May 2014 South Africa’s Renewable Energy IPP Procurement ... · private investment in renewable...

South Africa’s Renewable Energy IPP Procurement Program:

Success Factors and Lessons

May 2014

Anton Eberhard, University of Cape TownJoel Kolker, World Bank Institute

James Leigland, Private Infrastructure Development Group

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LargerSection titLe1

© 2014 Public-Private Infrastructure Advisory Facility (PPIAF)1818 H Street, NWWashington, DC 20433www.ppiaf.orgE-mail: [email protected] The findings, interpretations, and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the Public-Private Infrastructure Advisory Facility (PPIAF) or to The World Bank Group, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent.

Neither PPIAF nor The World Bank Group guarantees the accuracy of the data included in this publication or accepts responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this report do not imply on the part of PPIAF or The World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. For questions about this publication or information about ordering more copies, please refer to the PPIAF website or contact PPIAF by email at the address above.

Rights and Permissions The material in this work is subject to copyright. Because PPIAF and The World Bank Group encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes, as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected]. Cover photos: Left, Photograph taken during construction of Hopefield Wind Farm (66MW), Western Cape. Courtesy of Umoya Energy (RF) (Pty) Ltd.; right, Kalkbult. Eric Miller for Scatec.Cover design: TM Design, Inc.

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Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1 . From Feed-in Tariffs to Competitive Tenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 1.1 SouthAfrica’selectricitysupplysystem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 1.2 ElectricityplanningandpreviousattemptstointroduceIPPs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 1.3 Renewableenergypolicy...............................................................................................6 1.4 FromREFITtoREIPPPP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 2 . Government Design and Management of the REIPPPP Tender Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 2.1 Institutionalsetting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 2.2 TheREIPPPPmanagementteam.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 2.3 Managementstyle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 2.4 Programresources.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.5 Tenderdesignandbidprocess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.6 Bidevaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

3 . Tender Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 3.1 Round1outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.2 Round2outcomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.3 Round3outcomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.4 PlansforRound4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.5 Rounds1-3:Competitionandpricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4 . Key Private Sector Actors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 4.1 Projectsponsors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.2 Financiers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3 Engineering,ProcurementandConstruction(EPC)contractorsandequipmentsuppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 5 . Trade-offs Between Prices and Economic Development Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.1 Economicdevelopmentrequirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 5.2 Economicdevelopment:criticismandcontroversy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.1.1 Jobcreation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.2.2 Ownership/jobsvs.capacitybuilding.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.2.3 Manufacturing..................................................................................... . . . . . . . . . . . 28 5.2.4 Enterpriseandsocio-economicdevelopment...................................................... . . . . . . . . . . . . . . . 29

6 . Key Success Factors, Shortcomings and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.1 Programmanagementfactors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.1.1 Politicalsupport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.1.2 Institutionalsetting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.1.3 TheREIPPPPmanagementteam. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.1.4 Managementstyle............................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.1.5 Programresources........................................................................... . . . . . . . . . . . . . . . . . . . 31 6.1.6 Qualityoftransactionadvice.................................................................. . . . . . . . . . . . . . . . . . . . 31 6.1.7 Programmanagementshortcomings................................................................... . . . . . . . . . . 31 6.1.8 Programmanagementrisksgoingforward........................................................ . . . . . . . . . . . . . . . . 31 6.2 Programdesignfactors.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 6.2.1 Acceleratedroll-outofnewgeneratingcapacity................................................ . . . . . . . . . . . . . . . . . . .32 6.2.2Programsize.......................................................................................... . . . . . . . . . .32 6.2.3Potentialprojectprofitability................................................................ . . . . . . . . . . . . . . . . . . . . 32 6.2.4TheshiftfromFITstocompetitivetenders.................................................. . . . . . . . . . . . . . . . . . . . . . .32 6.2.5 Multiplebiddingrounds.......................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

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TABLE OF CONTENTS

6.2.6ExemptionfromPPPregulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 6.2.7Non-negotiableprogramcharacteristics........................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 6.2.8Economicdevelopmentrequirements............................................................. . . . . . . . . . . . . . . . .33 6.2.9Sovereignguarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 6.2.10Programdesignshortcomings.............................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 6.211Programdesignrisksgoingforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 6.3 Marketfactors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 6.3.1Globalsupplyanddemandofrenewableenergy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 6.3.2DonorandMultilateralDevelopmentBanksupportforrenewables.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 6.3.3TheSouthAfricanbankingsector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.3.4Otheradvisoryservices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.3.5Marketshortcomings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.3.6Marketrisksgoingforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

7 . Lessons for Other developing countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 7.1 Adoptabusiness-friendlyapproach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 7.2 Takeadvantageofexternalsourcesoffunding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 7.3 Makeacaseforrenewableenergy(…andkeepmakingit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 7.4 Findaprogramchampion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 7.5 Identifyaprogramdesignthatsuitscountrycircumstances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 7.6 Ensurequalityprocurementandcontractingdocumentationandprocessesareinplace.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

8 . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Appendix1:Eskom’spowerstations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Appendix2:SouthAfricanIntegratedResourcePlan2010-30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Appendix3:REIPPPPEconomicDevelopmentObjectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Appendix4:REIPPPPEconomicDevelopmentScoringCategories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Appendix5:REIPPPPProjects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

BoxesBox1:REIPPPPEvaluationConsultants..........................................................................................10

FiguresFigure1:AverageNominalandRealEskomElectricityPrices(Usc/Kwh)(ExchangeRateZAR10/USD)................................5Figure2:ProminentShareholdersinREIPPPPWindows1,2&3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Figure3:ShareofDebtFinancinginREIPPPPRounds1,2&3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Figure4:ShareofInitialDebtProvidersinREIPPPP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21Figure5:MajorDebtProvidersinREIPPPPRounds1,2&3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22Figure6:MainWindandPVEquipmentSuppliersinREIPPPPRounds1,2&3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

TablesTable1:REFITandREIPPPPprices...............................................................................................8Table2:SummarizedResultsforREIPPPPWindows1,2,and3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Table3:REIPPPPAverageBidPrices(2011SAc/kW). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Table4:REIPPPPLocalContentScoringRequirementsandResults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Table5:REIPPPPEconomicDevelopmentOutcomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

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ACKNOWLEDGEMENTS

Acknowledgements

TheauthorsareindebtedtotheDOEIPPteamforprovidingdetailedbackgroundandaccesstosubstantialamountsofinformation.Theteam,ledbyKarenBreytenbach,dedicatedhourstoextensiveinterviewsandqueries.TheSouthAfricaDepartmentofEnergyandtheNationalTreasuryalsoprovidedvaluableinputs.Anumberofprivatesectorplayers,financiersandoperatorsalsosharedtheirinsightsandviewsontheREIPPPPprogram.

SeveralWorldBankcolleaguesprovidedpeerreviews,includingLuizMaurer,InternationalFinanceCorporation;KaranCapoor,AfricaEnergyUnit;andSatheeshSundarajan,PublicPrivateInfrastructureAdvisoryFacility(PPIAF).PPIAFalsogenerouslyprovidedfinancialsupportforthestudy.MarkPickering,AndrewDonaldson,KatharineGratwick,RosalindThomas,HolleLinneaWolkas,SarahStands,MikeFitzpatrickandPaulWroblickiprovidedinsightsandreviews.

Finally,anyerrorscontainedinthedocumentaresolelytheresponsiblyoftheauthors.

ACKNOWLEDGEMENTS

iv

ABBrEvIATIONS

ABBrEvIATIONS

BEE BlackEconomicEmpowerment

BBBEE Broad-BasedBlackEconomicEmpowermentActof2003

COD CommercialOperationDate

COP ConferenceofParties

CSP ConcentratedSolarPower

DA DirectAgreement

DBSA DevelopmentBankofSouthernAfrica

DFI DevelopmentFinanceInstitution

DOE DepartmentofEnergy

EIB EuropeanInvestmentBank

FITs Feed-inTariffs

IA ImplementationAgreement

IFC InternationalFinanceCorporation

IPPs IndependentPowerProducers

MDB MultilateralDevelopmentBanks

MOA MemorandumofAgreement

MW Megawatt

NERSA NationalEnergyRegulatorofSouthAfrica

OECD OrganizationofEconomicCooperationandDevelopment

OPIC OverseasPrivateInvestmentCorporation

PPA PowerPurchaseAgreement

PPP Public-PrivatePartnerships

PPPFA PreferentialProcurementPolicyFrameworkAct

PV Photovoltaic

REFIT RenewableEnergyFeed-inTariffs

REIPPPP RenewableEnergyIndependentPowerProjectProcurementProgram

RFP RequestforProposals

VfM ValueforMoney

1

ExECUTIvE SUMMAry

ExECUTIvE SUMMAry

Executive Summary

Overview

SouthAfricaoccupiesacentralpositionintheglobaldebateregardingthemosteffectivepolicyinstrumentstoaccelerateandsustainprivateinvestmentinrenewableenergy.In2009,thegovernmentbeganexploringfeed-intariffs(FITs)forrenewableenergy,butthesewerelaterrejectedinfavorofcompetitivetenders.Theresultingprogram,nowknownastheRenewableEnergyIndependentPowerProducerProcurementProgram(REIPPPP),hassuccessfullychanneledsubstantialprivatesectorexpertiseandinvestmentintogrid-connectedrenewableenergyinSouthAfricaatcompetitiveprices.

Todate,atotalof64projectshavebeenawardedtotheprivatesector,andthefirstprojectsarealreadyonline.PrivatesectorinvestmenttotalingUS$14billionhasbeencommitted,andtheseprojectswillgenerate3922megawatt(MW)ofrenewablepower.Priceshavedroppedoverthethreebiddingphaseswithaveragesolarphotovoltaic(PV)tariffsdecreasingby68percentandwinddroppingby42percent,innominalterms.Mostimpressively,theseachievementsalloccurredoveratwo-and-a-halfyearperiod.Finally,therehavebeennotableimprovementsintheeconomicdevelopmentcommitments,primarilybenefitingruralcommunities.OneinvestorcharacterizedREIPPPPas“themostsuccessfulpublic-privatepartnershipinAfricainthelast20years.”ImportantlessonscanbelearnedforbothSouthAfricaandotheremergingmarketscontemplatinginvestmentsinrenewablesandothercriticalinfrastructureinvestments.

The Bidding PrOcess and The resulTs

InAugust2011,aninitialRequestforProposals(RFP)wasissued,andacompulsorybidder’sconferencewasheldwithover300organizationsattending.ByNovember2011,53bidsfor2128MWofpowergeneratingcapacitywerereceived.Ultimately28preferredbidderswereselectedoffering1416MWforatotalinvestmentofclosetoUS$6billion.MajorcontractualagreementsweresignedonNovember5,2012,withmostprojectsreachingfullfinancialcloseshortlythereafter.ConstructiononalloftheseprojectshascommencedwiththefirstprojectcomingonlineinNovember2013.

AsecondroundofbiddingwasannouncedinNovember2011.Thetotalamountofpowertobeacquiredwasreduced,andotherchangesweremadetotightentheprocurementprocessandincreasecompetition.Seventy-ninebidsfor3233MWwerereceivedinMarch2012,and19bidswereultimatelyselected.Pricesweremorecompetitive,andbiddersalsoofferedbetterlocalcontentterms.Implementation,powerpurchaseanddirectagreementsweresignedforall19projectsinMay2013.

AthirdroundofbiddingcommencedinMay2013,andagain,thetotalcapacityofferedwasrestricted.InAugust2013,93bidswerereceivedtotaling6023MW.SeventeenpreferredbidderswerenotifiedinOctober2013totaling1456MW.Pricesfellfurtherinroundthree.Localcontentagainincreased,andfinancialclosurewasexpectedinJuly2014.AfourthroundofbiddingwassettocommenceinAugust2014.

ThefirstthreeREIPPPPbidroundsattractedawidevarietyofdomesticandinternationalprojectdevelopers,sponsorsandequityshareholders.The64successfulprojectsinvolvedovera100differentshareholderentities,46oftheseinmorethanoneproject.Banks,insurers,DFI’sandeveninternationalutilitieshaveallparticipatedintheprogram.Themostcommonfinancingstructurehasbeenprojectfinance,althoughaboutathirdoftheprojectsinthethirdroundusedcorporatefinancingarrangements.Themajorityofdebtfundinghasbeenfromcommercialbanks(ZAR57bn)withthebalancefromDevelopmentFinanceInstitutions(DFIs)(ZAR27.8bn),andpensionandinsurancefunds(ZAR4.7bn).Eighty-sixpercentofdebthasbeenraisedfromwithinSouthAfrica,anddebttenorstypicallyextend15to17yearsfromCommercialDateofOperation(COD).SpreadsoverJIBARarebetween350and400basispoints.

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ExECUTIvE SUMMAry

Key success FacTOrs and challenges

REIPPPP’ssuccessfactors,shortcomingsandriskscanbeorganizedunderthreegeneralheadings:1)programmanagementfactors;2)programdesignfactors;and3)marketfactors.

Intermsofprogrammanagementfactors,thelargelyadhocinstitutionalstatusoftheDepartmentofEnergy(DOE)IndependentPowerProducer(IPP)unitallowedanapproachthatemphasizedproblemsolving,ratherthanenforcementofadministrativearrangements,anddidnotunderminequalityortransparency.TheDOEIPPmanagementteamandtheteamleaderhadextensiveexperience,PPPexpertise,andcredibilitywithbothpublicandprivatesectorstakeholders.Thisteamwasalsoabletoovercomesomeofthemistrustofprivatebusinessthatsometimesrestrictsthepublic-privatedialogueinSouthAfricaandsecuredresourcestoimplementaqualityprogram.TheseresourceswereusedtoappointexperiencedadvisorswhowereabletotransferinternationalbestpracticeintotheSouthAfricacontext.Despitethesesuccesses,thead-hocstatusoftheDOEIPPunitposessomerisks.Forthisprocurementprocesstobesustainable,institutionalcapabilitywillneedtobebuiltwithinaformalinstitution,preferablyafutureindependentsystemandmarketoperator.

TheinitialdesignofREIPPPPwasbuilttosomeextentonthelessonsofanearlier,unsuccessfuleffortthatusedfeed-intariffsandhasevolvedoverthethreeroundsofbidding.REIPPPPofferedaquickwaytorolloutnewgeneratingcapacity,andthesizeandstructureofthebiddingprocessmeantthattherewouldbemultiplebidwinners,animportantincentivefortheprivatesectortoparticipate.REIPPPalsorepresentedopportunitiesfordeveloperstomakereasonableprofitsduetothelinktothe“REFIT-like”tariffcapsinRound1.Theshifttocompetitivetenderingsubsequentlyhelpedtariffscomedownsharplyoverthenexttworounds.Therollingseriesofbiddingwithsubstantialcapacityallocationsalsohelpedbuildconfidenceintheprogram.CertainexemptionsfromsomeofthenationalPPPregulations,andtheprovisionsofthePreferentialProcurementPolicyFrameworkActalsoassistedinfast-trackingtheprogram,withoutnegativelyimpactingtransparencyorquality.Furthermore,therequirementthatbidsbefullyunderwrittenwithdebt,aswellasequity,effectivelyeliminatedthetendencyofcompetitivetenderstoincentivizeunder-bidding(or“low-balling”)towincontracts.Whilesomeoftheprogram’seconomicdevelopmentrequirementshavebeencontroversial,theydidgeneratecriticalpoliticalsupportforREIPPPP.

Therewerealsosomedesignshortcomingsandthesizeandreadinessofthelocalrenewableenergymarketwereinitiallyoverestimated.ThisresultedinlimitedcompetitioninRound1,withbidsclosetothepricecapsthatwerespecifiedinthetender.SomeREIPPPPcriticsalsoarguethattheprogram’ssignificantupfrontadministrativerequirementsandhighbidcostshavecontributedtohigherpricesthaninothercountries,likeBrazil,andalsoserveasabiasagainstSmallandMediumScaleEntrepreneurs(SMEs).Whilethelattercritiquemayhavesomemerit,itshouldbenotedthatbidcostswereneverthelesstinyinrelationtooverallprojectvalues.

Intermsofimportantmarketfactorsimpactingtheprogram,theglobalslow-downinOECDrenewableenergymarketsmeantthatREIPPPPwasabletoattractconsiderableattentionfromtheinternationalprivatesector.REIPPPPalsobenefitedSouthAfrica’ssophisticatedcapitalmarket,whichofferedlong-termprojectfinance.ThearrayofsophisticatedadvisoryserviceswasalsocriticaltothedesignandmanagementoftheREIPPPPprogram.

ExECUTIvE SUMMAry

3

ExECUTIvE SUMMAry

glOBal lessOns learned

TheSouthAfricanexperiencesuggestsseveralkeylessonsforsuccessfulrenewableenergyprogramsinotheremergingmarkets.Forexample,it’sevidentthatprivatesponsorsandfinanciersaremorethanwillingtoinvestinrenewableenergyiftheprocurementprocessiswelldesignedandtransparent,transactionshavereasonablelevelsofprofitability,andkeyrisksaremitigatedbygovernment.Renewableenergycostsarefallingandtechnologiessuchaswindturbinesarebecomingcompetitivewithalternatives.Furthermore,renewableenergyprocurementprogramshavethepotentialtoleveragelocalsocialandeconomicdevelopment.REIPPPPalsohighlightstheneedforeffectiveprogramchampionswiththecredibilitytointeractconvincinglywithseniorgovernmentofficials,effectivelyexplaintheprogramtostakeholders,andcommunicateandnegotiatewiththeprivatesector.Finally,REIPPPPdemonstratesthatwhetheranFITorcompetitivetenderischosen,privatesectorprojectdevelopersneedaclearprocurementframeworkwithinwhichtoinvest.

