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.

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.


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.



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]

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.


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

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:

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.

A nice summary of REIPPP Round 4 preferred bidders

Done, I believe, by ED Consulting.  I haven’t seen any formal announcements, but the ferreting fairies have been working hard since the letters were issued.

Well done to all who have been successful thus far.  We wait with bated breath for any further announcements.  I have heard rumours of expectations of a Round 4.5 being announced on Friday…

REIPPP_Round 4

When the formal announcement from the DoE comes out I will update the table of all preferred bidders and reissue to all who’d like it.

Summary of projects under the South African renewable energy independent power producer procurement programme

I am constantly looking for a summary of what has been awarded under the three (and a half) REIPPP rounds to date, and so thought I would put this on here, for my records as much as for your information.  I figure if I’m looking for it, someone else must be too.

Email me at vivi at if you'd like this in table format
REIPPP Preferred bidders up to round 3.5

If you’d like a table version of the project and capacity summary, please drop me an email on