date for Department to issue Briefing Notes: 22 September 2015
    • Bid Submission Date: 06 October 2015
    • Preferred Bidder Announcement: 11 December 2015
    • Financial Close no later than: 31 July 2016
  • all shallow connection works will be completed on a self-build basis.
  • In the Expedited Bid Submission Phase any Bidder may include in its Bid Response, in addition to the time and cost estimate letter from the Grid Provider, an opinion from an independent engineer which confirms the feasibility of an alternative grid connection solution (“Grid Solution Opinion”) which could be applied in the event that the Bidder is a Competing Compliant Bidder.
  • Bidders should note that a decision by the Department to appoint them as Preferred Bidder on the basis of an alternative grid connection solution proposed by such Bidder, shall not entitle such Bidder to increase its Price, as a result thereof, at any stage in the procurement process.
  • If any Bidder includes in their Bid Response the involvement of any person: who is or who is Related to any other Government official or person with the ability to influence or to have influenced the decision of the Department with respect to the appointment of Preferred Bidders, such Bidder may, in the sole discretion of the Department, be disqualified.
  • Development Fee to be paid to Treasury (and not DoE)
  • Bid Response: a master and one hard copy

Part B:

Environmental Criteria

  • Provide a master and one hard copy of the FEIR

Financial Criteria

  • Equity finance requirements have been reduced:
  • No audited financial statement for last 3 fin years
  • No Letter of Confirmation of funds for Equity Finance
  • No net asset test or track record test
  • No Letter of Indicative Support from Alternative Funders

Technical Criteria

  • No compliance certificate for wind turbine model
  • No track record of contractor capability

Part C:

  • Only changes to cater for evaluation of fully indexed tariff only

[Thank you to Ian for sharing this with me]

New REIPPP announcement – summary of all projects to date

I have gone and updated the table based on the latest announcement of the additional 13 projects.  I have done the best I could to allocate the projects to the right province – but I may have got some wrong.  Especially where there is not an easy to find EIA.  If you have better intel, please let me know and I’ll update accordingly.  I’ve called this series of projects 4.0 in the absence of a better name.

REIPPP projects awarded rd 4

Via @imacza:

REIPPP Announcement

 

Edit 9th Sep 2016: some of the figures from rd 1 had changed.  Just picked this up.  Not sure why, or what happened to increase the overall allocation of this round from the numbers I previously had – but it now reflects all the projects shown on the various gov sites & docs.

What has been happening in renewable energy in South Africa? A summary for those not in the know.

Most of the people that I come across in my comings and goings are generally well read, informed and in touch with what’s happening in South Africa.  And yet, when I say I work in energy I am often met with a response of ‘why is South Africa looking at nuclear power but they’re doing nothing in renewable energy?’ or ‘we have so much sunlight, why does the South African government not do anything to make use of this?’  It surprises me that South Africa has done something so incredibly right and so incredibly well, and very few people seem to know about it.

Ladies and gentleman of the public – I present to you the Renewable Energy Independent Power Producer Procurement Programme, or REIPPPP.

I won’t launch into the long and tangled history of it, but some things that are important are:

  • It’s a procurement programme run by the Department of Energy
  • It seeks to appoint private sector power producers to develop, build, commission and operate renewable energy facilities
  • Power generated by these facilities is exported to Eskom’s grid, and Eskom pays a fixed tariff (adjusted for inflation) for a period of 20 years
  • Development, construction and operational risks are therefore transferred to the private sector, and government only pays for what is actually produced (excepting where Eskom is unable to provide the grid – but let’s ignore that for now)
  • There have been four procurement rounds to date since 2011.
  • 79 projects have been awarded, totaling 5.23GW of renewable energy power.

The figures below show how many of each technology type have been awarded in terms of number of projects, and overall installed capacity.

No projectsproject capacity

As you can see, the vast majority are wind or solar projects, and most of the solar projects are photovoltaic (that’s the type that you can install on your rooftop to generate electricity – not to be confused with solar water heaters – see here.)

So what does this mean?

  • Our national grid at the moment is in the region of 40GW. Most of this comes from coal, which can churn out electricity at all times, so it’s not quite right to compare this directly, but it gives you a sense of how big this procurement programme is, relative to what we already have installed.
  • Concentrated Solar Power (CSP) has the potential to store energy in the form of heat, which means that solar energy can be harnessed and used when it is convenient.
  • There is a lot of work going on in the area of battery storage at the moment. Big gains in this will mean that other renewable facilities can also become ‘dispatchable’ power stations, where energy is available when it is needed, not when the sun shines.
  • Throughout the four procurement rounds, one of the most phenomenal things that has been happening is that the tariff prices have been dropping, and dropping, and dropping. There’s more info on this here for you if you’d like some idea of the extent of this.  What this means is that renewables are becoming increasingly price competitive with other more traditional technologies.  It also means that when storage options are readily available and affordable the energy picture will be totally changed.  For now, renewables may not be painting over our coal heavy picture, but they’re certainly adding a different hue.
  • South Africa has done an incredible job. This is important to acknowledge.  Countries like Spain have got themselves into trouble with committing to excessive Feed in Tariffs.  REIPPPP is a competitive programme, meaning that the country is getting the best value possible.  While the initial tariffs in round one may seem excessively high, it took other countries around the world YEARS to get to what we’re seeing in round 4.  It’s held as an example as to how these types of programmes should be run, and is also being used as the basis for the procurement of other independent power producers, including coal.
  • There are a lot of people who care. Industry associations like SAPVIA and SAWEA are pushing for further renewables to be procured.  Municipalities are trying to get involved where they can on smaller scale projects.  NGO’s like Sustainable Energy Africa work with government to help with policy development and capacity building.  Others like WWF are there to keep pushing government, challenging assumptions and questioning the basis behind decisions made.
  • Seeing the successes that have been made in this programme, national government recently announced that they will be adding over 6GW of capacity to the renewables programme. This means that we will be more than doubling what we already have.
  • On the side of this all there is also a lot of work going into small scale, distributed installations, like those you see on rooftops. Demand for these small systems is increasing.