ExECUTIvE SUMMAry

4

INTrODUCTION

Introduction

Asgrid-connectedrenewableenergyindependentpowerprojects(IPPs)becomemoreprevalentaroundtheglobe,debateshaveintensifiedonthemosteffectivepolicyinstrumentstoaccelerateandsustaininvestmentbytheprivatesectorintotheseelectricity-generatingtechnologies.Feed-intariffs(FITs)havebeenthemostwidelyusedgovernmentsupportmechanismforacceleratingprivateinvestmentinrenewableenergygeneration.FITsaremeanttoreflectthecostsofproducingparticularkindsofenergy,aspredeterminedbygovernmentanalysis(ratherthansetasaresultofcompetitivebidding).Theyareusedinoffersoflong-termsupplycontractstorenewableenergyproducers.However,competitivetendersorauctionshavealsoemergedinmanyjurisdictionsasacceptabletechniques,especiallyinemergingeconomies.Tendershavethepotentialtoofferlowerprices,whilestillprovidingadequateincentivesformarketentrybyrenewableenergysuppliers.

SouthAfricanowoccupiesacentralpositioninthisdebate.In2009,thegovernmentbeganexploringFITsforrenewableenergy,buttheywererejectedin2011infavorofcompetitivetenders.Theinitialoutcomesoftheprogram,nowknownastheRenewableEnergyIndependentPowerProcurementProgram(REIPPPP),havebeenencouraging.BeginningwithitsfirstbidroundinAugust2011,REIPPPPhasattractedamultitudeofinternationalandlocalprivateprojectdevelopersandinvestorswhohavechanneledlargeamountsofprivateexpertiseandinvestmentintogrid-connectedrenewableenergyinSouthAfricaatcompetitiveprices.Initssecondandthirdbidrounds,theprogramhasalsofosteredcompetitionwithconsequent,andimpressive,pricereductions.And,ithasachievedresultsinrecordtime:despitesomedelays,inlessthanthreeyearsthreesuccessfulbiddingroundshavebeenheld,evaluationshavebeentimelyandtransparent,allprojectsinbidwindowsoneandtwohavereachedfinancialclose,andmanyareunderconstructionorarealreadyinoperation.

Intotal,REIPPPPhasgenerated64newrenewableenergyIPPs,ofdifferentsizesatdifferentsites.US$14billionininvestmenthasbeencommittedfortheconstructionof3922MW1 ofcapacityintechnologieslikegrid-connectedwind,PVandconcentredsolarpower,aswellassmalleramountsofhydro,landfillgasandbiomassenergy.Since2012,SouthAfricahasrankedamongthetoptencountriesgloballyintermsofrenewableenergyIPPinvestments.Inlessthanthreeyears,SouthAfricahassignedupmoreinvestmentformoreindependentpowergenerationthanhasbeenachievedacrosstheentireAfricancontinentoverthepast20years.

ThispaperexplorestheSouthAfricanexperienceofintroducinggrid-connectedrenewableenergybyseekinganswerstoanumberofkeyquestions:

1. WhyandhowdidSouthAfricamovefromfeed-intariffstocompetitivetendersforgrid-connectedrenewableenergy?

2.Howdidthegovernmentdesignandmanagetheprogram?Whatwerethedistinctivefeaturesofthesecompetitivetenders,andhowwerethebidsevaluated?

3.Whatweretheinvestmentandpriceoutcomesofthedifferentbidrounds?

4.Whowerethekeyprivatesectoractorsinthevariousdeals?Whatkindsoffinancinginstitutionswereinvolved?Whowerethesuccessfulsponsors,equipmentproviders,andengineering,procurement,andconstruction(EPC)contractors?

5.Whatweretheimpactsandtrade-offsbetweenpricesandeconomicdevelopmentoutcomes(e.g.,localindustrialdevelopmentandemploymentcreation)?

6.Whatwerethekeysuccessfactors,shortcomingsandrisksassociatedwiththeprogram?

7. WhatlessonscantheSouthAfricanprogramoffertootherdevelopingcountries?

1Thisisthetotalafterfinancialcloseofbidwindows1and2.TheRFPtotalisslightlylowerat3915MW

INTrIDUCTION

5

FrOM FEED-IN TArIFFS TO

COMPETITIvE TENDErS 1

From Feed-In Tariffs To Competitive Tenders

1.1 sOuTh aFrica’s elecTriciTy suPPly sysTem

TheSouthAfricanpowersystemischaracterizedbylargepowerstationsthatareconcentratedintheinteriorofthecountryneartheminesandindustriesofGautengprovince,andlongtransmissionlinesdowntocoastalareas.Coalsuppliesapproximately70percentofthecountry’sprimaryenergyandmorethan90percentofitselectricity.Apubliclyownednationalpowerutility,Eskom,generates96percentofthecountry’selectricity,ownsandcontrolsthenationalhigh-voltagetransmissiongrid,anddistributesapproximately60percentofelectricitydirectlytocustomers.LocalauthoritiesbuybulkfromEskomanddistributethebalance.Directelectricitysalestominesandindustryaccountformorethan40percentofEskom’sdistributionbusiness(seeAppendix1foralistofEskom’smajorpowerstations).

Inthe1970s,Eskomoverestimateddemandgrowthandembarkedonamassiveinvestmentprogram,whichcontinuedintothe1980s,whenitbecameapparentthattheutilitywouldhavesignificantovercapacity.Bytheendofthe1990s,thecountry’selectricitypricesrankedamongthecheapestintheworld.In2007,Eskom’saverageelectricitysalespricewasaslowas2.5USc/kWh.Ineffect,theutilityhadpaidoffthecapitalcostsformuchofitsexistingcapacity,andcustomerpriceswereclosetoshort-runmarginalcosts.

However,by2004,already,itbecameclearthatpowerreservemarginsweredroppingsharplyandwouldturnnegativeinafewyearswithoutEskominterventionsonboththedemandandsupplysides.EskominitiatedaUS$40billionpowerplantconstructionprogram,andafewyearslatertheNationalEnergyRegulatorofSouthAfrica(NERSA)beganallowingsharpupwardadjustmentsinelectricitytariffsinanefforttosustainEskom’sfinancialviability.2 Figure1showshowelectricitypriceshaveriseninnominalandrealterms.Aboveinflationincreaseshavebeenagreedbytheregulatorforthenext5years,causingconcernamongEskom’scustomers.

2Eskomiscurrentlybuildingtwomassivenewcoal-firedplants–MedupiandKusile–each4800MW,aswellasanew1300MWpumpedstoragescheme,Ingula.Atthesametime,ithascommencedprocurementofitsfirstrenewableenergypower:a100MWwindfarm,Sere,anda100MWconcentratedsolarplant.ThelattertwopowerprojectshavebeenfundedmainlybyWorldBankandAfricanDevelopmentBankloans.

FrOM FEED-IN TArIFFS TO COMPETITIvE TENDErS

Figure 1: average nominal and real eskom electricity Prices (usc/kwh) (exchange rate Zar10/ usd)

Source: Constructed by the authors from data extracted from Eskom Annual Reports and StatsSA.Note: Eskom average sales prices include transmission and distribution costs.

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

1996 1998 2000 2002

Nominal Tari� Real 2013 values

2004 2006 20102008 2012

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FrOM FEED-IN TArIFFS TO COMPETITIvE TENDErS 1

1.2 elecTriciTy Planning and PreviOus aTTemPTs TO inTrOduce iPPs

Thepost-ApartheidSouthAfricanGovernmentnolongerleavespowerplanningexclusivelytoEskom.TheformalplanningsystemnowmandatestheDepartmentofEnergytoproduceanelectricityplan(IntegratedResourcePlan–IRP).Basedonthisplan,theMinisterofEnergyissuesperiodicdeterminationsregardinghowmuchnewpowergenerationisneeded,andfromwhichsources.NERSAcanonlylicencenewcapacitywithintheboundssetbytheseministerialdeterminations.ThemostrecentIRPisfortheperiod2010-30andwasupdatedin2013.Anumberofdifferentscenariosortestcaseswasincluded(Appendix2presentsthecoremodeloutput).

ThegovernmentrecognizesthatIPPsshouldbeallowedtoenterthemarkettoenhancethecountry’spowergeneratingcapacity.3 FollowingthepublicationoftheEnergyPolicyWhitePaperin1998,a70:30spiltbetweenEskomandtheprivatesectorwasacceptedbytheCabinet,andworkcommencedonthedesignofacompetitivewholesalepowerexchange.However,withloomingEskompowershortages,theprospectivewholesalemarketwasabandonedin2004infavouroftheexistingsingle-buyermodelwithEskombeingtheoff-taker.IPPswerestillexpectedtoplayasignificantroleinpowergeneration,butthepolicyandregulatoryframeworkforIPPswasnotimmediatelyputinplaceandprocurementprogramsrunbyEskomforcogenerationandbase-loadIPPsweremostlyunsuccessful.NoIPPcontractsweresignedexceptforahandfulofshort-termpowerpurchaseagreementswithindustrialgenerators,whichamountedtolessthan400MW.

1.3 renewaBle energy POlicy

SouthAfrica’ssystemforenergyplanningsystemnowalsorequiresthatrenewableenergyplayasignificantroleinthenation’spowergenerationmix.Forthefirsttime,theIRP2010-30incorporatedacarbonemissionscapandincludedrenewableenergyoptions,with17.8GWofsolarandwindenergycapacityplannedby2030(Appendix2).Morethanmostcountries,SouthAfricareliesheavilyoncoalandalsohasahighlyenergy-intensiveeconomy.ThesefactorsresultinSouthAfrica’scarbonemissions(onapercapitaandGDPbasis)beingdisproportionatelyhigh(although,intotal,theyamounttolittleoveronepercentofglobalemissions).Policymakershavebeenmindfulofrisksthattheseemissionlevelsmightposetotheeconomy’sfutureinternationalcompetitiveness.Theyarealsoawarethatthecountryhasconsiderablepotentialforsometypesofrenewableenergygeneration.4

Thegovernmentbegansettingrenewableenergytargetsin2003,withthepublicationofaRenewableEnergyPolicyWhitePaperthatenvisionedreaching10,000GWhofrenewableenergygenerationby2013.Foryears,verylittlewasdonetoachievethistarget,andtherewasagooddealofconfusionregardingwhatthistargetactuallymeant:wasitacumulativeorannualtarget?Diditincluderenewableenergyservicesotherthanelectricity?TheDepartmentofEnergyeventuallyclarifiedthatthetargetwouldbemetbyacombinationofbagasse(59percent),landfillgas(6percent),hydro(10percent),solarwaterheaters(13percent),otherbiomass(1percent),andonly1percentwind(andintriguingly,noPVorconcentratedsolarpower).Eventhesemodesttargetswerenotmetby2013.

However,whiletheofficialrenewableenergypolicyhasnotbeenveryeffectiveinapplyingpracticalimplementationstrategies,policiestomitigateclimatechangehavehadamuchmoreprofoundimpact.Inseveralrespects,thisissurprisingbecauseasanon-Annex1

3InSouthAfrica,IPPsaregenerallyrecognizedasprivatelyfinanced,Greenfieldgenerationplants,supportedbynon-recourseorlimitedrecourseloans,andbackedbylong-termpowerpurchaseagreements(PPA)signedwithEskom,thecountry’s“singlebuyer”ofelectricity.4SouthAfricahasoneofthehighestpotentialsolarenergyregimesintheworldwithaveragedailydirectnormalradiationinexcessof7KWh/m2(Flurietal.,2009).ThemostfavorableareasareintheNorthernCape,atsomedistancefromthemainmetropolitanareas.SouthAfricaalsohasreasonablewindenergyresourceswithaveragewindspeedsabove7m/sinsomecoastalandescarpmentregions.Thecountryislessendowedwithhydroandbiomassresources.Averagerainfallacrossthecountryis450mmperannumcomparedtoaglobalaverageof860mm).Therearerelativelyfewlargerivers,andthelimitedpotentialforlargedamsandassociatedhydroelectricschemeshavemostlyalreadybeenexploited.Thereremainssomepotentialforsmallhydroalongtheescarpment.


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FrOM FEED-IN TArIFFS TO

COMPETITIvE TENDErS 1

countryundertheKyotoProtocol,SouthAfricadoesnotfaceanycommitmentstoreducegreenhousegasemissions.55Nevertheless,theDepartmentofEnvironmentalAffairscommissionedresearchworkonLong-TermMitigationStrategies.ThesestrategiesprovidedthebasisforPresidentZumatomakeapledgeattheCopenhagenConferenceofParties(COP)in2009thatSouthAfricawouldreduceitsCO2emissions34percentbelowabusiness-as-usualscenarioby2020,andbelow42percentby2025,providedtheinternationalcommunitysupportedSouthAfricawithfinancialaidandthetransferofappropriatetechnology.Thepeak,plateau,anddeclinescenariosforcarbonemissionssubsequentlyinformedthedevelopmentoftheIRP2010-2030.ThepowersectorinSouthAfricacontributesroughlyhalfofthecountry’scarbonemissions,andaneffectiveemissionscapwassetatapproximately275Mt/annumCO2equivalent.AsubsequentNationalClimateChangeResponseWhitePaper,publishedin2011,providedawiderbandforemissioncaps,butmaintainedthepeak,plateauanddeclinetrajectories.AttheCOP17meetinginDurbanin2011,publicandprivatesectorstakeholderrepresentativesagreedto12“commitments”aimedatachievingthegovernment’sgoalofcreating300,000newjobsinthe“greeneconomy”ofSouthAfricaby2020.

1.4 FrOm reFiT TO reiPPPP

SouthAfrica’svoluntarypledgeinCopenhagentoreduceitscarbonemissionsfromabusiness-as-usualscenariowasthecatalystfornewprocurementstrategiesforrenewableenergy.Toexpandrenewableenergysupply,SouthAfricafirstexploredtheoptionofrenewableenergyfeed-intariffs(REFITs).AREFITpolicywasapprovedin2009byNERSA.Tariffsweredesignedtocovergenerationcostsplusarealaftertaxreturnonequityof17percentandwouldbefullyindexedforinflation(NERSA2009).Initialpublishedfeed-intariffsweregenerallyregardedasgenerousbydevelopers–15.6USc/kWhforwind,26USc/kWhforconcentratedsolar(troughs,with6hours’storage),and49USc/kWhforphotovoltaic.6 Butconsiderableuncertaintyaboutthenatureoftheprocurementandlicensingprocessremained.Thelegalityoffeed-intariffswithinSouthAfrica’spublicprocurementframeworkwasunclear,aswasEskom’sintentiontofullysupporttheREFITprogrambyallowingtimelyfinalizationofpowerpurchaseagreementsandinterconnectionagreements.

InMarch2011,NERSAintroducedanewlevelofuncertaintywithasurprisereleaseofaconsultationpapercallingforlowerfeed-intariffs,arguingthatanumberofparameters—suchasexchangeratesandthecostofdebt—hadchanged.Thenewtariffswere25percentlowerforwind,13percentlowerforconcentratedsolar,and41percentlowerforphotovoltaic(seeTable1).Moreover,thecapitalcomponentofthetariffswouldnolongerbefullyindexedforinflation.Importantly,initsrevisedfinancialassumptions,NERSAdidnotchangetherequiredrealreturnforequityinvestorsof17percent(NERSA2011).

Morepolicyandregulatoryuncertaintywastocome.AlreadyconcernedthatNERSA’sFITswerestilltoohigh,theDepartmentofEnergyandNationalTreasurycommissionedalegalopinionthatconcludedthatfeed-intariffsamountedtonon-competitiveprocurementandwerethereforeprohibitedbythegovernment’spublicfinanceandprocurementregulations.TheDepartmentofEnergyandNationalTreasurythentooktheleadonareconsiderationofthegovernment’sapproach.Thefundamentalgoalofachievinglarge-scalerenewableenergyprojectswithprivatedevelopersandfinanciersremainedthesame.However,thestructureofthetransactions,includingthefeed-intariffs,wastochangesignificantly.

5ThegoaloftheKyotoProtocolistolimitemissionsofgreenhousegases(GHGs).Accordingtothetreaty,in2012,AnnexIPartieswhohaveratifiedthetreatymusthavefulfilledtheirobligationsregardingGHGemissionlimitationsestablishedfortheKyotoProtocol’sfirstcommitmentperiod(2008–2012).TheseemissionlimitationcommitmentsarelistedinAnnexBoftheProtocol.Non-Annex1countries,likeSouthAfrica,arenotobligatedbythesecaps.

6ThesevaluesarecalculatedattheexchangerateatthetimeofZAR8/USD.


8

1

Aseriesofinformalconsultationswereheldwithdevelopers,lawyersandfinancialinstitutionsthroughoutthefirsthalfof2011.ThesemeetingsprovedtobeextremelyimportantintermsofallayingmarketconcernsresultingfromtheearlierREFITprocessandprovidinginformalfeedbackfromtheprivatesectorondesign,legal,andtechnologyissues.

InAugust2011,theDOEannouncedthatacompetitivebiddingprocessforrenewableenergywouldbelaunched,knownastheRenewableEnergyIndependentPowerProcurementProgram(REIPPP).Subsequently,NERSAofficiallyterminatedtheREFITs.NotasinglemegawattofpowerhadbeensignedinthetwoyearssincethelaunchoftheREFITprogramasapracticalprocurementprocesswasneverimplemented,andtherequiredcontractswerenevernegotiatedorsigned.Theabandonmentoffeed-intariffswasmetwithdismaybyanumberofrenewableenergyprojectdevelopersthathadsecuredsitesandinitiatedresourcemeasurementsandenvironmentalimpactassessments.But,itwastheseearlydeveloperswhowouldlaterbenefitfromthefirstroundofcompetitivebiddingunderREIPPPP.


Table 1: reFiT and reiPPPP PricesREFIT

(ZAR / kWh)REIPPPP

(ZAR/kWh)REIPPPP

(US c/kWh)

Technology 2009 Tariff 2011 Tariff Bid Cap Round 1 Round 1

wind 1.25 0.94 1.15 1.14 14.3

Photovoltaic 3.94 2.31 2.85 2.76 34.5

concentrated solar trough with storage 3.14 1.84 2.85 2.69 33.6

Source: Constructed by authors from Department of Energy sources.Note: 8 ZAR/USD.


