SA’s renewable energy IPP procurement programme: Success factors and lessons

June 9th, 2014, Published in Articles: Energize

 

This is an Executive Summary of the World Bank report

Download the full World Bank report here

South Africa occupies a central position in the global debate regarding the most effective policy instruments to accelerate and sustain private investment in renewable energy. In 2009, the government began exploring feed-in tariffs (FITs) for renewable energy, but these were later rejected in favour of competitive tenders. The resulting programme, now known as the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), has successfully channelled substantial private sector expertise and investment into grid-connected renewable energy in South Africa at competitive prices.

To date, a total of 64 projects have been awarded to the private sector, and the first projects are already on line. Private sector investment totalling US$14-billion has been committed, and these projects will generate 3922 MW of renewable power. Prices have dropped over the three bidding phases with average solar photovoltaic (PV) tariffs decreasing by 68% and wind dropping by 42%, in nominal terms. Most impressively, these achievements all occurred over a two-and-a-half year period. Finally, there have been notable improvements in the economic development commitments, primarily benefiting rural communities. One investor characterised the REIPPPP as “the most successful public-private partnership in Africa in the last 20 years.” Important lessons can be learned for both South Africa and other emerging markets contemplating investments in renewables and other critical infrastructure investments.

The bidding process and the results

In August 2011, an initial request for proposals (RFP) was issued, and a compulsory bidder’s conference was held with over 300 organisations attending. By November 2011, 53 bids for 2128 MW of power generating capacity were received. Ultimately 28 preferred bidders were selected offering 1416 MW for a total investment of close to US$6-billion. Major contractual agreements were signed on 5 November 2012, with most projects reaching full financial close shortly thereafter. Construction on all of these projects has commenced with the first project coming on line in November 2013. A second round of bidding was announced in November 2011. The total amount of power to be acquired was reduced, and other changes were made to tighten the procurement process and increase competition. Seventy-nine bids for 3233 MW were received in March 2012, and19 bids were ultimately selected. Prices were more competitive, and bidders also offered better local content terms. Implementation, power purchase and direct agreements were signed for all 19 projects in May 2013. A third round of bidding commenced in the same month, and again, the total capacity offered was restricted.

In August 2013, 93 bids were received totaling 6023 MW. Seventeen preferred bidders were notified in October 2013 totaling 1456 MW. Prices fell further in round three. Local content again increased, and financial closure is expected in July 2014. A fourth round of bidding was set to commence in August 2014. The first three bid rounds attracted a wide variety of domestic and international project developers, sponsors and equity shareholders. The 64 successful projects involved over a 100 different shareholder entities, 46 of these in more than one project. Banks, insurers, development finance institutions (DFIs) and even international utilities have all participated in the programme. The most common financing structure has been project finance, although about a third of the projects in the third round used corporate financing arrangements. The majority of debt funding has been from commercial banks (R57-billion) with the balance from DFIs (R27,8-billion), and pension and insurance funds (R4,7-billion). Eighty-six percent of debt has been raised from within South Africa, and debt tenors typically extend 15 to 17 years from commercial date of operation (COD). Spreads over JIBAR are between 350 and 400 basis points.

Key success factors and challenges

The REIPPPP’s success factors, shortcomings and risks can be organised under three general headings:

  • Programme management factors
  • Programme design factors
  • Market factors

Programme management factors

In terms of programme management factors, the largely ad hoc institutional status of the Department of Energy (DoE) Independent Power Producer (IPP) unit allowed an approach which emphasised problem solving, rather than enforcement of administrative arrangements, and did not undermine quality or transparency. The DoE IPP management team and the team leader had extensive experience, PPP expertise, and credibility with both public and private sector stakeholders. This team was also able to overcome some of the mistrust of private business that sometimes restricts the public-private dialogue in South Africa and secured resources to implement a quality programme. These resources were used to appoint experienced advisors who were able to transfer international best practice into the South Africa context. Despite these successes, the ad-hoc status of the DoE IPP unit poses some risks. For this procurement process to be sustainable, institutional capability will need to be built within a formal institution, preferably a future independent system and market operator.

Programme design factors

The initial design of the REIPPPP was built to some extent on the lessons of an earlier, unsuccessful effort which used feed-in tariffs and has evolved over the three rounds of bidding. The programme offered a quick way to roll out new generating capacity, and the size and structure of the bidding process meant that there would be multiple bid winners, an important incentive for the private sector to participate. It also represented opportunities for developers to make reasonable profits due to the link to the “REFIT-like” tariff caps in Round 1. The shift to competitive tendering subsequently helped tariffs come down sharply over the next two rounds. The rolling series of bidding with substantial capacity allocations also helped build confidence in the programme. Certain exemptions from some of the national PPP regulations, and the provisions of the Preferential Procurement Policy Framework Act also assisted in fast-tracking the programme, without negatively impacting transparency or quality. Furthermore, the requirement that bids be fully underwritten with debt, as well as equity, effectively eliminated the tendency of competitive tenders to incentivise under-bidding (or “low-balling”) to win contracts. While some of the programme’s economic development requirements have been controversial, they did generate critical political support for the programme.

Market factors

There were also some design shortcomings and the size and readiness of the local renewable energy market were initially overestimated. This resulted in limited competition in Round 1, with bids close to the price caps that were specified in the tender. Some critics also argue that the programme’s significant upfront administrative requirements and high bid costs have contributed to higher prices than in other countries, such as Brazil, and also serve as a bias against small and medium scale entrepreneurs (SMEs). While the latter critique may have some merit, it should be noted that bid costs were nevertheless tiny in relation to overall project values. In terms of important market factors impacting the programme, the global slow-down in OECD renewable energy markets meant that the programme was able to attract considerable attention from the international private sector. It also benefited South Africa’s sophisticated capital market, which offered long-term project finance. The array of sophisticated advisory services was also critical to the design and management of the programme.

Global lessons learned

The South African experience suggests several key lessons for successful renewable energy programmes in other emerging markets. For example, it’s evident that private sponsors and financiers are more than willing to invest in renewable energy if the procurement process is well designed and transparent, transactions have reasonable levels of profitability, and key risks are mitigated by government. Renewable energy costs are falling and technologies such as wind turbines are becoming competitive with alternatives. Furthermore, renewable energy procurement programmes have the potential to leverage local social and economic development. The programme also highlights the need for effective champions with the credibility to interact convincingly with senior government officials, effectively explain it to stakeholders, and communicate and negotiate with the private sector. Finally, it demonstrates that whether a FIT or competitive tender is chosen, private sector project developers need a clear procurement framework within which to invest.

The above is an Executive Summary of the World Bank report.

Download the full World Bank report here

This summary was originally published by the Public-Private Infrastructure Advisory Facility (PPIAF) and is republished here with permission.

Contact Prof. Anton Eberhard, University of Cape Town, Tel 021 406-1362, anton.eberhard@gsb.uct.ac.za

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