All in all it’s a very exciting time.

Renewable energy tariffs dropped again by over 25% – how low can we go?

An opinion piece by my fabulous colleague, Johannes Horstmann, Transaction Advisor, Arup Cape Town:

In a long awaited announcement, which attracted intense media attention, the South African Department of Energy recently published the list of preferred bidders for Round 4 of the Renewable Energy IPP Programme – 415MW of solar photovoltaic (PV) and 676MW of wind projects will now soon be constructed.

Favourably to the economy, electricity prices have again dropped significantly. PV generated electricity will cost on average R786/MWh, 29% cheaper in real terms than round 3 projects. Similarly, electricity generated by wind is priced at R619/MWh, a drop of about 25% in real terms. This followed the trend of Round 2 and 3 where prices already fell by 30-40% in each round for both technologies.

A hot topic for the market is now: how far can this go? How will bidders price their projects in the next tendering rounds 5 and 6?

From a pure time trend perspective, it seems as if PV prices could decrease further by some 19% and wind by 8% in real terms, as shown in the graphs below. Those tariffs would follow a nice statistical learning curve, but can the market deliver these price cuts?

PV & wind ave tariffs

Developers and financiers will review their projects with regards to development cost, EPC cost, cost of capital, O&M expenditure and potential energy yields on a case-by-case basis. However, the market is maturing and is becoming more and more competitive. The DOE received 77 bids in August 2014 and only awarded preferred bidder status to 13.

From market responses, transaction costs and return on equity have decreased and are starting to resemble international benchmarks more closely, as healthy competition is still inducing development efficiencies. Favourable project development locations are also becoming scarcer with incumbent projects having secured the best areas, limiting the potential to improve energy yields further. In addition, grid connection is now becoming more difficult, creating cost pressure for developers.

International learning rates (the level of cost reduction when doubling the capacity), estimated and published by institutions such as the IEA or IRENA, are currently between 18-22% for PV and between 5%-9% for onshore wind. These global trends and the capacities for the next bid windows could translate to levelling out bidding prices. PV tariffs could decrease by ‘only’ 6% that would just cancel out inflation effects.

Notwithstanding the above, this aligns with the IRP update report for Crystalline and Thin Film module costs (7% and 6% decrease per annum, respectively). Wind prices could fall by 3% in real terms or a slight first-time rise in nominal terms.

0000417342_resized_arupgraphs2

It is also worth benchmarking the South African practice with international markets. DEWA, the Dubai Electricity and Water Authority, announced in January this year a new world record for solar PV. It awarded a consortium, led by Saudi Arabian’s ACWA power, a 200MW project based in the UAE for not-yet-seen 5.84 USD-cents/kWh. Notwithstanding, the consortium has an advantage over the developers in South Africa – financing cost. The availability of a 27 years tenor for a loan of $344 million and a 4% interest rate are the biggest factors for the low bid.

To illustrate this, with a shorter tenor of 15 years, higher interest rates of 10% and amid higher inflation of 6% (as seen in the South African market), indicative modelling shows that ACWA power would have needed to bid with c7.2 USD-cents/kWh. This is interesting, because this is exactly the average PV price of the latest Round 4 projects, in 2014 USD terms.

In conclusion, based on the above observations, South Africa may now have reached global best-practice benchmarks and future prices may follow closer to those internationally observed market movements. These international learning rates may be much less than the cost reductions experienced in the past few years. Developers and financiers will follow these trends with great interest to inform their own future bidding strategies.

This projected change in trends should not be discouraging but rather be seen as a reflection of the positive development of the renewable energy programme in South Africa, and the positive impact the REIPPPP is having on the South African economy as a whole. A strong regulatory environment for renewables has led to this market confidence that increased competition and drew investors and project development companies to South Africa. It shows the achieved efficiency of the IPP programme and provides confidence for the prospects of new IPP programmes for coal and gas that are currently being implemented.

Arup is an independent firm of designers, planners, engineers and technical specialists that makes up the heart of the creative force of many of the world’s most prominent projects in the built environment and industry. Good planning is at the heart of regenerating cities, towns and rural areas to establish long-term social, economic and environmental sustainability. Its international network of inventive and highly skilled specialists marries global factors, such as climate change, with local needs to create strategies that are efficient, exciting and practical. For more information, go to www.arup.com/Global_locations/South_Africa.aspx.

REIPPP updated list of preferred bidders – up to bidding window four

I have updated the overall list of preferred bidders (previous post here) based on this morning’s DoE media announcement.

REIPPP_Round 4

Press release from the DoE found here: https://www.facebook.com/permalink.php?story_fbid=566339060135913&id=316555815114240

Big news items:

  • Financial close for Round 4 expected for Q4 this year
  • Additional capacity to be allocated to round 4.  Word on the street is that this is in the region of 1GW
  • Another 1.8GW may be allocated to an additional procurement round (Round 4.5).  This would be an expedited application process, open to bidders who were unsuccessful in previous rounds.  A good opportunity for developers to get returns on their development costs…
  • Round 5 due to be issued next year, with updates to the RFP
  • Finally, the DoE intends to apply for a further allocation of 6.3GW of RE capacity.

Bid day folks.  Big day.