9

2

GOvErNMENT DESIGN AND MANAGEMENT OF ThE rEIPPPP TENDEr PrOCESS

GOvErNMENT DESIGN AND MANAGEMENT

Government Design and Management of the rEIPPPP Tender Process

2.1 insTiTuTiOnal seTTing

REIPPPPwasimplementedagainstanhistoricalbackgroundofinstitutionalshortcomingsinthecountry’senergysector.PreviouseffortstocontractIPPshadbeenlefttoEskom,basedoninstructionsfromgovernment.7 Butalloftheseeffortsfailed,perhapsbecauseofalackofcapacityor(accordingtosomecritics)becauseofafundamentallackofincentivesforEskomtoweakenitsmonopolyonpowergeneration.REIPPPwasdifferentbecausetheDepartmentofEnergy(DOE)tookcontroloftheprogram.ButDOEalsorecognizedthat,likeEskom,ithadlittleinstitutionalcapacitytorunasophisticated,multi-project,multibillion-dollarinternationalcompetitivebiddingprocessforrenewableenergy.Asaconsequence,DOEsoughttheassistanceoftheNationalTreasury’sPublic-PrivatePartnership(PPP)Unittomanagetheprocess.AsmallteamoftechnicalstafffromDOEandthePPPUnitestablishedaprojectoffice,knownastheDOEIPPunit,whichfunctionedeffectivelyoutsideoftheformaldepartmentalstructureofnationalgovernmenttoactasafacilitatorfortheREIPPPPprocess.

2.2 The reiPPPP managemenT Team

TheREIPPPPteamwasledbyaseniormanagerfromtheNationalTreasuryPPPUnitwhohadworkedintheresinceitscreationin2000,hadhelpedestablishTreasury’srigorousPPPprojectappraisalframework,andhadbeeninvolvedwithDOE’seffortstopromoteIPPsasearlyas2007.Otherlegalandtechnicalexpertswerealsobroughtonboardandformedasmall,tightknitteam,whichwasviewedfavorablybyboththepublicandprivatesectorsasaprofessionalunitwithatrackrecordofconsiderableexpertiseinclosingPPPcontractsandareputationasproblemsolversandfacilitatorsratherthanregulators.ThiskindofcredibilityallowedtheunittoacteffectivelyasachampionoftheREIPPPPprocess.

2.3 managemenT sTyle

Largelybecausetheteamwasfamiliarwithprivatesectorinfrastructureprojects,aswellasmostofthebankers,lawyers,andconsultantsinvolvedinsuchprojectsinSouthAfrica,theunitdidnotstartoutwiththelevelofmistrustofprivatebusinessthatsometimescharacterizesothergovernmentagenciesinSouthAfrica.DialoguewithprivatesectorcounterpartsonkeyREIPPPPdesignandimplementationissuesbeganalmostimmediatelyandcontinuedthroughouttheprocess.Theprogramwasmanagedfromtheoutsetinafashionthatwastailoredtowardgeneratingenthusiasticparticipationbyprivatesectorplayers.Highstandardsweresetandmaintainedthroughoutthebiddingprocess,includingsecurityarrangementsandtransparentprocurementprocedures.Documentationwasextensive,highquality,andreadilyavailableonaspeciallydesignedprogramwebsite.Anotherfeatureoftheteam’smanagementstylethatimpressedmanyprivateplayerswastheeffortmadetomeetmostoftheprogram’sannounceddeadlines.ThedeadlinefortheRound1financialcloseslippedafewmonthsasthegovernmentfinalizedfinancialsecurityarrangements,butotherscheduledelayswereminor.ThiswasadramaticdifferencefromvirtuallyalloftheearlierIPPprogramsinthesector,andwasaclearsignaltomanyoperators,investors,andadvisorsthatthisprogramwasfocusedonresults.

Afinal,veryimportantaspectoftheprogram’smanagementstyleinvolvedtheextensiveuseofprivatedomesticandinternationaladviserstodesignandhelpmanagetheprogram,reviewbids,andincorporatelessonslearnedintotheprogramasitprogressedthroughthebidrounds(Box1).

7OneexceptionwasanearliereffortbytheDepartmentofEnergytoprocureopen-cycle,diesel-firedturbines.

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GOvErNMENT DESIGN AND MANAGEMENT 2

2.4 PrOgram resOurces

Keyfactorsinhavingaccesstosuchhighqualityprivateadvisoryassistancewastheavailabilityoffinancialresourcestopaytheseexperts,aswellasoffices,awebsite,variousdatabases,andoneofthemostsophisticated,complicatedbiddingprocesseseverseeninAfrica.Fundingfortheprogramwasoriginallymadeavailablepursuanttoamemorandumofagreement(MOA)signedbyDOE,NationalTreasuryandtheDevelopmentBankofSouthernAfrica(DBSA).ThelatterwastoprovideashareofseniordebtontheprojectsandmakeavailableR80millionforconsultants,aprojectoffice,andcapacitybuilding.Inaddition,technicalassistancefundingwasmadeavailablebyvariousbi-lateraldonoragencies,includingthoserepresentingDenmark,Germany,SpainandtheUK.TheWorldBankhadalsopreviouslyfacilitatedaUS$6milliongrantfromtheGlobalEnvironmentFacility(GEF)foradvisoryservicesundertheRenewableEnergyMarketTransformationProject.

Bytheendof2010,ateamofconsultantswasonboardandprogramdesignwasunderway.WhenitbecameclearthattheREFITprocesscouldnotproceed,theexternaldonorsadvisedonREIPPPP’stenderprocessafterreviewinginternationaltenderprocessesinIndia,Brazil,Germany,France,Spainandelsewhere.

In2011,theNationalTreasurymadeR100millionavailable,andsomeofthiswasusedtorepaytheDBSA(althoughtheDBSAstillactsasthepaymentagentforREIPPPP).TheNationalTreasurymoneysawtheprogramthroughthefirstroundandpartofthesecond.Subsequenttothat,theprogramhasreliedonbidderregistrationfeesandfeespaidbysuccessfulIPPprojectcompanies–ontheeffectivedateoftheImplementationAgreements,successfulprojectcompaniesmustpayaprojectdevelopmentfeeofonepercentoftotalprojectcoststoa

Box 1: reiPPPP evaluation consultants

Source: Constructed by authors from DOE presentation.

inTernaTiOnal reviewersLegal:Linklaters(UK)

Technical:TonyWheelerConsulting(UK)Governance:Ernst&Young

PrOjecT managemenTSPPProjectSolutions

legal evaluaTiOnBowmanGilfillan

EdwardNathanSonnebergs(ENSafrica)LedwabaMazwaiWebberWentzel

Technical evaluaTiOnMottMacDonald

Financial evaluaTiOnErnst&Young(EY)

PWC


11


ProjectDevelopmentFundforRenewableEnergyprojectsmanagedbyDOE.ThefundcoverscurrentandfuturecostsassociatedwithDOEprocurementofrenewableenergyandoversightoftheprogram.Thesefundingarrangementshavehelpedtheprogramremainofftheformalgovernmentbudgetinsubsequentbiddingrounds.

2.5 Tender design and Bid PrOcess

OnAugust3,2011aRequestforProposalswasissued,andthenextmonthacompulsorybidder’sconferencewasheldtoaddressquestionsonbidrequirements,documentation,powerpurchaseagreements,etc.Some300organizationsattendedthisconference.TheREIPPPPprogramenvisionedtheprocurementof3,625MWofpoweroveramaximumoffivetenderrounds.Another100MWwasreservedforsmallprojectsbelow5MWthatwereprocuredinaseparatesmallprojectsIPPprogram.Capsweresetonthetotalcapacitytobeprocuredforindividualtechnologies–thelargestallocationswereforwindandphotovoltaics,withsmalleramountsforconcentratedsolar,biomass,biogas,landfillgas,andhydro(seeTable2below).Therationaleforthesecapswastolimitthesupplytobebidoutandthereforeincreasethelevelofcompetitionamongthedifferenttechnologiesandpotentialbidders.

Thetendersfordifferenttechnologieswereheldsimultaneously.Interestedpartiescouldbidformorethanoneprojectandmorethanonetechnology.Projectshadtobelargerthan1MW,andanupperlimitwassetonbidsfordifferenttechnologies—forexample,75MWforaphotovoltaicproject,100MWforaconcentratedsolarprojectand140MWforawindproject.Capswerealsosetonthepriceforeachtechnology(atlevelsnotdissimilartoNERSA’s2009REFITs).BidswereduewithinthreemonthsofthereleaseoftheRFP,andfinancialclosewastotakeplacewithinsixmonthsaftertheannouncementofpreferredbidders.

TheRPFwasdividedintothreesectionsdetailing:1)generalrequirements,2)qualificationcriteria,and3)evaluationcriteria.ThedocumentsalsoincludedastandardPowerPurchaseAgreement(PPA),anImplementationAgreement(IA)andDirectAgreements(DA).ThePPAwastobesignedbytheIPPandEskom,theoff-taker.PPAsspecifiedthatthetransactionsshouldbedenominatedinSouthAfricaRandandthatcontractswouldhave20-yeartenuresfromCOD.TheIAsweretobesignedbytheIPPsandtheDepartmentofEnergy(DOE)andeffectivelyprovidedasovereignguaranteeofpaymenttotheIPPs,byrequiringDOEtomakegoodonthesepaymentsintheeventofanEskomdefault.TheIAalsoplacedobligationsontheIPPtodelivereconomicdevelopmenttargets.TheDAsprovidedstep-inrightsforlendersintheeventofdefault.ThePPA,IAandDAwerenon-negotiablecontractsandweredevelopedafteranextensivereviewofglobalbestpracticesandconsultationswithnumerouspublicandprivatesectoractors.Despitesomebidderreservationsregardingthelackofflexibilitytonegotiatethetermsofthevariousagreements,theoverallthoroughnessandqualityofthestandarddocumentsseemedtosatisfymostofthebiddersparticipatinginthethreerounds.

Bidswererequiredtocontaininformationontheprojectstructure,legalqualifications,land,environmental,financial,technicalandeconomicdevelopmentqualifications.Biddershadtosubmitbanklettersindicatingthatfinancingwaslocked-in–highlyunusualandbasicallyawaytooutsourceduediligencetothebanks.Effectivelythismeantthatlenderstookonahighershareofprojectdevelopmentriskandthisarrangementdealtwiththebiggestproblemwithauctions–the“low-balling”thatresultsindealsnotclosing.

Thedeveloperswereexpectedtoidentifythesitesandpayforearlydevelopmentcostsattheirownrisk.AregistrationfeeofZAR15,000(US$1,875)wasdueattheoutsetoftheprogram.Bidbondsorguaranteeshadtobeposted,equivalenttoZAR100,000(US$12,500)permegawattofnameplatecapacityoftheproposedfacilities,andtheamountwasdoubledoncepreferredbidderstatuswasannounced.8 TheguaranteesaretobereleasedoncetheprojectscomeonlineorifthebidderwasunsuccessfulaftertheRFPevaluationstage.

8AnexchangerateofZAR8/USDisusedinthebuild-uptotheREIPPPPandforRound1whenthefirstagreementsweresigned.ForRounds2and3,theexchangerateatthetimeofsigningagreementsisusedtocalculateprojectpricesandinvestmentvalues.


12


Projectselectionwasbasedona70/30splitbetweenpriceandeconomicdevelopmentconsiderations.REIPPPPwasabletoadjustthenormalgovernment90/10splitfavoringpriceconsiderationsintheprocurementselectionprocess.AnexemptionwasobtainedfromthePublicPreferentialProcurementFrameworkActinordertomaximizeeconomicdevelopmentobjectives.

AregulatoryreviewdeterminedthattheREIPPPPwouldnotbesubjecttoNationalTreasuryRegulation16forevaluatingandapprovingpublic-privatepartnerships(PPPs).ThePPPregulationsreflectnationallegislationandareconsistentwithbestpracticeinOECDcountries.Bythesametoken,theyrequireacomplicated,time-consuming,andexpensivereviewprocessthatmustbeimplementedbyexpertconsultantsusingspecializedanalyticaltechniques(like“publicsectorcomparators”)toconfirmvalue-for-money(VFM),andmustincludewiderangingconsultationwithstakeholders,aswellasfrequentinteractionwithNationalTreasury’sPPPUnit.ThenationalPPPregulationscallfor24elaboratepreparationsteps,aswellasfour“opinions”ontheprocessissuedbyNationalTreasuryatdifferentstagesofpreparation,basedoninputsfromNationalTreasury’sPPPUnit.TheprocessisrequiredregardlessofthesizeornatureofthePPPproject,andhasbeencharacterizedbysomeprivatesectoroperatorsandinvestorsascumbersomeandslow.

ThisPPPregulatoryprocesswasnotapplicabletotheREIPPPPbecauseEskom,whichsignsthepowerpurchaseagreementswithprivateoperators,isconsideredastate-ownedenterpriseratherthanagovernmentagency,andthereforeitspurchaseofpowerisnotsubjecttoNationalTreasury’sPPPregulations(eventhoughtheprocurementprogramwasformallytheresponsibilityofDOE).InorderfortheDOEtodemonstratevalue-for-money,andtofulfilltherequirementsofClause9oftheNewGenerationRegulations,thesecondbidwindowrequestedbiddersvoluntarilytosubmittheirownargumentsdocumentingVFM.

Thetimingoftheinitialroundofbiddingwasalsoadvantageousfortheprogram.Therenewableenergysectorishighlycompetitivegiventhediversityofsources,themodularnatureofmostofthetechnologies,andthenumberofprojectdevelopers.Manufacturingofcomponentsformostrenewableenergytechnologiesinvolvesrelativelymature,existingtechnologiesandestablishedindustries.But,forseveralyearstheseindustrieshavebeenexperiencingglobalover-capacityandintensecompetitionthathasresultedinverythinprofitmargins,ifprofitsaregeneratedatall.Asaresult,theindustrycontinuestoexperienceconsolidation,theemergenceofincreasinglyverticallyintegratedsupplychains,andthesteadymovementofmanufacturingfirmsintoprojectdevelopment.Furthermore,renewableenergymarketswereindeclineinEurope,anddeveloperswerelookingfornewopportunitiesinemergingmarkets.AllofthisledtointenseinterestonthepartoftheglobalrenewableenergyindustryinREIPPPPandgrowinglevelsofcompetitionasthebiddingprogressed.

Despitefavorablemarketdynamics,therewasstillsomeconcernamongprospectivebiddersatthestartofthebiddingprocess.However,thequalityanddetailofthebiddocumentation,theclarityprovidedduringthebidder’sconference,aswellastheon-goingdialogueduringthefirsthalfof2011,seemedtoalleviatesomeofthenervousnessthathaddevelopedovertheprevioustwoyears.Investorsandoperatorsalsoparticularlylikedthestructureofthepricing,astheREIPPPPtariffcapswereatlevelssimilartotheearlierfeed-intariffs.Thefirstroundofbidswasreceivedinlate2011andtheDOEIPPunitusedagroupofinternationalandlocalexpertstoassessthebids.Manyoftheseadvisorshadbeeninvolvedintheinitialdesignprocess.Giventhescaleoftheinvestments,thecompetitionanticipated,andthereputationalriskidentified,securityandconfidentialitysurroundingtheevaluationprocesswasextremelytightwith24-hourvoiceandCCTVmonitoringofthevenue.Approximately130to150localandinternationaladvisorswereusedtodeveloptheRFPandevaluatethebidsinthefirstround,atatotalcostofapproximatelyUS$10million.


13


2.6 Bid evaluaTiOn

Thebidevaluationinvolvedatwo-stepprocess.First,biddershadtosatisfycertainminimumthresholdrequirementsinsixareas:environment,land,commercialandlegal,economicdevelopment,financial,andtechnical.Forexample,theenvironmentalreviewexaminedapprovalswhilethelandreviewlookedattenure,leaseregistration,andproofoflanduseapplications.Commercialconsiderationsincludedtheprojectstructureandthebidders’acceptanceofthePowerPurchaseAgreement.Thefinancialreviewincludedstandardtemplatesusedfordatacollectionthatwerelinkedtoafinancialmodelusedbytheevaluators.Technicalspecificationsweresetforeachofthetechnologies.Forexample,winddeveloperswererequiredtoprovide12monthsofwinddataforthedesignatedsiteandanindependentlyverifiedgenerationforecast.Theeconomicdevelopmentrequirements,inparticular,werecomplexandgeneratedsomeconfusionamongbidders(seeadetaileddiscussionoftheserequirementsinSection5).

Bidsthatsatisfiedthethresholdrequirementsthenproceededtothesecondstepofevaluation,wherebidpricescountedfor70percentofthetotalscore,withtheremaining30percentofthescoregiventoacompositescorecoveringjobcreation,localcontent,ownership,managementcontrol,preferentialprocurement,enterprisedevelopmentandsocioeconomicdevelopment.Bidderswereaskedtoprovidetwoprices:onefullyindexedforinflationandtheotherpartiallyindexed,withthebiddersinitiallyallowedtodeterminetheproportionthatwouldbeindexed.Insubsequentrounds,floorsandcapswereinstitutedfortheproportionthatcouldbeindexed.Thebidswereevaluatedusingastandardfinancial.


14

TENDErOUTCOMES3

Table 2: summarized results for reiPPPP windows 1, 2 and 3

Wind PV CSP Hydro Biomass Biogas Landfill Total

windOw 1capacity offered (mw) 1850 1450 200 75 12.5 12.5 25 3625

capacity awarded (mw) 634 631.5 150 0 0 0 0 1415.5

Projects awarded 8 18 2 0 0 0 0 28

average tariff (sac/kwh) 114 276 269 N/A N/A N/A N/A N/A

average tariff (usc/kwh) Zar8/$ 14.3 34.5 33.6

Total investment (Zar mill) 13312 23115 11365 0 0 0 0 47792

Total investment (usd mill) Zar8/$ 1664 2889 1421 5974

windOw 2capacity offered (mw) 650 450 50 75 12.5 12.5 25 1275

capacity awarded (mw) 562.5 417.1 50 14.3 0 0 0 1043.9


average tariff (sac/kwh) 90 165 251 103 N/A N/A N/A N/A

average tariff (usc/kwh) Zar7.94/$ 11.3 20.8 31.6 13


Total investment (usd mill) Zar7.94/$ 1372 1517 565 79 0 0 0 3534

windOw 3capacity offered (mw) 654 401 200 121 60 12 25 1473

capacity awarded (mw) 787 435 200 0 16 0 18 1456


average tariff (sac/kwh) 74 99 164 N/A 140 N/A 94 N/A

average tariff (usc/kwh) Zar9.86/r 7.5 10 16.6 14.2 9.5 N/A


Total investment (usd mill) Zar9.86/r 1721 826 1820 108 29 4504

TOTalscapacity awarded (mw) 1984 1484 400 14 16 0 18 3915



Total investment (usd mill) 4683 5085 3806 79 108 0 29 14011

TENDEr OUTCOMES

Tender Outcomes

TheresultsofRounds1,2and3aresummarizedinTable2anddiscussedinthesectionsbelow.

