Procurement models applied to IPP programmes in South Africa

August 27th, 2014, Published in Articles: EE Publishers, Articles: Energize, Featured: Energize

 

The Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) is largely viewed as a positive and innovative programme. We need a base-load procurement model that builds on the successes of the REIPPPP and extends these to base-load IPPs. Eskom’s future financial health presents a significant risk to procurement of renewables, thermal base-load and nuclear power. The contribution to socio-economic development should be extended to all other IPP procurement. There is significant risk that political considerations may override rational planning in relation to nuclear power. Procurement should be well-designed upfront, flexible, plans indicative, the regulator active and procurement more vibrantly competitive. 

This is an executive summary of a research report from the University of Cape Town’s Energy Research Centre.

Download the full report here

What is the procurement model in South Africa as it applies to renewable energy (RE) and base load (BL) independent power producer procurement programmes (IPPPP) and how might these be improved? What lessons have been learned in the REIPPPP? What challenges might the emerging BL IPPP programme face and how might these challenges be addressed? To what extent are lessons from RE applicable to BL?

This research paper provides conclusions from consideration of these questions, shares research findings, highlights remaining critical questions, and provides recommendations for the future.

Procurement is an aspect of governance, and improved governance is one of five goals of energy policy, as outlined in the 1998 White Paper, which considers procurement as “that step within planning during which government determines what is to be built; and which ends with the announcement of preferred bidder(s)”.

Research findings are based on primary data gathered through a literature review followed by interviews with 20 senior respondents from the following zones within the energy sector: government, business, investment, consultancy and advisory, labour and NGOs. A listing of secondary literature consulted is provided on the final pages of this report.

Based on analysis of interviews and literature, this study finds that the key successes in South Africa’s RE IPP Procurement Programme (REIPPPP) are, in summary:

  • The transparency of the process and decisions reached
  • Learning and improvement of the procurement process through multiple bidding rounds
  • Flexibility in relation to process and policy
  • The role of the IPP unit, the partnership between Treasury and DOE and the relative independence of the unit
  • Sound design and trusted expertise
  • Stimulating competition, which drove down prices significantly
  • Speedy conclusion of evaluation of bids
  • High-level political support
  • Relative independence of the IPP procurement unit
  • Tough but achievable Socio Economic Development and Enterprise Development (SED and ED) criteria

Key challenges of the REIPPPP were noted as:

  • Eskom as single buyer
  • Ministerial powers
  • Uncertainty whether RE can yet be deemed to have changed the sector overall
  • Risk of failure to implement and monitor SED and ED criteria
  • Local legal and technical capacity are limited
  • Transmission constraints which may negatively impact grid connection

Overall, the REIPPPP is viewed by many respondents as a positive and innovative programme. Caution is mainly expressed in relation to the long-term prospects for benefits that really accrue to South Africa’s development agenda.

Next we analysed South Africa’s emerging BL IPPP programme. Given that we do not yet have sufficient information on the emerging BL IPP procurement model, we have limited the section on BL IPPPP to what is currently known, hoped for and questioned.

These are some of the main concerns expressed by interviewed respondents in relation to the emerging BL IPPPP:

  • There is no clearly stated procurement model, and publicly available information following the 2012 Ministerial determination remains limited
  • The REIPPPP has revealed that we have limited local capacity to manage complex transactions, and this is expected to be further stretched in larger, more complex BL IPP procurement
  • The devil is in the (dispatch) detail – the content of power purchase agreements will be key to viability of this programme
  • The mandates of ministers concerned with base load supply may potentially be in conflict
  • Large energy deals generally have a higher risk of rent-seeking, which needs to be carefully managed
  • Managing this is exacerbated by high transaction costs and strains on domestic financial resources

A key finding is that Eskom’s future financial health presents a significant risk to both RE and BL IPPPPs.

The paper then pauses in its analysis of RE and BL IPPPPs to consider nuclear procurement, which is treated as a “special case” – nuclear procurement is excluded from new generation regulations and its model of ministerial determination. Given the geopolitical dynamics around nuclear power, it is feared by many respondents that political considerations may override rational planning. This seems inappropriate for a technology facing particular challenges and risks (in addition to the financial challenges that all investments face).

The study concludes with questions and recommendations for the future. It is proposed that a procurement model in South Africa should:

  • Build on the successes of the RE IPPPP as many of these are transferable
  • Be transparent and enhance accountability, being well-defined for all energy technologies, upfront
  • Be flexible, indicative of plans and vibrantly competitive resulting in lower tariffs but not at the cost of SED and ED criteria weighting
  • Continue the role of the IPP unit, enhance domestic capacity for transaction advice and ensure watertight power purchase agreements that are not solely subject to the priorities of the system operator
  • Extend the contribution to socio-economic development to all procurement, with the possibility of applying different price/non-price ratios
  • Include an active role for the regulator, and limit the role of the minister to the highest level of policy development
  • Consider the large scale of BL IPP procurement, and explicitly manage the risk of rentseeking
  • Seek to avoid politicisation of large investment, including that of nuclear power

This is an executive summary of a research report from the University of Cape Town’s Energy Research Centre.

Download the full report here

This executive summary was originally published in the Research Report Series by the University of Cape Town’s Energy Research Centre, and is republished here with permission.

Contact Brenda Martin or Harald Winkler, University of Cape Town, Tel 021 650-2521, erc@erc.uct.ac.za

 

 

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