The Emerging Shape and Size of the Renewables Sector and some Implications for development in parts of rural South Africa

March 22nd, 2013, Published in Articles: Energize

The Emerging Shape and Size of the Renewables Sector and some Implications for development in parts of rural South Africa

Brief Introduction to the Renewable Energy Sector in South Africa

The development of renewable energy power plants in South Africa is premised on a Public Private Partnership model using a competitive procurement process. This is known as the Renewable Energy Independent Producer Procurement Programme (REIPPP).  Potential bidders submit their proposals in terms of a Request for Particulars (RFP) developed by the Department of Energy. It is envisaged that electricity from renewable sources will account for 42% of all new power plants built in the future. The first part of REIPPP seeks to procure a total of 3 725 MW of generating capacity from renewable energy sources in roughly 3 bidding windows. Thereafter, it is now clear that each subsequent year will see a further 1 000 MW being allocated in annual bidding rounds.  This aligns with the Integrated Development Plan (IDP 2010) dealing with energy procurement which says that 42% of all new sources of electricity should be from renewable sources and that at the end of the period covered in the IDP2010, renewable energy will constitute 9% of South Africa’s total generating capacity. In the broadest terms, this is how the REIPPP works:

  • Developers go out and find the best sites for their particular technology and secure them.

  • Having done so, these developers set about measuring the “resource” and also undertake comprehensive environmental impact assessments.

  • Provisional agreements with Eskom for the feed-in need to be concluded.

  • Later in the process, the shareholding mix (counter parties), the chosen engineering procurement and construction as well as the operations and maintenance partners are chosen.

  • Nersa licences are issued and inter-connect and Power Purchase Agreements are signed

  • Crucially, all the funding and debt arrangements are secured prior to reaching financial close as well as implementation agreements with the Department of Energy.

Bids are assessed on the basis of 70% being allocated to price and 30% to other factors such as local procurement, black economic empowerment, skills development, job creation, enterprise development, socio-economic development and the like. Winning a bid entitles the project concerned to enter into a 20 year agreement to supply electricity to the national grid at the tariff bid by the project and have this tariff escalate annually by inflation.

An Overview of the REIPPP to Date

Of the three bidding windows in the initial 2011-2013 phase of the REIPPP, one window has reached financial close and the second window is due to close in March 2013.  There have been several delays. Financial close for the first round was scheduled to take place between 9 and 20 July 2012, but it was postponed several times. There were several reasons for this notably the difficulty in finalizing certain guarantees required from Eskom to protect the Independent Power Producers in the event of Eskom’s default.  The delays in finalising the financial close of the first round have resulted, via a knock-on effect, in delays in the subsequent rounds. Round 2 preferred bidders are due to reach financial close this month and the closing dates for submission of round 3 bids, originally scheduled for October 2012 has now moved to August 2013.  There is a good reason for the delays. The REIPPP model relies on competitive bidding. The more competing participants in each bidding round, the lower the tariffs bid by participants are likely to be.

It would be fair to say that the first round saw everyone involved learning what needs to be done to reach financial close. Having reached financial close for the first round bidders, there is a renewed confidence in the REIPPP itself.  Round 1 and 2 represents more than 42 projects. The size of the investment is huge – by the end of the 3rd bidding window, it is envisaged that the total capital investment then required will be in the region of R75 billion. Up to 75% of this is secured via senior debt from local banks. Further funding for BEE and local community participants has been provided by various agencies such as the DBSA, the IDC, the NEF and also the PIC. As the feed in tariff secured by closed projects is in South African Rands, it follows that senior debt must be secured from local banks and capital markets. The RFP also stipulates this as a condition of participation.

Implications for Socio Economic and Enterprise Development in Rural South Africa

Almost all of the renewable energy plants will be located outside the urban areas.  Solar PV development is concentrated in and around the hot Northern Cape where the seemingly endless sunny days without rain or cloud cover, once a constraint to development, becomes an exploitable resource.  Onshore wind projects are to be distributed around the west coast, some in the Southern Cape but the biggest proportion in the Eastern Cape.  (Maps Attached).  This is important because many of the projects will be located in the poorest and most under-developed parts of our country. For the most part, these power plants will be the biggest investment investments that these areas have ever seen.