Source: Constructed by the authors from DOE presentations and data provided by the DOE IPP Unit.Note 1: ZAR/USD conversions calculated at date agreements were signed in each window.Note 2: The above data is representative at the time of bidding. Contracted capacity and investment amounts changed slightly at the time of financial close. The investment data for bid Window 1 were provided by the DOE IPP Unit and differ slightly from data released in DOE presentations.

15

TENDErOUTCOMES 3

3.1 rOund 1 OuTcOmes

TheinitialresultsweresomewhatsurprisingtotheDOEIPPunit.Oneofficialnotedthattheunitthoughttheymightreceive12bidsandclosethreeprojectsduringthefirstround.Infact,theirbiggestfeargoingintotheprocesswasthatnobidswouldultimatelybeclosed.Theslowglobalmarket,tightdeadline,earlierissueswithREFIT,andtheextensivequalificationprocesswereallfactorsthatcontributedtomodestexpectationsbytheDOEIPPunit.

YetonNovember4,2011,atotalof53bidsfor2,128MWofpowergeneratingcapacitywerereceived.Theevaluationprocesstookplaceoverafour-weekperiodandpreferredbidderswereannouncedonDecember7,2011,coincidingwiththeCOP17meetinginDurban.Ultimately,28preferredbidderswereidentifiedinthefirstround,offering1,416MWforatotalinvestmentofUS$5.97billion.9 EighteenprojectsusedPVtechnology,withacapacityof632MW,whileanothertwotransactionsusedCSPtechnology,withacapacityof150MW.Eightprojectsusedwindtechnology,totaling634MW.BothSouthAfricanandinternationalsponsorsandlenderswereinvolved,althoughmostofthedebtfinancingwassourcedfromSouthAfricanbanks,withmuchofthebalancefromDevelopmentFinanceInstitutions(DFI’s).Forthemostpart,conventionalprojectfinancingwasused.SubsequenttoRound1,asecondarymarketbegantodevelop,primarilyinvolvingSouthAfricanpensionfundsandinsurancecompanies.

Forthefirstround,adeadlineofJuly2012wassetforfinancialclose,andadeadlineoftheendof2014forthecommercialoperatingdate.Thesedateswerelaterextended.Thegovernmenttooklongerthanexpectedtofinalizeitsguaranteesandlocalbanks,advisors,andotherprojectpartnerswerestretchedtothelimitwithsomanyprojectsreachingclosuresimultaneously.

MajorcontractualagreementsweresignedonNovember5,2012,withmostprojectsreachingfullfinancialclosewithintendaysafterconditionsprecedentweremet.Theprocessofclosingalltheinvestmentsonthesamedaywasusedtostandardizeandlimitforeignexchangerisk,althoughitposedsignificantchallengestothebankingsystem.ConstructiononalltheprojectsinRound1hascommenced,andthefirstprojectcameonlineinNovember2013.NineotherprojectswerescheduledtobeginoperationduringMarch2014andtheremainingschemesareexpectedtobeonlinebyMarch2015.

Althoughbidderscouldnotknowforcertainthetotalcapacitythatwouldbebid,theylikelyrecognizedthatthetightdeadlinesandchallengingthresholdqualificationcriteriawouldresultinlesscapacitybeingbidthanwasmadeavailableinRound1.Accordingly,thepricesbidweremostlyunaffectedbycompetitivelimitationsandonlymarginallybelowthecapsspecifiedintherequestforproposals.Highpriceswerealsodrivenbyhighinitialtransactioncostsandpossiblepolicyuncertainty.Table1(inSection1,above)comparespricesbidinRound1withthetendercapsandthepreviousREFITtariffs.


Round2wasannouncedinNovember2011andmadeuseofthesameRequestforProposalsusedinRound1.However,thetotalamountofpowertobeprocuredwasdroppedto1,275MWinordertostimulateadditionalcompetition.Byreducingtheamountofpowersought,theDOEIPPunithopedtomaketheprocessmorecompetitive.Interestingly,thepricecapsremainedatthesamelevel,althoughthenewRFPstatedthatthegovernmentexpectedpricestofallandwasconsideringloweringthepricecapsinthethirdround.Therationalewasbasedonananalysisofworldwidepricesandimprovementsintechnology.Otherchangesincludedaceilingforthepartialindexingandstricterrulesregardingpricingoflocalcontent.

9DOEpresentationsrefertoinvestmentofR5.75bninWindow3,buttheIPPunithasupdatedthisfigure.

TENDEr OUTCOMES

16

TENDErOUTCOMES3

Atotalof79bidswerereceivedinRound2,nearlya50percentincreaseoverRound1despitethesignificantdropinthecapacityoffered.ThebidswerereceivedonMarch5,2012andtotaled323310 MW.Again,ateamoflocalandinternationalexpertswasusedtoevaluatethetendersandagainthereviewprocesswasheldinasecurelocationwith24-hoursurveillance.UnlikeRound1however,amoresophisticatedsystemwasusedtorecordandtrackthebiddingdocumentstoincreasesecurityandimproveefficiency.Fifty-oneprojectsmetthequalifyingcriteria.ThepreferredbidderswereannouncedonMay21,2012.Atotalof19bidswereselectedinRound2,including9solarPVprojects,7windprojects,2smallhydroprojectsandoneconcentratedsolarproject.

WindandsolarPVpricesinthesecondroundweremuchmorecompetitive,fallingonaverageby20percentforwindand40percentforPV(Table2).Therangeofpricesbidwasalsowider,withpricesvaryingfrom10.2to11.4USc/kWhforwind,andfrom17.6to22.4USc/kWhforphotovoltaic.Thepriceforconcentratedsolarfellby7percentto32USc/kWh,withonepreferredbiddertakinguptheremainingavailablecapacity.Therewaslittlecompetitioninsmallhydro,withonlytwoqualifyingbids,bothatthecappedpriceof13USc/kWh.

TheRound2preferredbiddersalsoofferedbetterlocalcontentterms(partlyinresponsetohighertargetsinthebiddocuments),withaveragelocalcontentrisingfrom38.4percentto53.4percentforsolarPV,from27.4percentto48.1percentforwind,andfrom34.6percentto43.8percentforconcentratedsolar.11 ThedeadlineforfinancialcloseforRound2wasextendedfromtheendof2012toMay9,2013whencontractsweresignedforall19projects.Accordingtogovernmentofficials,theresultsofRound2–particularlythelowerpricesandbetterlocalcontentterms–effectivelysavedthereputationoftheprogramandsuggestedtosomeofficialsthatcompetitivetendersmightbeawaytoachievesignificantlylowerpricesthanFITs.


TheprocurementdocumentsforRound3werereleasedonMay3,2013andwereagainbasedonthoseusedinpreviousrounds,butwithfurtherrefinements.Thetotalcapacityonofferwasrestrictedto1473MW,withindividualcapacitycapsfordifferenttechnologies.Themaximumsizeofindividual,smallhydroplantswasincreasedfrom10MWto40MW.Pricecapswereadjusted:windenergywasdroppedfrom115to100c/kWh,PVfrom285to140c/kWh,CSP’sbasepriceto165c/kWh,andsmallhydrofrom103to85c/kWh.AlaterbidnotescrappedpricecapsforbothPVandWindandincreasedthesmallhydrocapto106c/kWh.Biomassandlandfillgasenergypricecapswereadjustedupwardsto140and94c/kWhrespectively(allSouthAfricancents).Onceagain,bidderscouldofferfullyindexedorpartiallyindexedprices.Thepartiallyindexedportioncouldnotbelessthan20percentofthepriceandnotmorethan50percent.Bidpricesweretobeadjustedatfinancialclosebythedifferencebetweentheforeignexchangeratesusedinthefinancialmodelsatthetimeofbidsubmissionandtheratesreflectedinthespotpricesatthedateoffinancialclose.Evaluationwasagainconductedunderstrictsecurityconditionswithsignificanteffortspaidtoensuringatransparentprocess.Allfirmsandindividualsinvolvedintheevaluationprocesshadtomakedeclarationsofinterest.Independentreviewteamsscrutinizedreportspreparedbyevaluators,andanindependentgovernancereviewteamreviewedtheoverallprocess.

OnAugust19,2013,93bidswerereceivedtotaling6023MW.SeventeenpreferredbidderswerenotifiedonOctober29,2013.Theirbidstotaled1456MWandincluded787MWwindenergy,435MWPV,200MWCSP,18MWoflandfillgas,and16MWofbiomassenergy.PricesfellfurtherinRound3.SolarPVfellby68percentcomparedtoRound1,andwindenergyby42percent.CSPalsofell,although

10TheDOEannouncedafigureof3255MW,buttheDOEIPPUnitdatabaserecords3233MW.11ThisdatadiffersfromthatincludedinsomeDOEpublicpresentationsandincludesmoreaccuratedatacalculatedbytheDOEIPPunit.ThiscalculationisdonebyaggregatingtheTotalProjectValueforalltheprojectsinabidwindowforthatspecifictechnologyanddividingitbytheaggregateoftheLocalContentforalltheprojectsinabidwindowforthatspecifictechnology.AlsoimportanttonotethattheTotalProjectValueisthetermdefinedbytheEDteamintheIAandisusedasopposedtotheTotalProjectCost,whichisthetotaldebtandequityrequiredtofundtheproject.Thetwotermsandamountsarenotthesame.

TENDEr OUTCOMES

17

TENDErOUTCOMES 3

Round3hadanewtariffsystem(basepricesweretobepayablefor12hourseverydayand270percentofthebasepricepayableforfivepeakhourseveryday).Round3bidpricesforCSParethusnotdirectlycomparablewiththoseinRounds1and2.LocalcontentincreasedmarginallyforsolarPVfrom53.4percentinRound2to53.8percentinRound3andforCSPfrom43.8percentto44.3percent.Localcontentforwindenergyactuallydeclinedslightlyfrom48.1percentinRound2to46.9percentinRound3.

FinancialcloseforRound3wassetforJuly30,2014andprojectshadtoreachthecommercialoperationdate(COD)withinfouryearsofthebidsubmissiondate,i.e.,bytheendof2017exceptforCSPprojects,whichwererequiredtobeoperationalbytheendof2018.

3.4 Plans FOr rOund 4

Asnotedabove,theREIPPPPprogramhasbeenimplementedpursuanttotheIRP2010-30andauthorizedthroughtwoministerialdeterminationsspecifyingtheneededamountofnewrenewablepowergeneration(3725MWand3200MW).AfterRound3,2808MWstillremainedtobeallocatedcomprising1041MWofsolarPV,1336MWofwind,200MWofsolarCSP,121MWofsmallhydroand110MWofbiomass,biogasandlandfillgas.Round4tendersareplannedforAugust2014.

3.5 rOunds 1-3: cOmPeTiTiOn and Pricing

Asalreadynoted,Round1attracted28qualifyingbids,butinvestorsbidforfewermegawattsthanwereactuallybeingoffered.Biddersrealizedthattherewouldbealimitednumberofprojectsthatwouldbereadyintimetomeetthequalifyingcriteria,andthus,bidswereclosetothepricecaps.Biddersassumedthateventhoughtheirpriceproposalswerehigh,thelackofcompetitionmeantthatitwasunlikelythattheirbidswouldberejected.

Lesscapacitywasmadeavailableinsubsequenttenderroundsandcompetitionincreaseddramatically,bothinthenumberofbidsandthosethatmetandexceededthequalificationhurdles.Asresult,pricesfellsignificantly–assummarizedinTable3below.

TENDEr OUTCOMES

Round 1 Round 2 Round 3

wind 114.3 89.7 65.6

reduction from previous round -21.5% -26.9%

Total reduction from round 1 -42.6%

solar Pv 275.8 164.5 88.1


Total reduction from round 1 -68.1%

concentrated solar power 268.6 251.2 146.0*


reduction from previous round -45.6%

*The price structure for CSP in Round 3 was different to Rounds 1 and 2 and included a peak tariff 270% of the base price.Source: Constructed by authors from Department of Energy presentations.

Table 3: reiPPPP average Bid Prices, 2011 values (sac/kw)

18

TENDErOUTCOMES3

RealreturnstoequityinRound1wereclosetothe17percent(inlocalcurrency)thatwasenvisagedindeterminingtheoriginalfeed-intariffs.Equityreturnsdippedslightlyinroundtwoforwindandprobablymoresubstantiallyforphotovoltaic.Dollarreturnsintherangeof12–13percentwerereported.ReturnsfellfurtherinRound3,especiallyforsomeofthecorporatefundedprojects.

IncreasedcompetitionwasnodoubtthemaindriverforpricesfallinginRounds2and3.But,therewereotherfactorsaswell.Internationalpricesforrenewableenergyequipmenthavedeclinedoverthepastfewyearsduetoaglutinmanufacturingcapacity,aswellasongoinginnovationandeconomiesofscale.REIPPPPwaswellpositionedtocapitalizeontheseglobalfactors.Transactioncostswerealsolowerinsubsequentrounds,asmanyoftheprojectsponsorsandlendersbecamefamiliarwiththeREIPPPPtenderspecificationsandrequirements.

TENDEr OUTCOMES

19

KEy PrIvATE SECTOr ACTOrS 4

KEy PrIvATE SECTOr ACTOrS

Key Private Sector Actors

4.1 PrOjecT sPOnsOrs

ThefirstthreeREIPPPPbidroundsattractedawidevarietyofinternationalprojectdevelopers,sponsorsandequityshareholders.The64successfulprojectsincorporatemorethan100differentshareholderentities,46ofwhichparticipatedinmorethanoneprojectand25inthreeormoreprojects.Figure2showsshareholderswiththreeormoreprojects.ProminentequityplayershavebeentheinsurancecompanyOldMutual,bankssuchasStandardBankofSouthAfricaandtheIndustrialDevelopmentCorporation,specialistfundssuchasAfricaInfrastructureInvestmentFund,andsponsorssuchasMainstream,Mulilo,andThebe.AnItalianutility,EnelGreenPower,wasprominentinRound3with6successfulprojects.

4.2 Financiers

Fifty-sixofthe64projectsinRounds1,2,and3havebeenprojectfinanced.OneprojectinRound1(TouwsrivierSolarPark)issuedacorporatebondvaluedatZAR1billionandasmallhydroproject(Stortemelk)wasinitiallycorporatefinanced,butisnowbeingrefinancedthroughdebt.Sixprojectsoutof17inRound3werecorporatefinanced,allbytheItalianutility,Enel(whichhadbeenunsuccessfulinpreviousrounds).ReportsindicatethatreturnonequityforthecorporatefundedprojectsinRound3waslow.ThistrendtowardcorporatefinancinginREIPPPPmayormaynotcontinue,butitislikelythatmoreinternationalutilitieswillbeinterestedinenteringtheSouthAfricarenewableenergymarket,especiallyEuropeanutilitiesthatarestrugglingtogrowmarketshareintheirhomemarkets.

Figure 2: Prominent shareholders in reiPPPP windows 1, 2 & 3

OldMutualID

CDEGFM

OEn

elM

ainstr

eam

Mulilo

Thebe

Standard

Bank

AIIF

Bioterm/B

TSAEv

olutionO

neGen

esis

Gestam

pGlobele

qInnow

indPIC

Scac

tecSo

larIntik

onKuris

ani

Solar

Reserv

e

18161412108642

no.o

fpro

ject

spe

rsha

reho

lder

Source: Authors’ calculations.

20

KEy PrIvATE SECTOr ACTOrS4

Onaverage,acrossthethreerounds,approximatelytwo-thirdsoffundinghasbeendebt,withthehighestproportioninRound2andthelowestinRound3.Afurtherquarterhasbeenfundedfrompureequityandshareholderloans,withtheremainingfromcorporatefinance.Themajority,64percent,ofdebtfundinghasbeenfromcommercialbanks(ZAR57bn)withthebalancefromDFIs(ZAR27.8bn),andpensionandinsurancefunds(ZAR4.7bn).Eighty-sixpercentofdebthasbeenraisedfromwithinSouthAfrica.12

ThefivelargeSouthAfricancommercialbanks–Standard,Nedbank,ABSA,RMB,andInvestec–havedominatedREIPPPPlending.TheirrelativeshareofcommercialandoveralldebtfinancingisshowninFigure4below.Nedbankhasbeeninvolvedinthemostprojects(23)followedbyStandard(17),ABSA(14),RMB/FirstRand(11)andInvestec(4).Thesebankshaveallplayedleaddebtarrangingroles,althoughnotforalldeals,andinanumberofprojects,havealsoparticipatedasco-seniorlendersorasprovidersofsubordinatedmezzaninedebt.Debttenorsarearound15to17years(fromCOD)andspreadsoverJIBARarebetween310to400points(riskpremium250,liquidity120,andstatuarycosts30points).NedbankandABSA,betweenthem,wereinvolvedinthemajorityofprojectsinRound3.Someprojectsponsorshavecomplainedthattherehasnotbeenenoughcompetitionbetweenthebanks,andpremiumshavenotfallenasmuchaswouldhavebeenexpectedasbanksbecamemorefamiliarandcomfortablewiththeREIPPPPprocess.

12TheDevelopmentBankofSouthernAfrica,locatedinJohannesburg,hasbeenclassifiedaslocalinthisanalysis

Commercial Lenders 64% South African 86%Life Funds 5%

DFIs 31% International 14%

Figure 3: share of debt Financing in reiPPPP rounds 1, 2 & 3



21



ZAR 18

ZAR 16

Billio

ns

Nedbank

Stand

ard

Invest

ec

Old Mutu

al

ZAR 14

ZAR 12

ZAR 10

ZAR 8

ZAR 6

ZAR 4

ZAR 2

ZAR 0

Window 1

RMB

IDCABSA

DBSA

EKF

IFC Rest

Window 2 Window 3

Figure 4: share of initial debt Providers in reiPPPP

Source: Authors’ calculations from the time of financial close. Some debt has subsequently been syndicated to other banks or funds.Note: The “rest” category includes OPIC, AfDB, Liberty Group, ACWA, EIB, Sanlam, FMO, PROPARCO and Sumitomo.

RemaininglocaldebtfundinghascomefromtheIndustrialDevelopmentCorporation(IDC)andtheDevelopmentBankofSouthernAfrica(DBSA).TheIDCparticipatedin20dealsandtheDBSAin16deals,mostlyinarrangingvendorfinancingforblackeconomicempowermentandcommunityparticipation(Figure5).

AnotherfeatureoflocalfinancinghasbeentheinvolvementofinsuranceandpensionfundsasOldMutual,Sanlam,andLibertyhaveallbeeninvolved.OldMutualhasalsoparticipatedthroughitsIdeasFund,aswellasitsmajority-ownedspecialistinvestmentfund,FutureGrowth,andindirectlythroughAfricanCleanEnergyDevelopments(AECD),whichisajointventurebetweenAfricaInfrastructureInvestmentManagers(inturnajointventurebetweenMacquarieAfricaandOldMutual)andAFPOC(aMauritian-registeredcompany).ItisexpectedthatcommercialbankswillselldownmoreoftheirdebttothesesecondarycapitalmarketsandpositionthemselvesforongoingdebtexposureinfutureREIPPPProunds.

InternationalDFIsthathavebeeninvolvedhaveincludedtheInternationalFinanceCorporation(IFC)andtheDanishExportCreditagency(EKF)withthreeprojectseach,andtheNetherlandsDevelopmentFinanceCompany(FMO),theAfricanDevelopmentBank(AfDB),EuropeanInvestmentBank(EIB)andtheOverseasPrivateInvestmentCorporation(OPIC),withoneprojecteach.

22

KEy PrIvATE SECTOr ACTOrS4

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Figure 5: major debt Providers in reiPPPP rounds 1, 2 & 3


4.3 engineering, PrOcuremenT and cOnsTrucTiOn (ePc) cOnTracTOrs and equiPmenT suPPliers

Forty-nineEPCcontractorshavebeeninvolvedinthe64projectsduringthefirstthreeroundsofREIPPPP,themajorityinmorethanoneprojecteitherastheprimaryorsecondarycontractor.ProminentEPCcontractorswiththreeormoreprojectsincludeVestas(Danish),Acciona(Spanish),ConsolidatedPowerProjects(SouthAfrican),GroupFiveConstruction(SouthAfrican),JuwiRenewableEnergies(German),MurrayandRoberts(SouthAfrica),Abengoa(Spanish),ACSCobra(Spanish),IberdrolaEngineeringandConstruction(Spanish),NordexEnergy(Germany),Scatec(Norwegian),Suzlon(India),andTemiEnergia(Italian).ManyoftheseEPCcontractorshavesetupsubsidiarycompaniesinSouthAfrica.

ThemainsuppliersofwindturbinesandPVequipmentareshowninFigure6.WindturbinesuppliershaveincludedVestas,Siemens,Nordex,ABB,Guodian,andSuzlon,i.e.,mainlyEuropeancompaniesandaChineseandanIndiancompany.MainPVsuppliershavebeenSiemens,SMASolarTech,BYDShanghai,HanwhaSolar,3Sun,AEGandABB:i.e.,European,Chinese,andKoreanmanufacturers.Alocalmanufacturingfacility,DCDWindTowers,hasbeenestablishedattheCoegaIndustrialDevelopmentZoneintheEasternCape.AtleastfivePVpanelassemblyplantshavebeenestablishedinSouthAfricaoverthelastfewyears,andsomeofinternationalsuppliershaveusedthesetoachievelocalizationtargets.


23



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Figure 6: main wind and Pv equipment suppliers in reiPPPP rounds 1, 2 & 3


24

TrADE-OFFS5

Trade-Offs Between Prices And Economic Development Outcomes

5.1 ecOnOmic develOPmenT requiremenTs

AmongREIPPPPbidders,themostcontroversialaspectoftheprogramhasbeenitsstrongrelianceonnon-pricefactorsinbidevaluation.Thesefactors,organizedinbiddocumentsundertheheadingof“economicdevelopmentrequirements”aredesignedtoincentivizebidderstopromotejobgrowth,domesticindustrialization,communitydevelopment,andblackeconomicempowerment.Accountingfor30percentoftotalbidvalue,economicandsocialdevelopmenthasplayedamuchstrongerroleintheREIPPPprocurementprocessthannon-pricecriteriaarenormallyrequiredtoplaypursuanttotheSouthAfricangovernment’spreferentialprocurementpolicy.

Theserequirementswerecontroversialforseveralreasons:manyinternationalbiddersfeltthatthesefactorsweretoodemandingandplayedtoosubstantialaroleinbidvaluation,whiledomesticparticipants,backedbySouthAfricantradeunions,thoughttherequirementswerenotdemandingenough.Biddersofallkindsseemtohavebeenconfusedbysomeofthecriteria,especiallythosethatcalledforlocaleconomicdevelopmentplanstobepartofthebids.However,noguidanceonhowsuchplansweretobepreparedorhowtheywouldbeevaluatedwasinitiallyprovided.Also,astheprocessproceededthroughthreeroundsofbidding,someoftheeconomicdevelopmentrequirementsbecamemoreonerous,seeminglyinresponsetocomplaintsbylocalstakeholders,ratherthanasaresultofeconomicanalysisorfollowingconsultationwithbidders.Furtherchangesinsomeofthecriteriabecamethesubjectofrumorandspeculation,especiallybetweenRounds2and3,makingitdifficultforcompaniestopreparetheirproposalsgiventhetighttimefamesbetweenbidrounds.Perhapsmostimportant,REIPPPP’selaboratesystemforpenalizingandrewardingcontractorperformanceagainsteconomicdevelopmentcommitmentsbegsthequestionofwhatresourceswillbeavailabletocarryoutperformancemonitoring,makedecisionsregardingperformancepenalties,andresolverelateddisputes.

ThefocusofREIPPPPonlocalcontent,bothdefactoanddejure,hasbeensignificantlydifferentfromthatrequiredunderexistingframeworkslikethePreferentialProcurementPolicyFrameworkAct(PPPFA),promulgatedin2000,ortheBroad-BasedBlackEconomicEmpowerment(BBBEE)Actof2003withitsCodesofGoodPracticepublishedin2007.AnexemptionwasgrantedfromthePPPFA’srequirementthat90percentofthebidscorebeallocatedtopricewiththeremaining10percentallocatedtocompliancewithpreferencecategories(orthe80/20splitforsmallercontracts).Instead,REIPPPPdividesbidscoringona70/30basis,withtheformerallocatedtopriceandthelattertonon-price“economicdevelopment”criteria.

IncontrasttoBBBEE,REIPPPPemphasizesblackjobcreationoverblackownership,andreclassifiesenterpriseandsocio-economicdevelopmentaslocalcommunitydevelopmenttargetsratherthanBEEtargets.Overall,REIPPPPtargetseconomy-widejobs,localcontentbenefits,andlocalcommunitydevelopmentoverBEE.Appendix3showstheextenttowhichREIPPPP’seconomicdevelopmentcategoriesservetraditionalSouthAfricansocio-economicobjectiveslikeBEE.

ThesedeparturesfromexistinglocalcontentrequirementssuggestthatgovernmentofficialsviewREIPPPPasaprogramthat,inthewordsofthefirstRFP,“isinherentlyexcellentforachievingpositivesocio-economicoutcomes”(RSA,3Aug.2011,p.11).Governmentofficialsclearlyseeapotentialtoboostlocalmanufacturinginasectorthatiscompletelyunderdevelopedinthecountry.Becauseofthedistributednatureofrenewableenergygeneration,projectsitesofferanunusuallyintensebusinessfocusonruralareasthatotherwisemayhavelittlepotentialtoattractinvestment.

LocaleconomicdevelopmentconcernstakeavarietyofformsintheREIPPPPbidprocess,notallofwhichareincludedinRFPvolumeson“EconomicDevelopment.”Forexample,the“Qualification”sectionsoftheRFPsnotethatinordertobebidcompliant,allprojects

TrADE-OFFS BETWEEN PrICES AND ECONOMIC DEvELOPMENT OUTCOMES

25

TrADE-OFFS 5

musthaveSouthAfrican“entity”participationofatleast40percent.13 OthersectionsoftheRFPthatcallonbidderstosubmitreviewsoftheirfinancialmodelsdonebyprofessionalmodelauditors,requirethattheauditletterconfirmthatnomorethan60percentofprojectcapitalinvestmentconsistsofforeigncurrency.

ButthemainpresentationsofthesekindsofrequirementsareincludedinRFPvolumesonEconomicDevelopment.Appendix4oftheRFPshowshowthescoringcategoriesaretobemeasured,andindicates“thresholds”and“targets”for“onshorewind,”oneofthesevenrenewableenergycategoriescoveredbyREIPPPP.Meetingthethresholdlevelsimplymeansthatabidisminimallycompliant.Pointsarescoredbythebidforthesecategoriesiftheprojectexceedsthethresholdlevels(inRound1,tenpointswereawardedforachievementbetweenthresholdandtargetlevels,andanadditionalscoreoftenpointsforachievementsabovethetargetlevel).

Bidderswererequiredtosubmitvariouskindsofdocumentationtosubstantiatetheireconomicdevelopmentcommitmentsincluding:

• Acompleted“economicdevelopmentscorecard”(thetemplatewassuppliedwithbiddocuments)thatscoresbiddereconomicdevelopmentperformanceagainstgovernmenttargets

• Variouskindsofdocumentationtoconfirmcompliance,includingorganizationcharts,employeeinformation,shareholdercertificatesandagreements,etc.

• Aneconomicdevelopmentplanthat,amongotherthings,identifiesthesocio-economicneedsofthecommunitiessurroundingtheprojectsiteandoffersastrategyformeetingthoseneedswithgrantfunding14

• Areportingplan(requiredatfinancialclose)thatbreaksdowntheeconomicdevelopmentobligationsintoquarterlysegmentsoverthelifetimeofeach20-yearproject,alongwithquantitativemeasuresfortheobligationstoallowformonitoringandevaluationbygovernment

ThestandardImplementationAgreements(IAs)includedinRFPpackagesforeventualsignaturebyDOEandthewinningbidders,layoutanelaboratesystemofperformancerewardsandpenaltiesbasedonthequarterlyreportingbycontractors.PerformanceagainsteacheconomicdevelopmentcommitmentismeasuredusingformulasincludedinascheduletotheIA.Performancecreditsorpenaltiesaredeterminedquarterlyforeachsubcomponent,thenaddedtogetherattheendofthemeasurementperiod(theconstructionperiodandeach12-monthperiodthereafter).ThisdetermineswhetherornotthecontractorowesDOEpenaltypaymentsforunder-performanceduringtheperiod(Over-performanceisusedonlytooff-setunder-performance.DOEdoesnotmakeperformancepaymentstocontractors).Inaddition,under-performanceduringaquartercanresultin“terminationpoints”ifperformancescoresbelowdesignatedthresholdsintheIA.Ifcontractorsdonotrespondinasatisfactorywaytocorrectthecauseofeachterminationpoint,thepointsareaddedtogetherattheendofthemeasurementperiod.Ifthetotalexceedsdesignatedthresholds,DOEisentitledtoterminatetheagreement.Inkeepingwithwhatappearstobeacomplexandlabor-intensivesystemofperformancemeasurement,DOEreservestherighttohireindependentverificationexperts,knownas“EconomicDevelopmentIndependentMonitors,”whowillcheckcontractorreportingandconfirmcontractorcompliancewitheconomicdevelopmentcommitments.

13SouthAfrican“entities”mustbebasedandregisteredinSouthAfrica,andinvolveshareholdingbySouthAfricancitizens.14TheeconomicdevelopmentplanwaspartofthebidrequirementinWindows1and2,butwasonlyrequiredatfinancialcloseinWindow3.


26

TrADE-OFFS5


Technology First Bid Second Bid Third Bid

Threshold Target ActualBid Threshold Target ActualBid Threshold Target ActualBid

Onshore wind 25% 45% 27.4% 25% 60% 48.1% 40% 65% 46.9%

solar Pv 35% 50% 38.4% 35% 60% 53.4% 45% 65% 53.8%

solar csP 35% 50% 34.6% 35% 60% 43.8% 45% 65% 44.3%

Biomass 25% 45% Nobids 25% 60% Nobids 40% 65% 40%

Biogas 25% 45% Nobids 25% 60% Nobids 40% 65% Nobids

landfill gas 25% 45% Nobids 25% 60% Nobids 40% 65% 41.9%

small hydro 25% 45% Nobids 25% 60% Nobids 40% 65% Nobids

Table 4: reiPPPP local content scoring requirements and results

Source: Constructed by the authors from DOE IPP unit data (note: differs from data in DOE presentations).

REIPPPPwarnedthatoneeconomicdevelopmentcategory–localcontent–wouldhaveitsthresholdsandtargetsrevisedupwardsovertime,asmanufacturingcapacityincreasedinthecountry.BelowisasummaryoftheLocalContentScoringRequirementsandtheresults.

Localcontentrequirementsalsounderwentotherchangesasthebiddingprogressedthroughthethreerounds.InRound1,“localcontent”wasdefinedtomeanthetotalcostsattributedtoeachprojectattheCommercialOperationDate,excludingfinancecharges,land,andmobilizationfeesoftheOperationsContractor.InRound2,thedefinitionwasrefinedsothattotalcostswerelimitedtospendingonSouthAfricansandSouthAfricanproducts.Theexclusionswereexpandedtocoverimportedgoodsandservices,aswellasfinancecharges,landandmobilizationfees.

Round2alsoincludedarequirementthatbiddersprovidemoredetailedinformationontheirlocalcontentplans.Theyweretoldtoprovideabreakdownofthecomponentsandactivitiestobeundertakeninordertoachievethecommittedlocalcontentfigures.UsingatemplateprovidedintheRFP,thebreakdownwastobeusedtoidentifythecomponentsrelatedtoEPCcontractsandnon-EPCcomponents,theper-centageoflocalcontentforeach,alongwiththecostfiguresreflectedbythepercentages.

Finally,Round2alsoidentifiedcomponentsthathadbeenearmarkedbythegovernmentasprioritiesformanufacturinginSouthAfrica.Theseincluded:

•Windturbinebladesandtowers•PVmodules•PVinverters•ThemetalstructuresusedinPVplants

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TrADE-OFFS 5

DOEdidnotactuallychangeitsscoringmetricstoreflecttheseprioritycomponentsandindicatedthata“...gradualrolloutmaybeneces-saryinordertobuildmanufacturingcapacityinSouthAfrica”(RSA,Feb.1,2012).Nevertheless,thedepartmentmadeitclearthatfuturebidroundswouldfocusontheseprioritycomponentswiththeexpectationthateventuallytheywouldallbemanufacturedinthecountry.

InRound3,thedefinitionoflocalcontentwasfurtherrefined.Ontheonehand,costsincurredbytheprivatecompanyinconnectingtodistributionand/ortransmissionsystemswerenowexcludedfromthedefinition.Ontheotherhand,allraworunworkedsteelandalumi-numusedinthelocalmanufactureofcomponentsweredeemedlocallysourcedforthepurposesofcalculatinglocalcontent.ThischangereflectedtheDepartmentofTradeandIndustry’sdesiretoencouragelocalmanufacturersofcomponents(e.g.,windturbinetowersandsolarPVmountingstructures)tokeeptheircostsascompetitiveaspossiblebyseekingthebestpricesgloballyforprimarysteelandaluminum

Round3bidderswerealsorequiredtoprovideamoredetailedbreakdownofrelevantcoststhanhadbeenrequiredinearlierrounds,andtodifferentiatebetweencostsassociatedwith“keycomponentsandorequipment”(identifiedintheRFP)ontheonehand,andcostsfor“balanceofplant”ontheother.Keycomponentsincludedtheearmarkedcomponentslistedabove,plus18additionalcomponentsacrossthetargetedtechnologies.

Thescoringofeconomicdevelopmentcriteriaalsochangedinlaterrounds.DOEwantedtoincentivizecompliantbidderstomakecommit-mentsthatwereashighaspossible.Nopointswereawardedforcommitmentsuptoorequaltothethresholdlevel.Thecompliantbidderthatofferedthehighestcommitmentinrespectofaspecificeconomicdevelopmentsub-elementwasnowawardedfullpointsforthatsub-element,providedthatthiscommitmentwasabovethetargetlevel.Othercompliantbidderswereawardedpoints,inproportion,basedontheirpositionbetweenthehighestcompliantbidderandthethresholdlevel,orzeroifnothresholdlevelwasset.

Table5showsDOE’scalculationsofthenumbersofjobsandlocalcontentpercentagescreatedbydifferenttechnologiesinthedifferentrounds.Nodoubttheresultswereinfluencedbytheamountofenergybeingprocuredineachroundbutthecomparisonsdoillustratetheevolutionoftheeconomicdevelopmentoutcomes.


Technology Round 1 Round 2 Round 3

solar Pv

local content % 38.4 53.4 53.8

local construction jobs 2381 2270 2119

local operations jobs 6117 3809 7513

wind energy




concentrated solar power




Table 5: reiPPPP economic development Outcomes

Source: Constructed by authors from DOE IPP unit data (note differs from DOE presentations).