The RFP calls for contributions by projects bidding to commit to Socio-Economic Development (SED) and Enterprise Development (ED) up to a limit of 1.5% for SED and 0.6% for ED of gross revenues generated by the project once the power plant is constructed.  The greatest recognition for SED and ED spend is that spent within the local community where the power plant is to be constructed (defined as communities located within a 50km radius of the proposed power plant).  This is a serious commitment besides the obligation to report on a quarterly basis, they will be required to keep monthly records and provide proof to substantiate claims in relation to reporting on SED and ED expenditure. How big is this expenditure likely to be? Based on the tariffs and capacity allocated, it is possible to do a rough calculation based on the capacity licensed and the tariffs granted in the first two bidding rounds. On the assumption of a 1% of revenues SED commitment and a 0,6% ED commitment, aggregate is that the sector has already committed can be as high as R105 million per annum. The next bidding round due to be completed later this year will have lower tariffs but could add possibly another R25 million per annum. At this level of commitment, the sector will need to professionalise their corporate social investment capacity if this funding is to be spent wisely and in compliance with the requirements of the RFP.

In South Africa most rural towns are characterised by high levels of poverty, the outmigration of skilled people and a gradual decline in economic activity, a situation made worse by ineffective local governments. These areas show increasing impoverishment and increasing poverty rates. A good part of the reason for this is the decline of the agricultural industry. The response to this decline is also worrying: a large percentage of rural South Africa now survives off welfare grants and state pensions. The economically active population is increasingly employed in the community services sector – this raises questions about sustainability. It does illustrate need for effective development interventions.

However, the development along with a lack of skilled people and resources makes development hard to do.  Local governments are constrained by a lack of finance and capacity which raise questions over their ability to implement local economic development initiatives.  Yet international research shows that some development interventions can be successful. Successful interventions share some characteristics – they are generally driven by the private sector and are well structured. Interventions also require the presence of strong leadership and the involvement of the local community itself in the planning and initiating of the project and a strong emphasis on long-term planning.  All this points to SED and ED interventions mandated by the REIPPPP to be run professionally by specialists who know and understand the issues.  This expertise exists within the NGO sector. Rural South Africa is not well serviced by the NGO sector – lack of funding has and remains the critical issue.  The ambitions to turn things around in local communities where renewable power plants will be located should be tempered. The backlogs are just too big – but if the injection of SED and ED funds is done properly, they have the potential to assist the populations in these small, marginalised localities

Summary of SED/ED Calculations

Projects that bid in terms of the RFP are also, in respect of SED and ED obligations, required to propose a reporting mechanism which must include the actual quarterly obligations over the life of the Project and the quantum of such obligations. Further, although the reporting obligations are on a quarterly basis, they will be required to keep monthly records and provide proof to substantiate claims in relation to reporting.

Based on this and on the fact that preferred bidder projects would have committed for SED and ED at 1% and 0.6% respectively, one can derive the following rough budgets:

Table 1:
Summary of SED/ED Calculations

Projects that bid in terms of the RFP are also, in respect of SED and ED obligations, required to propose a reporting mechanism which must include the actual quarterly obligations over the life of the Project and the quantum of such obligations. Further, although the reporting obligations are on a quarterly basis, they will be required to keep monthly records and provide proof to substantiate claims in relation to reporting.

Based on this and on the fact that preferred bidder projects would have committed for SED and ED at 1% and 0.6% respectively, one can derive the following rough budgets:

Table 2:

Solar PV Window 1 Annual Spend per MW Window 2 Annual Spend per MW Total
SED Spend (1%)(ZAR ‘000) (Year 1) R29 441 R46.583 R11 655 R27.949 R41 106
ED Spend (0.6%) (ZAR ‘000) (Year 1) R17 665 R27.590 R6 993 R16.769 R24 658
Totals R47 106 R74.173 R18 648 R44.718 R65 764

This is significant. The aggregate is that the sector has already committed is a minimum figure of R105 million per annum for both SED and ED spend. In the construction phase of the projects, much of the ED spend will be absorbed in activities relating to the projects themselves. The falling revenues per MW of capacity will see future licensing rounds generate slightly less SED and ED spend but this fall is unlikely to be more than 20% less. At this level of commitment, the sector will need to professionalise their corporate social investment capacity if this funding is to be spent wisely and in compliance with the requirements of the RFP.

Table 3:

Summary of Calculation of Revenues from Onshore Wind

 Window 1 Window 2 Window 3 Comment
Energy Yield    
Efficiency of converting wind energy into grid electricity    One needs to calculate the rotational kinetic power produced in a wind turbine at its rated wind speed. Different sizes of turbines are used for different wind speeds. Against this data different turbine sizes are selected for the site.  The Betz Limit/Law shows that no wind turbine can convert more than 16/27 (59.3%) of the kinetic energy of the wind into mechanical energy turning a rotor. This is called the “power coefficient”.  Once one incorporates various engineering requirements of a wind turbine – the real world limit is well below the Betz Limit. By the time we take into account the other factors in a complete wind turbine system – e.g. the gearbox, bearings, and generator and so on – only 15-30% of the power of the wind is ever actually converted into usable electricity. Power ratings of wind turbines are quoted after these losses
Wind Availability Factor Figures P50/P90 32% 32% 32% Figures are obtained through careful measurement over a period of time. The wind availability factor measures the amount of time that minimum wind speed at which a wind turbine produces its rated power blows. This is therefore the measurement of the average yearly sum of usable wind resource. So, this is the actual energy yield of the wind at the point where rotational kinetic power produced by a wind turbine at its rated wind speed (i.e. the minimum wind speed at which a wind turbine produces its rated power). Provision for downtime, maintenance transmission downtime and other contingencies is calculated in with this figure. P50 is the mean expected outcome
P50/P90 (P90 selected) 25% 25% 25% P90 is a probability measurement which means that there is a 90% chance that the P50 is the measured average probability. P90 will be exceeded 90% of the time. The lower rate of P90 is used. There is seasonal variation and the figure is a net annual figure.
Power Generation Assumptions    
Total Plant capacity 634MW 563MW  This is the total maximum potential generation capacity allocated via the bidding windows.
Power Generation Calculations    
Annual Gross Energy Production (MWh) 1 777 229 1 232 970  This is a figure expressed in Megawatt hours is derived from multiplying: A. total plant capacity (MW)  B. 365 days a year; C. 24hour a day and Wind Availability  Factor to give Net figure of total energy produced and delivered to the grid representing the amount used for the calculation of revenues from agreed tariffs.
Revenue Assumptions    
Average Tariffs  1.14 0.89  These are the average tariffs for all IPP’s as published by the Department of energy
Gross Revenues (ZAR ‘000) R2 026 041 R1 097 343  This is the total gross revenues across the IPP’s
SED Spend (1%)(ZAR ‘000) R20 260 R10 973  Using total gross revenues to the IPP’s and based on a contribution of 1% of gross revenues
ED Spend (0.6%) (ZAR ‘000) R12 156 R6 584  Using total gross revenues to the IPP’s and based on a contribution of 0,6% of gross revenues

Table 4:

Summary of Calculation of Revenues from Solar PV

 Window 1 Window 2 Window 3 Comment
Energy Yield    
Global Irradiation Figures (P50) 1900 1900 1900 This is the measurement of the average yearly sum of global irradiation, h, that hits the PV module in its specific location. Figures are obtained from an irradiance map through careful measurement. It is measured in [kWh/m2]. SA has some of the best global irradiance in the world
P50/P90 (P90 selected) 1780 1780 1780 P90 is a probability measurement which means that there is a 90% chance that the actual energy yield figure (Global Irradiance) will be exceeded 90% of the time. P50 is the measured average probability.
Power Generation Assumptions    
Total Plant capacity 632MW 417MW  This is the total maximum potential generation capacity allocated via the bidding windows
Estimated output after all System Losses (also called Gross Capacity)  20.44% 20.44% 20.44% The outcome represents all the energy losses occurring at every step of the way before the electricity is actually delivered to the grid is expressed in percentage terms. Starting with the intensity of the incoming light (i.e. the energy that is actually available to the system), there are three major blocks of energy losses:
1. Pre-photovoltaic losses: Attenuation of the incoming light though shading, dirt, snow and reflection before it hits the photovoltaic material..
2. Module and thermal losses: Reflecting the efficiency and temperature dependence of the solar module
3. System losses: Reflecting losses in the electrical components including wiring, inverters and transformers. 
Power Generation Calculations    
Annual Maximum Energy Production (MW/h) 5 536 320 3 652 920  This is a figure expressed in Megawatt hours is derived from multiplying: A. total plant capacity (MW)  B. 365 days a year and C. 24hour a day to give total potential power output 
Annual Gross Energy Production (MW/h) 1 131 778 746 759  This figure is derived from multiplying the Annual Maximum Energy Production by the Gross Capacity Figure
Provision for downtime, maintenance transmission downtime and others 5.4% 

5.4% 

5.4% This is a figure which makes provision for plant downtime possible maintenance transmission downtime, degradation and other contingencies – it is included in the financial models of all developers
Annual Net Generation (MWh) 1 070 600 
706 393   Net figure of total energy produced and delivered to the grid representing the amount used for the calculation of revenues from agreed tariffs.
Revenue Assumptions    
Average Tariffs  2.75 1.65  These are the average tariffs for all IPP’s as published by the Department of energy
Gross Revenues (ZAR ‘000) R2 944 149 R1 165 548  This is the total gross revenues across the IPP’s
SED Spend (1%)(ZAR ‘000) R29 441 R11 655  Using total gross revenues to the IPP’s and based on a contribution of 1% of gross revenues
ED Spend (0.6%) (ZAR ‘000) R17 665 R6 993  Using total gross revenues to the IPP’s and based on a contribution of 0.6% of gross revenues

Contact Dirk de Vos, QED Solutions, Tel 021 426-4590, ddevos@quedsolutions.co.za