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TrADE-OFFS5

5.2 ecOnOmic develOPmenT: criTicism and cOnTrOversy

Local,aswellasinternationalstakeholdershavefavorablyreceivedmanyaspectsofREIPPPP.Buttheuseoflocalcontentrequirementsseemstohavegeneratedconsiderablecriticismandcontroversy.Thefollowingsectionsreviewsomeoftheseissues.15

5.2.1 jOB creaTiOn

AsTable5shows,thePV,windandCSPprojectsinRounds1,2and3promisetogenerateapproximately20,000temporaryconstructionjobsandapproximately35,000operationsjobs.16 Ifthesefiguresareaccurate,theyreflectaconsiderableachievement,butperhapsnotenoughtomeetallofthestakeholderexpectationsregardingjobcreationbyREIPPPP.Italsomaybethecasethatthecombinationofalloftheeconomicdevelopmentrequirementsmaybecounter-productivewhenitcomestojobcreation.Forexample,localcontentrequire-mentsarespecifiedinvalueterms,butthehighestvalueelementsofthemanufacturingandconstructionchainarenotalways,andperhapsseldom,associatedwiththosepartsthatyieldthemostjobs.Thereappearstobeconsiderablepotentialtorefinelocalcontentrequirementssothattheymaximizejobcreation,ifthatistheintent.

5.2.2 OwnershiP and jOBs vs. caPaciTy Building

SouthAfricanownershipandmanagementcontrolandjobsforSouthAfricanscombinetoaccountfor45percentofthenon-pricevalueofbids.Buttheinternationalexperiencewiththesekindsofrequirementssuggeststhatthiskindoffocusmaybemisdirected.Oneinternationalreviewofsuchrequirementsdescribesthe“primarylesson”frombestpracticeintermsoftheneedtofocusonlocalcapacitybuildinganddomesticvalue-addition,regardlessofthenationalityofthefirms,employees,orinvestors(WTI,2013).Localownershipmaybedesirable,butitisnotthesamethingascapacitybuilding,whichinvolvesthedevelopmentofmanagerial,technicalandoperationalskillsinnationalfirmsandthedomesticlaborforce.Andtoachievethehighestlevelofindustrialcapacitybuilding,policymakersmustfocusinacoordinatedwayonbasicpolicydeficienciesaffectinginfrastructuredevelopment,trade/industrialpolicy,andskillsdevelopmentandtransfer.Otherwise,theserequirementsbecomelittlemorethanadditionalcostsforforeignoperatorsandtheendusers.

5.2.3 manuFacTuring

LocalcontentrequirementsforRound3hadtheeffectofmakingfirmsmoveawayfromsimplysourcinglocalmaterials,forelementslikesupportstructures,towardtheestablishmentoflocalmanufacturingcapacityforhighvaluecomponentslikewindturbinesandblades.Butseveralissuesmakethisparticularlyriskyforcompetingfirms.First,globally,manufacturingofcomponentsforbothwindandsolarPVinvolverelativelymature,existingtechnologiesandwell-establishedindustries.Moreover,theseindustriesalreadyareexperiencingglobalover-capacityandintensecompetitionthatisresultinginverythinprofitmargins,ifanyprofitsaregeneratedatall.Thequestionforbidders

15OneissuenotdiscussedhereisthepossibilitythattheWorldTradeOrganization(WTO)mighttakeactionagainsttheuseoflocalcontentrequirementsinREIPPPP,astheWTOdidrecentlyagainsttheuseofsuchrequirementsinafeed-intariffprogramsponsoredbyCanada’sOntarioprovince.LikeCanada,SouthAfricawouldbeboundbyaWTOdecisiononthismatter.However,anextensivelegalanalysis,publishedbytheInternationalCentreforTradeandSus-tainableDevelopment(ICTSD),suggeststhatSouthAfricawouldavoidWTOactionagainstlocalcontentrequirements.Thisisbecausetheserequirementsareusedinapublicprocurementscheme,asopposedtoasupportschemelikethatemployedinconnectionwithOntario’sFITprogram.PublicprocurementisgovernedonlybyasinglearticleintheGeneralAgreementonTariffsandTrade(GATT),whichisunlikelytobeappliedbytheWTOincasesofrenewableenergy(KuntzeandMoerenhout,2013).16REIPPPP’sjobfiguresseemsomewhatmisleading.Theunitofmeasureforoperationsjobsisperson-years,calculatedoverthe20-yearlifeoftheproject.Forconstructionjobs,theunitisperson-yearscalculatedovertheconstructionperiod(typically18months).Thesefiguresarehighlyaggregated,designedtocomparewithfiguresfromotherindustries.Butthemeasurementsaredifferentfordifferentindustries,andthereforethecomparisonsarequestionable.Overall,theREIPPPPjobmeasurementissimplistic,and“jobcreation”ismarketedtothepublicinawaythatmostpeopleprobablydonotunderstand.


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TrADE-OFFS 5

beginningwithRound3iswhetherornotthegovernment-drivendemandforrenewableenergycanbesustainedlongenough,andathighenoughlevels(andhighenoughprices)tomakecommerciallyfeasibletheestablishmentofmanufacturingcapacity.Thisexistsinanenvi-ronmentwherepowergenerationhasfallenbehinddemand,andconsumersarealreadyunhappywiththehighcostofelectricity.Interna-tionalexpertsurgethatinsteadofprotectingnon-competitivelocalproducersofstandardtechnology,governmentsshouldsupportresearchanddevelopmentininnovativerenewabletechnologiesthatcancreateanewwaveofearlymovers,whetherforeignordomesticallyowned(Peszko,2012).17

5.2.4 enTerPrise and sOciO-ecOnOmic develOPmenT

Anareaofparticularconfusionformanybiddershasbeentheeconomicdevelopmentrequirementsfor“enterprisedevelopment”and“so-cio-economicdevelopment,”accountingforatotalof20percentofthenon-pricebidvalueofREIPPPPproposals.Biddersmustassesstheneedsofcommunitieswithina50kmradiusofprojectsitesandpreparestrategiescoveringhowtheseneedswillbemetwithcontributionsfromtheproject’srevenues.Socio-economicdevelopmentplansmustbepreparedbybiddersandsubmittedwithproposals.Butbeyondtheseminimalinstructionsinthetenderdocuments,DOEhasprovidednoguidanceonhowtoprepareacceptableplans,howtodemon-stratepotentialbenefits,andhasgivennoindicationofhowthesesubmissionswillbescored.ExpertsattheEnergyResearchCentreattheUniversityofCapeTownpointedoutthatthebiddersarerenewableenergyprojectdevelopers,notcommunitydevelopmentexperts,andthelackofguidanceriskssevereerrorsinthedevelopmentofthesegrantprogram.Amongmanyotherthings,theynotedthatitwasprematuretodevelopmeaningfulsocio-economicdevelopmentplansaspartofabidprocess,andthearbitrary50kmradiusrequirementrisksdividingcommunities,villagesandtownsintobeneficiariesandnon-beneficiaries:“Confusionandconflictarerisksinevitablyassociatedwithsucharestriction...”(Wlokas,Boyd,andAndolfi,2012).Makingmattersevenmorecomplicated,theresponsibilityforinformingcommunitiesregardingtheseandallothereconomicdevelopmentrequirementslieswiththeprojectdeveloper,becausethedetailedrequirementsinthebiddocumentsandrelatedguidancenoteshaveneverbeendisclosedtothepublic.

Othercriticshavepointedtoasevereconflictofinterestbetweendevelopersandeventualownersoftheseprojects.Developershaveincen-tivestopromisesubstantialcommunitybenefitsinordertosecureprojects,butowners(wheretheyaredifferentfromdevelopers)arelefttoactuallydeliveronpromises.Thisalsohasatendencytocreateunrealisticexpectationsonthepartofcommunities.

Afinalconcernamongbiddershasbeenthatsomeofthedirectfinancialbenefitstolocalcommunities,particularlytheprojectdividendsthatgointocommunitytrusts,arenotlikelytomaterializeuntilwellintothelifeoftheinfrastructureafterloansthathavefinancedlocalcommunityequityhavebeenserviced.Thismaynotbesoonenoughtoforestalldisappointmentamongcommunityleaders,someofwhomclearlyexpecttorealizequickfinancialgainsfromREIPPPP.ThecapacityoftheDBSAandIDCtocontinuetofundcommunityequitymayalsobelimited.

17Arelatedcontroversyhasbeenthepersistentallegation,especiallyvoicedbylocalbidders,thatdespiterefinementstotherequirementsbytheDOEIPPunitsomeEPCcontractorshavesuccessfully“gamed”thesystembycircumventingtheserequirements.Forexample,someprojectshavescoredwellonlocalcontent,butareallegedlyimportingfullyassembledPVpanels.Thesehighscoresareprobablyonlypossibleifpanelsaresoldbyparentcompaniestolocalsubsidiariesatbelowmarketprices,andthenthelocalmarkuponthepanelsiscountedaspartoflocalcontentvalue-addition.


30

KEySUCCESS6

Key Success Factors, Shortcomings and risks

Throughitsfirstthreebidrounds,theSouthAfricanREIPPPPprogramhasregisteredimpressiveachievements.Onelarge,equityinvestornotedthatREIPPPPwasthemostsuccessfulpublicefforttoattractprivateinvestmentininfrastructureinAfrica.Todate,ithassecuredinvestmentcommitmentsofUS$14billiontobuild3922MWofnewrenewableenergygeneratingcapacity.Thisplacestheprogramamongthetoptenprivatelyfundedrenewableenergyprogramsintheworldinrecentyears.Powerpriceshavebecomecompetitiveoverthelasttwobidrounds,andthespeedofimplementationhasbeenunprecedented.Thevastmajorityofprogramstakeholders,fromboththepublicandprivatesectors,judgeittobehighlysuccessfuloveritsfirstthreerounds.

ThenextsectionattemptstoidentifyfactorsthataccountforthesuccessoftheREIPPPP.Inaddition,thesectionlooksatprogramshortcomings,aswellassomeoftherisksgoingforward.Thesefactorsareorganizedunderthreegeneralheadings:1)programmanagement,whichprimarilycoversthegovernment’sadministrationoftheprogram,howitwasdone,whodidit,etc.;2)programdesign,whichincludesthesizeandstructureoftheprogram;and3)marketfactors,whichincludecharacteristicsofthemarketplaceenvironmentinwhichthebiddingtookplace,includingthebidders,privatefinanciers,advisors,aswellasdonorsandmultilateraldevelopmentbanks.

6.1 PrOgram managemenT FacTOrs6.1.1 POliTical suPPOrT

REIPPPPbenefitedtremendouslyfromhigh-levelpoliticalsupport,intheformofarelativelylonghistoryofpolicystatementsonrenewableenergy,butmoreimportantly,PresidentZuma’scommitmenttogreenenergyduringtheCOP15meetinginCopenhagenandSouthAfrica’ssubsequenthostingofCOP17inDurban,wherethegovernment’sGreenAccordwithbusinessandotherstakeholderswassigned.Adeeperanalysisofthepoliticaleconomyofthesecommitmentsisrequiredbutisbeyondthescopeofthispaper.WhydidSouthAfricavoluntarilycommittoreducingcarbonemissionswhenitfacednobindingobligationsundertheUnitedNationsFrameworkConventiononClimateChangeortheKyotoprotocol?AndwhydidSouthAfricaproceedeventhoughitsCopenhagenofferwassubjecttofinancialassistancethathasnotmaterialized?PostCopenhagen,SouthAfricatransformeditselectricityplanning.ItincorporatedacarbonemissionscapinitsIntegratedResourcePlanandforthefirsttimerenewableenergyoptionsfeaturedeventhoughtheoverallcostoftheelectricityplanincreased.Foracountryasdependentoncoalforitsenergy,andfacingextraordinarypovertyanddevelopmentchallenges,thiswasastrikingbreakfromthepast.TheeffectivenessoftheDepartmentofEnvironmentalAffairsinbuildingcoalitionsandinfluencingtheDepartmentofEnergy,Eskomandindustrystakeholderstoacceptanewelectricity-planningparadigmdeservesmorein-depthstudy.

6.1.2 insTiTuTiOnal seTTing

ThelargelyadhocinstitutionalstatusoftheDOEIPPunit,actingatarm’slengthfromDOEasakindofdedicatedprojectoffice,allowedand,tosomeextent,encouragedanoperatingapproachthatemphasizedproblemsolvingtomaketheprogramsuccessful,ratherthanautomaticallyfollowinggovernmentoperationalpoliciesandproceduresthatemphasizedenforcementofrules.

6.1.3 The reiPPPP managemenT Team

Theteamandtheteamleaderhadextensiveexperienceworkingwiththeprivatesector.TheyhadanexcellentworkingknowledgeofPPPcontracts;experiencemanagingconsultants,andcredibilitywithbothpublicandprivatesectorstakeholders.

KEy SUCCESS FACTOrS, ShOrTCOMINGS AND rISKS

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KEySUCCESS 6

6.1.4 managemenT sTyle

Becauseofitsbackgroundandskills,theDOEIPPunitexhibitednoneofthekindofmistrustofprivatebusinessthatsometimescharacterizesothergovernmentagenciesinSouthAfrica.DialoguewithprivatesectorcounterpartsonkeyREIPPPPissuesbeganalmostimmediatelyasdidtheuseofexternal,privatesectorexpertadvisors.

6.1.5 PrOgram resOurces

BysuccessfullyaccessingfundingfromsourcesliketheDBSA,donors,andaNationalTreasuryjobsfund,thenestablishingamechanismtocapturefeesfromclosedprojects,theprogramwasabletoremainlargelyofftheformalgovernmentbudgetthroughthefirstthreebiddingrounds.

6.1.6 qualiTy OF TransacTiOn advice

TheDOEIPPunitmadesurethattheyselectedexperiencedlocalandinternationaltransactionadvisorswhowouldbesuccessfullyabletotransferinternationalbestpracticeinPPPsandrenewableenergyprocurementintotheSouthAfricacontext.Teamsofprofessionalsfromdifferentlegalandfinancialfirmswererequiredtosittogethertodraftprocurementdocumentationandcontracts.Therewasexcellentcooperationbetweenthesefirmsandtheendresultwasaqualityprocurementprocess.

6.1.7 PrOgram managemenT shOrTcOmings

ThetransactioncostsfortheREIPPPPprogramweregenerallyhighforboththegovernmentandthebiddersandcertainlyhigherthanforaREFITprogram.Thegovernmenthashadtorelyonexternaltransactionadvisers.Thereispotentialforthetransferofskillsandexperienceinfutureprocurementroundsandtobuildcapacityintheproposedindependentsystemandmarketoperator.Butitisunclearhowquicklysuchcapacitycanbebuilttolevelswheresubstantialexternaladvicewillnotbeneeded.Unlesshandledcarefully,theearlydepartureofexternaladvisorscouldbeviewedasasignalofprogramdecline.

6.1.8 PrOgram managemenT risKs gOing FOrward

OneofthemostsignificantriskstothesustainablesuccessofREIPPPPrelatestooneoftheprogram’skeysuccessfactors–itsadhoccharacter.Thenon-departmentalinstitutionalsetting,theoff-budgetfunding,andtheentrepreneurialattitudeoftheprojecthaveallhelpedfacilitatetheprogramssuccessfulperformanceandavoidthedelaysandindecisionthatinthepasthavecrippledearlierattemptstodevelopIPPsinthepowersector.Butthisadhoccharacterwillinevitablygivewaytosomekindofformalization,ifonlytoguaranteeamoresecuresourceoffundingandsustainabilityfortheprogram.Thechallengewillthenbetoproceedwithinstitutionalizationinawaythatpreservesasmanyoftheprogrammanagementsuccessfactorsaspossible.IfEskomisunbundledinthefuture,thenitwillmakesensetolocatefutureIPPprocurementsintheIndependentSystemandMarketOperator.18

18Asystemandmarketoperatorbasicallyschedulesanddispatchesgenerationresourcestomeetdemand,butalsotypicallyperformsanumberofadditionalfunctionsincludingsystemplanningandprocurementandcontractingofnewcapacity(withintheframeworkofprioritiessetbyDOE’sIntegratedResourcePlan).CurrentlyinSouthAfrica,coresystemoperatorandmarketfunctionsareperformedbyEskom,thestate-owned,verticallyintegrated,single-buyerofpowerfordistributiontomunciplaitiesandalsodirectcustomers.Butcriticsarguethatthisisaconflictedrole,becauseEskomisaproducer,aswellasthepri-marypurchaserofelectricity.IfEskomcouldbeunbundled,arguablyasystemoperatorcouldbesetuptofunctionindependentlyofEskomtomoreeffectivelysourceneededpowergeneratingcapacity,usingallavailableprivate,aswellaspublic,sources.Thiswouldbean“independent”systemandmarketoperator.


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6.2 PrOgram design FacTOrs

6.2.1 acceleraTed rOll-OuT OF new generaTing caPaciTy

Despitethehigherinitialcostofrenewableenergy,REIPPPPofferedSouthAfricanssomethingtheythoughttheyurgentlyneededin2011,arelativelyfastwaytorolloutnewpowergeneratingcapacity.WhileitwouldtakeyearsforthelargepowerprojectsplannedbyEskomtobegingeneratingpower,REIPPPPwasdesignedtorolloutasignificantamountofpowerinaveryshorttime,usingtransparentprocurementandimplementationprocesses.Stakeholdersofallkinds,includingcriticsoftheinitialhighercostofrenewableenergy,appeartohaveadoptedawait-and-seeattitudetowardREIPPPP,givingittimetobuildmomentum.Asrenewableenergycostsfall,andSouthAfricafacesongoingsupplyshortages,industryplayersareaskingwhytheDOEisnotcontractingmorerenewableenergythatisonoffer.

6.2.2 PrOgram siZe

Asnotedearlier,REIPPPPisthelargestnationalIPPprogrameverattemptedinAfrica.Theprogramimmediatelycaughttheattentionoftheglobalenergydevelopmentindustry,particularlybecausetheEuropeanrenewableenergymarketshadbeenindecline.Theprogram’ssizemeantthattherewouldbemultiplebidwinnersandfutureprospects.

6.2.3 POTenTial PrOjecT PrOFiTaBiliTy

Initially,REIPPPPclearlyrepresentedopportunitiesfordeveloperstomakereasonableprofits.WhentheRound1biddocumentswerereleasedinAugust2011,developerssawwhatonecalled“REFIT-like”tariffswithcapssetatornearREFITlevels,meaningthattheprojectscouldpotentiallymakeequityreturnscloseto17percent.TheclearpotentialforprofitableRound1projectshelpedinitiateinterestintheprogramonthepartofawiderangeofbidders,whichhascarriedoverintosubsequentbidrounds.

6.2.4 The shiFT FrOm FiTs TO cOmPeTiTive Tenders

TheshifttocompetitivetenderingseemstohavehelpedtariffscomedownsharplyafterRound1,andthisreductionwasamajorfactorinthegovernment’swillingnesstocontinueitssupportforREIPPPPasa“successful”program.Formanydevelopingcountriesandemergingmarkets,includingSouthAfrica,theargumentforgreateruseofpotentiallymoreexpensiverenewableenergytechnologiesresonatesonlywheneffortsaremadetoclearlykeepcostsundercontrol.REIPPPPdoesnotproveconclusivelythatcompetitivetenderingisbetterabletodothatthanFITprograms,butitdoessuggestthatthismightbethecaseandshouldbeexploredmorevigorouslyevenincontextswhereelectricitymarketsarenotaslarge.

6.2.5 mulTiPle Bidding rOunds

AkeydesignalterationmadebeforeAugust2011wastochangetheREIPPPPfromaonce-offtendertoarollingseriesofbidrounds.Themultiplebidroundshavehadasignificantimpactintermsofbuildingconfidenceintheprogramamongoperatorsandinvestorsandgeneratingincreasinglevelsofcompetitionasmoreandmoreoftheseplayersbegintoparticipateinthetendering.Overall,thenumberofbiddersincreasedby49percentfromthefirsttosecondrounds,andanother18percentinthethirdround.


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6.2.6 exemPTiOn FrOm PPP regulaTiOns

ExemptingIPPsfromnationalPPPregulationsbydefiningthenationalgovernment-ownedpowerutility–initsroleastheoff-takerandcontractor–assomethingotherthanagovernmentagency,employsadefinitionaldistinctionthatwouldnotalwaysbepossibleinothercountries.Butwhateverthereasoning,subjectingtheseIPPstoSouthAfrica’scomplexandtime-consumingPPPruleswouldhavedramaticallyslowedand,perhapssubverted,thissuccessfulprogram.

6.2.7 nOn-negOTiaBle PrOgram characTerisTics

Insomeways,REIPPPPwasperceivedtobe“privatesector–friendly,”buttheteamalsohadenoughexperiencewithprivatesectorinvestmentdealstounderstandwhereandhowtocontrolbidderbehaviorandrestrictopportunitiesforgamesmanshiportime-consumingnegotiations.Chiefamongtheseeffortswerethenon-negotiablePPAsandIAsthatweremadeavailabletobiddersalongwithothertenderdocuments,thestandardizedsetoffinancialdatathatbidderswererequiredtoprovideforevaluationmodels,andtherequirementthatbidsbefullyunderwrittenwithdebtaswellasequity.19 Thislatterrequirementeffectivelyeliminatedoneofthemainshortcomingsoftypicaltenderprocesses–thattheyincentivizeunder-bidding(or“low-balling”)towincontracts,thenrenegotiationinthehopesofsecuringmoreprofitabledeals.

6.2.8 ecOnOmic develOPmenT requiremenTs

REIPPPP’seconomicdevelopmentrequirementshavebeencontroversial,oftenconfusing,andexpensiveforbidderstorespondtotheserequirements.ButinSouthAfrica,asinothercountries,theserequirementshavealsohelpedtogeneratepoliticalsupportfortheseprogramsfrompoliticians,investors,aswellasthegeneralpublic.Byincreasingtheroleofthesefactorsto30percentofbidvalue,theprogramhelpedincreasethevisibilityofeconomicdevelopmentconsiderationsandunderscoretheirimportance.TheSouthAfricanParliamentseemstohaveconcludedthattheeconomicdevelopmentdimensionoftheprogramhasbeensuccessful,basedonthecommitmentsmadeduringthebidrounds.

6.2.9 sOvereign guaranTee

Thepoliticalwillbehindtheprogram,mentionedaboveundermanagementfactors,wasgivenpracticalshapeintheformofsovereignguaranteesintheImplementationAgreementsbackingEskom’spurchaseofpowerfromtherenewableenergyprojects.TheNationalTreasury’sFiscalLiabilityCommitteethatformallyapprovedtheissuingofthegovernmentguarantyscrutinizedthetransactions.(Thereisnoreservefundorcontingentliabilityfundsetasideforeachtransaction).SouthAfrica’srelativelystronginternationalcreditstandingmeansthatbanksandinvestorswillacceptsovereigncountryriskwithoutrequiringpoliticalriskinsurance,aswouldbethecaseinvirtuallyeveryotherAfricancountry.Whatisinterestingisthatthesesovereignguaranteeswererequired(oroffered)despiteEskom’sinvestmentgradecreditrating.Clearly,thereareconcernsaroundEskom’sfinancialstandingandperhapstheprospectsofunbundlingandelectricitysectorreform.

19OtherstandardizedagreementsincludedImplementationAgreementsandDirectAgreements.


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6.2.10 PrOgram design shOrTcOmings

• Marketreadinessoverestimated.Thesizeandreadinessofthelocalrenewableenergymarketwereinitiallyoverestimated,resultinginlimitedcompetitioninRound1andbidpricesclosetothepricecaps.Itmighthavebeenmoreprudenttostartsmaller,thengraduallyrampuptheprogram,withlargerblocksofcapacitybeingofferedinsubsequentrounds.

• Closedenvelopebidsversusdynamicreverseauctions.Useofthesingle-priceoffer(ratherthanadynamicreverseauctionasemployed,forexample,inBrazil)alsomayhaverestrictedcompetition.20

• Hightransactioncosts.ThetransactioncostsfortheREIPPPPwerehigherforboththegovernmentandthebiddersthantheywouldhavebeenforaREFITprogram,althoughthesecostswereultimatelysmallforinvestorscomparedtotheoverallprojectcosts.Withoutitsearlyaccesstoadequatefinancialresourcesandexpertise,theDOEIPPunitwouldhavestruggledtoachievethequalitylevelsthatcontributedsomuchthecontinuinginterestofprivatesectorplayersinREIPPPP.

• BiasagainstSMEs.Finally,highercostsofthiskindcanbecoveredbylargerandmoreestablishedcompanies,butpotentiallyserveasabiasagainstSMEsandworkagainstmostgovernments’explicitpoliciesinfavorofSMEinvolvementintherenewableenergysector.However,thelargenumberofinvestorsandcommunitytrustsinvolvedintheREIPPPisanindicationthatopportunitieshavebeenmadeavailabletonewplayers.SME’swerebroughtinbybiggercompaniesasminorityshareholdersonanumberofthebids.Also,theentireREIPPPPprogramhascreatedmultipleopportunitiesforSMEsintheformofadvisoryservices,economicandsocialdevelopmentconsultantsandconstructioncontractors.Theparallel,smallprojectsIPPprocurementisanattempttodomorethanREIPPPPtoencouragelocalSMEinvolvementinthesector.

6.2.11 PrOgram design risKs gOing FOrward

Fourkindsofprogramdesignriskmaycreateproblemsinthefuture:

• Deliveryfailure.Thefirstdimensioninvolvesthepossibilitythattheeconomicdevelopmentrequirementswillnotdeliverexpectedresults.Inparticular,supportfornewSouthAfricanindustriesaimedattheproductionofrenewableenergycomponentswillfacechallengesinaglobalindustryalreadyaffectedbyover-supplyandseverecompetition.Jobgrowthresultingfromsuchrequirementsmaynotbesustainableinthelongtermandislikelytoresultinhighercostsforpowerthanwouldhavebeenthecasewithouttherequirements.Finally,localcommunitiesmayseefewerrealfinancialoreconomicbenefitsfromlocalprojectsthantheyexpect.Thisinevitablyleadstodisappointmentwithandconfusionaboutthecommunitydevelopmentaspectsoftheeconomicdevelopmentrequirements.Eachprojectisexpectedtoinvestatleastonepercentofrevenuesincommunitydevelopment,butfewprojectdevelopershaveexperienceindesigningeffectiveprograms.Furthermore,thebenefitsthatshouldaccruethroughlocalcommunityshareholdingwilltaketimetoberealized:shareholderloanswillfirstneedtoberepaid.Ingeneral,aninabilityofREIPPPPtodeliverintheseareascouldresultinlocalcommunitydissatisfaction.Itcouldalsohighlight,atanationallevel,therelativelyhighercostsofsomeoftherenewableenergysupplytechnologies,leadingtoquestionsaboutthewisdomofpursuingtheseenergyalternativesandpotentiallyunderminingtheoverallpoliticalsupportfortheprogram.

• Failuretomonitor/manage.Asecond,relateddimensionofriskinvolvesthepossibilitythattheeconomicdevelopmentactivitieswillnotbeappropriatelymonitoredormanagedbythegovernmentoverthelifeofthecontracts.Severalnotableexamplesexistofagenciesresponsibleformonitoringlocalcontentperformanceindevelopedcountries,whichhavestruggledtoadequatelyperformtheirtasksdespitehavingconsiderablenumbersofprofessionalstaff(WTI,2013).Afterthefirstthreeroundsofbidding,theREIPPPPhadgenerated

20Dynamic,reverseauctionsliterallyreversetherolesofbuyersandsellers.Asinglebuyeroffersacontractforbidding.Multiplesellersthenofferbidsonthecontract.Astheauctionprogresses,sellerscompetewithlowerprices.Thebuyerisabletoseealloftheoffersandchooseanythatareattractive.Whendoneinrealtime,usuallyviatheinternet,thedynamicreverseauctioncanachieverapiddecreasesinpricethatarenotusuallypossiblewithstatic,paper-basedbidding.


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64separateIPPcontracts,eachwithalifespanof20years,eachinvolvingcommitmentstoasmanyas17economicdevelopmenttargets,eachreportingperformanceonaquarterlybasis.AsdescribedaboveinSect.5.1,thisreportinginturnwillbeusedtocalculateperformancedeductionsorcredits,aswellasterminationpoints.Inthecasesofterminationpoints,contractorrectificationprogramsmustbereviewedinmostcases,anddisputeresolutionislikelytobeneededinsomecases.ThestandardImplementationAgreementmakesvaguementionofthefactthatDOEreservestherighttohire“EconomicDevelopmentIndependentMonitors”whomayberecruitedinsomecasestohelpDOEconfirmcontractorcompliance.Butwithoutasubstantialnumberofpermanentprofessionalstaffandanongoinggovernmentbudgetallocationtocoverperformancemonitoringandevaluationcosts,itisdifficulttoseehowthismonitoringworkcanbesustainedatanappropriatelevel.

• Transmissionconstraintsanddeemedenergypayments.ItisbecomingapparentthatEskom’stransmissionplanninghaslagged,orhasnotbeensynchronizedwith,theREIPPPPawardofnewgenerationprojects.Thereisariskthatsomecompletedrenewableenergyprojectsmaynotbeabletoconnecttothegridinatimelyfashion.Theproblemisgenerallynottheshallowconnections(i.e.,thetransmissionconnectionstothenearestsubstationsthatmostdevelopersarefundingorconstructingthemselves),butratherthedeepconnectioninvestmentsthatEskomneedstomaketostrengthenthetransmissionbackbonetoevacuateallthenewenergythatisgeneratedintheseremoteareas.Inthesecases,Eskomastheoff-takerwillbeliablefordeemedenergypayments,eventhoughnoelectricityisbeingfedintothegrid.ThesesituationscouldleadtoreputationalrisksforREIPPPP.

• Thesingle-buyerroleofEskom.ThisisatopicthathasbeenatthecenterofafiercedebateinSouthAfricaforoveradecade,andacompletediscussionofitisbeyondthescopeofthispaper.Criticshavearguedthattheutilityhasbeenmismanagedandisnowinsignificantfinancialdistress.Asolutionlongpromotedbytheinternationaldevelopmentcommunityistobreakuptheutilitybyunbundlingitskeyfunctionsintogeneration,transmission,anddistributioncompanies,someorallofwhichcaneventuallybeprivatized.Eskom’spossiblefuturecircumstancespresentobviousriskstoaprogramlikeREIPPPP.IfEskom’sfinancialhealthcontinuestodeteriorate,thegovernment’ssovereignguaranteemayhavetobecalledontopayIPPs.Inturn,thatcouldaffectthegovernment’screditstanding.IfEskomwereeventuallyunbundled,asuccessorentitywouldpresumablyinheritthePPAcontracts(andsovereignguarantees).ThecreditworthinessofanysuchsuccessorwouldbeofcriticalconcerntothenationalgovernmentandIPPsalike.Atthemoment,theprevailingviewingovernmentseemstobethatEskomshouldcontinueasis–asthestate-ownednationalmonopolyutilitythatactsasasingle-buyerofpowerfordistributiontoratepayers.But,ifthatviewbeginstochange,itwillhaveimplicationsforthefutureofREIPPPP.

6.3 marKeT FacTOrs

6.3.1 glOBal suPPly and demand OF renewaBle energy

TheinterplayofrenewableenergysupplyanddemandatthegloballevelhasclearlybenefitedREIPPPP.Theslow-downinOECDmarketsmeantthataprogramthesizeofREIPPPPattractedconsiderableattentionfromtheinternationalprivatesector.Thishelpedincreasecompetitionandlowerpricesasthebiddingproceeded.

6.3.2 dOnOr and mulTilaTeral develOPmenT BanK suPPOrT FOr renewaBles

Thepublicpolicyaspectsofrenewableenergy,particularlytheperceivedneedtouseitinmitigatingclimatechange,havegeneratedinterestinrenewableenergyamongmembersoftheinternationaldonorcommunity,includingbi-lateraldonoragenciesandmulti-lateraldevelopmentbanks.Eventhoughrenewableenergygenerationisalreadyaworldwidecommercialindustry,insomecasesthisinterestonthepartofdonorsandDFIstranslatesintothewillingnesstousegrants,concessionalfinanceorinnovativefinancialinstrumentstopromotetheexpandeduseofrenewableenergy.REIPPPPbenefitedtoanextentfromearly-stagedonorfundingoftechnicalassistance,aswellastheinvolvementbyDFIs(e.g.,theIFC)asprojectfinanciers.DonorsandDFIshavealsodiscussedtheideaofissuingbondstohelpwiththe


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refinancingofexistingREIPPPPprojectdebt,andthecreationofdonor-capitalizedfacilitiestoprovidesubsidizedtransactionsupportandprojectcreditenhancements.Inearly2014,theSouthAfricangovernmentissuedatendertodesignandstructureafundthatwouldfacilitateDFIparticipationinfutureREIPPPPwindows.MoreDFIfundingprobablywillbeneededforBEEandcommunityownershipinfuturerounds.

6.3.3 The sOuTh aFrican BanKing secTOr

Thecountry’sbankingsectorhasalsoplayedalargeroleinthesuccessoftheprogram.Thissectoristhelargest,deepest,andmostsophisticatedinAfrica.Itishighlyliquid,offerslong-termdebt(15to17yearsforREIPPPPprojects),understandsprojectfinance,andhasexperiencewithPPPsandprivatefinanceofpublicinfrastructure.Thesectoralsoincludesasmall,butfunctioningsecondarymarketinbondsandsyndicatedpaper.Whiletheindustryisperceivedtobeconservativeandexpensive,ithasbeenessentialinhelpingREIPPPPachievesomanyclosedtransactionsinarelativelyshortperiodoftime.

6.3.4 OTher advisOry services

SouthAfricaalsohasarelativelywidearrayofotherkindsofsophisticatedadvisoryservicesneededforREIPPPPprojects,includinglegalfirmsandtechnicalconsultants(andalsoburgeoningeconomicandsocialdevelopmentadvisors)availabletohelpwiththedesignandimplementationofcompetitivebids.TheseserviceswereessentialforthesuccessofREIPPPP,butwerestretchedtothelimitbythesizeoftheprogram.21

6.3.5 marKeT shOrTcOmings

• Limitsonthesupplyofadvisoryservices.Becauseofthehugedemandsmadeonthelocalconsultingindustry,somefirmswerepermittedtoofferadvisoryservicestoboththegovernmentandprivatebiddersandfundersaslongastheycreatedadequateinternalbarrierswithinthefirmtolimitpotentialconflictsofinterest.Somebidderscomplainedthatlegalandfinancialfirmswereofferinga“onesizefitsall”service,whichwasnotalwaysappropriateforspecificprojects.

• Inabilitytosupportsmallprojects.Therisk-aversecharacterofSouthAfrica’ssophisticatedcommercialbankingsectorhasmeantthatithasbeenlimitedintheextenttowhichitcanenthusiasticallysupportallofREIPPPP’sobjectives.Forexample,oneobjectivehasbeentoallowsmall-andmedium-sizedSouthAfricanfirmstogainfootholdsinthecountry’semergingrenewableenergyindustry.Inanefforttomoredirectlypursuethisobjective,thegovernmentlaunchedtheso-calledSmallScaleProjectsIPPTenderinAugust2013,aimedatsmaller-scaleprojectsof1to5MWofinstalledcapacity.ButtheSouthAfricancommercialbankingsectorlackstheincentivestosupportthesesmallerprojects.Smallersponsorsthatlackthebargainingpowertonegotiatecost-effectivecontractsforsupply,operations,andmaintenance,orlacktheexperiencetomitigatecompletionandperformancerisks,facetheprospectsofhigherequityrequirementsorhigherdebtmargins.FormanySouthAfricanbanks,thesekindsofsponsorrisksmeanthatmanysmallerprojectsaresimplynotcommerciallyviableorarenotevenworthduediligencecosts.

21Thesizeandpotentiallife-spanoftheprogramhasalsoencouragedinternationalconsultanciestoestablishofficesinSouthAfrica.


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6.3.6 marKeT risKs gOing FOrward

Theprincipalmarket-relatedrisksareassociatedwiththevolatilityofprivatesectorinterestinsuchaprogram,andthelikelihoodofoperatorsandinvestorsbackingawayfromnewbidroundsthemomentthateventssuggestthattheirinterestsarebetterservedelsewhere:

• Globalmarketrecovery.Iftheglobalslow-downaffectingtherenewableenergyindustryexperiencesaturn-around.andtheindustrybeginstodemonstraterenewedgrowth,theremaybemuchlessinterestinREIPPPPamongoperatorsandinvestors,particularlyiftheprogram’seconomicdevelopmentrequirementsbecomemoreonerous.

• Inabilitytolowerpricesfurther.Anumberofprivatesectoractorshavenotedthatbidpricinghaslikelybottomed-out.Priceshavecomedownbecauseofincreasedcorporatebalancesheetfunding,toughernegotiationswithEPCcontractors,andmorecost-effectivesourcingofcomponents.Bankspreadshaveremainedlargelyunchangedoverthethreerounds,andthereislittleindicationthattheywilldecreaseinthefuture(althoughthedominanceoftwooftheSouthAfricanbanksinRound3mayspurtheotherstobemorecompetitiveinRound4).Duetoalackofforeignexchangeprotection,sponsorsareunlikelytoturntoforeignbanksforfinancing.IfdomesticbanksareunabletosyndicateexistingREIPPPPdebtofftheirbooks,spreadscouldactuallyincreaseduetohigherliquiditypremiums.Nevertheless,thegovernmentislikelytopressforlowerbidpricesbecause:SouthAfricanpricesarestillhigherthanthosebeingachievedinotherjurisdictions.22 Butanyadditionaleffortstousecapstopushforfurtherpricereductionsmaydiminishthebankabilityofprojectsandtheinterestoftheprivatesector.Thesameistrueifthegovernmentpushesformoreonerouseconomicdevelopmentrequirementstoincreasevalueformoney.23

• Negativereactionstoprogramformalization.Effortstoinstitutionalizewhathasbeen,todate,alargelyadministrativelyadhocprogramcouldleadtodelaysandindecision.Privatesectoractorsstillseementhusiasticaboutparticipatingintheprogram,butremainextremelyvigilantregardinganysignofareturntothepre-REIPPPPmanagementstylethatledtosomanycostlyanddisappointingfailures.

22Forexample,Brazilhasachievedbidpricesforwindenergybelow5USc/kWhcomparedtoSouthAfrica’slowestbidof6.6USc/kWhinRound3.23ExacerbatingthisproblemisthelikelihoodthatthelocalDFIslikeDBSAandIDCwhohavebeenfinancingeconomicdevelopmentactivitieshaverunoutoffundingforthisworkorwillsoondoso.


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LESSONS FOr OThEr DEvELOPING COUNTrIES7

Lessons for Other Developing Countries

SouthAfrica’sREIPPPPprogramprovidesavaluableopportunitytolearnhowtoprocurerenewableenergyprojectsquicklyandeffectivelyindevelopingcountries.Ofcourse,notallofREIPPPP’ssuccessfactorscanbeeasilyduplicated,particularlyinlow-incomecountries.MostAfricancountriescannotmountaprogramofREIPPPP’ssize,orwithitsrolling,multi-roundsortofbidprocess.NoAfricancountryhasthekindofbanking,legalandotheradvisoryresourcesthatarereadilyavailableinSouthAfrica.AndfewdevelopingcountriescaneasilymusterthekindofprogramresourcesthatSouthAfricahasappliedtoREIPPPP,althoughitshouldberecognizedthatSouthAfricanbanks,infrastructurefunds,andadvisoryservicesareincreasinglyactiveintherestofAfrica.However,notallofthesuccessfactorsintheSouthAfricanREIPPPPneedtobepreciselyduplicated.Somecanbereplicatedwithproxies;othersmaybeignored.Nevertheless,theSouthAfricanexperiencedoessuggestlessonsregardingwhatfactorsareessentialincountrieswherethegovernmentandprivatesectorplayersarestronglycommittedtorollingoutarenewableenergyprogram.

7.1 adOPT a Business-Friendly aPPrOach

Privatesponsorsandinvestorsintherenewableenergysectorwanttosellpowertogovernments,particularlynowthattheglobalmarketfortheseservicesstillseemstoberecovering.Ifdealsarereasonablyprofitableandkeyrisksaremitigatedinanacceptablemanner,aconsiderableamountofprivatesectorinterestislikely.Andthelikelyinterestofcommercialbanks,infrastructurefundsandprojectsponsorsfromotheremergingeconomiesshouldnotbeunderestimated.REIPPPP’soperatorsandinvestorshaveshownremarkablylittlesensitivitytopastmistakesandpolicyshiftsinthepowersector,andalthoughtheyremainwaryoftheconsequencesoffuturepolicychangesorproblemsresultingfromattemptstoformalizethestructureoftheprogram,theyseemremarkablyconfidentthattheirprojectswillendure.Forthatreason,todatesuchpolicyandgovernanceissueshavenotplayedasignificantroleinbankcreditcommitteedecisionsonprojects.PrivatesectorplayersinSouthAfricaseemmostimpressedwithfactorsthatwouldberelativelyeasytoreplicate–thingsliketheeffortsoftheDOEPPPunittocommunicatewiththemonkeyissues,theunit’strackrecordofconsistentlymeetingprogramdeadlines,thewidespreaduseofprivatesectoradvisors,andthegeneralbusiness-friendlyapproachoftheprogram.

7.2 TaKe advanTage OF exTernal sOurces OF Funding

DonorsandDFIsareinclinedtohelpwithrenewableenergyprograms,andthefundingtheyprovidecanhelpfillavarietyofgaps.Donorfundingcanhelpimproveinternalcapacitytodesignandmanagetheseprograms,bysupplyingadvisors,coveringprocurementcosts,etc.Donorscanalsohelpreduceprojectpreparationcosts(e.g.,bypayingforstandardizeddocumentation),aswellasprovidecreditenhancementsforprojectsponsors.PartialriskguaranteesofferedbyDFIscanbecriticalinstrengtheningsovereigngovernmentguaranteesincountrieswithbelow-investmentgradecreditratings.Donorsaregenerallyeagertohelpwiththeimplementationofthesmall-scaleIPPprogram.Othercountrieswithgovernmentcommitmenttowell-designed,renewableenergyprograms,shouldexplorethepossibilityofelicitingsupportfromdonorsandDFIs.

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COUNTrIES 7

7.3 maKe a case FOr renewaBle energy (…and KeeP maKing iT)

Inmostdevelopingcountries,aconvincingcaseneedstobemaderepeatedlytojustifytheprocurementofrenewableenergy.REIPPPPwasprecededbyseveralyearsofpolicyproposalsthatsupportedclimatechangemitigation.Thisbackground,combinedwiththeloomingthreatofpowershortagesinthecountry,andfrustrationwithEskom’slackofactiononIPPs,meantthatREIPPPPwasinitiallygiventhebenefitofthedoubt,evenbycriticsofrenewableenergycosts.Asthetenderdesignworkstarted,theDOEIPPunitemphasizedtheservicedeliveryandeconomicdevelopmentimpactsoftheprogram.Again,thisresonatedwithpoliticiansandratepayerswhowereworriedaboutunemploymentandlackofeconomicandsocialdevelopmentinruralareas,aswellaswithsomeinvestorsinterestedinsocialimpacts,suchaspensionfunds.TheeconomicdevelopmentrequirementssuggestedthatREIPPPPwouldgeneratetangiblebenefitsthatshouldhelpoffsettheincreasedcostsforpower.Aboveall,theDOEIPPunitkeptmakingthecasefortheprogramateveryopportunity,ininformalgovernmentmeetings,conferences,cabinetmeetings,andpresentationsbeforeParliament.Noonewasallowedtoforgetthattheprogramseeminglyhadstrongjustifications.

7.4 Find a PrOgram chamPiOn

Itisalmostaclichénowtotalkabouttheimportanceofprogramchampionsindrivingsuccessfulprogramsofthiskind.Someonewithcredibilityneedstobeabletointeractconvincinglywithseniorgovernmentofficials,effectivelyexplainanddefendtheprograminmeetingswithstakeholders,dealwithdonors,selectandmanageconsultants,communicatewiththeprivatesector,andmanageacomplicatedprocurementandcontractingprocess.Thisdoesnotnecessarilyneedtobeaseniorgovernmentofficial.Butitshouldbesomeonewhoisfamiliarwith(andfamiliarto)seniorofficials,aswellassomeonewithenoughexperienceworkingwiththeprivatesectortobecomfortableadoptingthebusiness-friendlyapproachmentionedabove.ThisisaclearlessonoftheREIPPPPprogramsuccess,butrepresentsasuccessfactorthatisprofoundlydifficulttoreplicate.

7.5 idenTiFy a PrOgram design ThaT suiTs cOunTry circumsTances

Developingcountriesandtheirdevelopmentfinancepartnersshouldcarefullyconsidertheextenttowhichdifferentelementsofprogramdesignfitcountrycircumstances.REIPPPPillustratesthislessoninthegovernment’sconsiderationofcompetitivetendersrelativetofeed-intariffregimes.FITshave,ofcourse,longbeenthedefaultapproachinrenewableenergyprograms,andwereinfactstronglyadvocatedbysomeoftheREIPPPPadvisors.FITsarelesscostlytomanagethantendersorauctionandcanincludepricecapsorperiodictariffadjustmentmechanismsaswaystocontrolprices.ButREIPPPP’sexperiencesuggeststhatcompetitivetendersforrenewableenergyarepotentiallyanattractivealternativetoREFITsbecausetheymaybeabletokeeptariffsundertightercompetitivecontrol.VariousadaptationsoftheREIPPPParepossibleincludingloweringtransactioncoststhroughsimplerRequestsforProposals(RFPs)andeconomicdevelopmentrequirements.REIPPPPdemonstratesthatfundingthehigherinitialtransactioncostswillultimatelybemorecost-effectiveiflowerpowerpriceseventuallyresultfromtheprocess.24

24Thecaseforauctionsissimilartothatfortendering.Competitivetendersgenerallyincorporateaweightingofpriceandnon-pricefactors,whileauctionsareawardedsolelyonthebasisoflowestprice(sometimesafteranumberofbiddingrounds)amongqualifiedbidders.Runningeffectiveauctionsmightrequireevengreatertime,expenditure,transactioncosts,expertiseandcapabilitiesthanrunningtenders.Auctionsmightalsoencourageunderbidding,withtheriskofsubsequentcontractfailures.Buttheexperiencewithdynamicreverseauctions–forexample,forwindenergyinBrazil–hasbeenpositive:competitionhasdrivenpricesdowndramatically.Insomesituations,itmightbeworthwhiletoexplorethepossibilityofahybriddesigninwhichwinningpricesfromadynamicreverseauctionaresubsequentlyweightedwithnon-pricefactors.


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7.6 ensure qualiTy PrOcuremenT and cOnTracTing dOcumenTaTiOn and PrOcesses are in Place.

WhetheraFITorcompetitivetenderischosen,aneffectiveprocurementmechanismisrequired,whichissuesRFPs,hasclearqualificationandevaluationcriteria,andhasbankablepowerpurchaseandimplementationagreements,aswellasappropriatecreditenhancementorsecurityarrangementsthatenableprojectstobebankable.ManydevelopingcountrieshavesimplypublishedFITswithoutputtinginplaceaneffectiveprocurement,contractingandimplementationframeworkwiththeresultthatfewprojectshaveclosed.PerhapsthemostimportantlessontotransferfromtheREIPPPPisthebenefitsofawell-designedandtransparentprocurementprocess.Forexample,theGETFitprogramisUgandahascreatedahybridbetweenfeed-intariffsandaseriesofprocurementwindowsthathavefacilitatedinvestmentsingrid-connectedrenewableenergy.WhilethecomplexityandcostoftheSouthAfricanprocurementandcontractingdocumentationmaybeinappropriateinsmallerjurisdictions,thecorelessonisthatprivatesectorprojectdevelopersneedaclearframeworkwithinwhichtoinvest,andtheprocurementprogramneedsconsistent,timely,andexpertimplementation.



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rEFErENCES 8

references

Kuntze,Jan-ChristophandTomMoerenhout(2013),“LocalContentRequirementsandtheRenewableEnergyIndustry–AGoodMatch?”InternationalCentreforTradeandSustainableDevelopment,Geneva,Switzerland,www.ictsd.org.

Peszko,Grzegorz(2012),“Localcontentrequirementsforrenewableenergy:anunnecessaryevil,”EBRDblog,EuropeanBankforReconstructionandDevelopment,November23.

RepublicofSouthAfrica(RSA)(1998),“WhitePaperontheEnergyPolicyoftheRepublicofSouthAfrica,”DepartmentofMineralsandEnergy,December.

__________(2003),“WhitePaperonRenewableEnergy,DepartmentofMineralsandEnergy,”November.

__________(2007),“BiofuelsIndustrialStrategyoftheRepublicofSouthAfrica,”DepartmentofMineralsandEnergy,December.

__________(2010),“TheNewGrowthPath:TheFramework,”DepartmentofEconomicDevelopment,November17.

__________(2011),“IndustrialPolicyActionPlan2011/2012–2012/13,”DepartmentofTradeandIndustry,February.

__________(2011),“PreferentialProcurementPolicyFrameworkAct(/2000):PreferentialProcurementRegulations,”NationalTreasury,June8.

__________(2011),“GreenEconomyAccord,”DepartmentofEconomicDevelopment,November29.

__________(2012),“NationalDevelopmentPlan.”

__________(2011-13),REIPPPPTenderNoticesandBriefingNotes,DepartmentofEnergy,accessedonlineathttp://www.ipp-renewables.co.za.

Wlokas,HolleLinnea,AnyaBoyd,andMarcoAndolfi(2012),“Challengesforlocalcommunitydevelopmentinprivatesector-ledrenewableenergyprojectsinSouthAfrica:anevolvingapproach,”JournalofEnergyinSouthernAfrica,Vol.23,No.4,November.

WTIAdvisors(2013),“LocalContentRequirementsandtheGreenEconomy.”PaperpreparedfortheAdHocExpertGroupMeetingonDomesticRequirementsandSupportMeasuresinGreenSectors:EconomicandEnvironmentalEffectivenessandImplicationsforTrade,June13-14,Geneva.

rEFErENCES

42

APPENDIx 19

appendix 1: eskom’s Power stations25

Name Location Fuel Available MW

Arnot Middelburg Coal 2232

Camden Ermelo Coal 1430

Duvha Witbank Coal 3450

Grootvlei Balfour Coal 950

Hendrina Hendrina Coal 1865

Kendal Witbank Coal 3840

Komati Middelburg Coal 940

Kriel Bethal Coal 2850

Lethabo Sasolburg Coal 3558

Majuba Volksrust Coal 3843

Matimba Lephalale Coal 3690

Matla Bethal Coal 3450

Tutuka Standerton Coal 3510

Acacia CapeTown Gas/petroleum 171

Ankerlig Atlantis Gas/petroleum 1327

Gourikwa MosselBay Gas/petroleum 740

PortRex EastLondon Gas/petroleum 171

Gariep OrangeRiver Hydro 360

Vanderkloof OrangeRiver Hydro 240

Drakensberg Bergville Pumpedstorage 1000

Palmiet Grabouw Pumpedstorage 400

Koeberg CapeTown Nuclear 1830

TOTal 41847

Source: Eskom Annual Report (2012).

25Figureexcludesfoursmall,non-operatinghydroplantsinTranskei.Thebalanceofnon-Eskomgeneratingcapacitytotalsabout1,150MWandislocatedmainlyatSasol’s

synfuelsplant(520MW),Kelvin(128MW),Rooival(155MW),PretoriaWest(100MW),Steenbras(180MW)andmini-hydro(65MW).

APPENDICES

43

APPENDIx 2 9

Committed Build New Build Options

Tota

l new

bui

ld

Tota

l sys

tem

cap

acity

RTS

Capa

city

(coa

l)

Med

upi (

coal

)

Kusi

le (c

oal)

Ingu

la (p

umpe

d st

orag

e)

DO

E O

CGT

IPP

(die

sel)

Co-g

ener

atio

n, o

wn

build

Win

d

CSP

Land

fill,

hydr

o

Sere

(win

d)

Dec

omm

issi

onin

g

Coal

(PF,

FBC

,iIm

port

s)

Gas

CCG

T (n

atur

al g

as)

OCG

T (d

iese

l)

Impo

rt H

ydro

Win

d

Sola

r PV

CSP

Nuc

lear

MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW

2010 380 0 0 0 0 260 0 0 0 0 0 0 0 0 0 0 0 0 0 640 44535

2011 679 0 0 0 0 130 0 0 0 0 0 0 0 0 0 0 0 0 0 809 45344

2012 303 0 0 0 0 0 300 0 100 100 0 0 0 0 0 0 300 0 0 1103 46447

2013 101 722 0 333 1020 0 400 0 25 0 0 0 0 0 0 0 300 0 0 2901 49348

2014 0 722 0 999 0 0 0 100 0 0 0 500 0 0 0 400 300 0 0 3021 52369

2015 0 1444 0 0 0 0 0 100 0 0 -180 500 0 0 0 400 300 0 0 2564 54933

2016 0 722 0 0 0 0 0 0 0 0 -90 0 0 0 0 400 300 100 0 1432 56365

2017 0 722 1446 0 0 0 0 0 0 0 0 0 0 0 0 400 300 100 0 2968 59333

2018 0 0 723 0 0 0 0 0 0 0 0 0 0 0 0 400 300 100 0 1523 60856

2019 0 0 1446 0 0 0 0 0 0 0 0 250 237 0 0 400 300 100 0 2496 63352

2020 0 0 723 0 0 0 0 0 0 0 0 250 237 0 0 400 300 100 0 2010 65362

2021 0 0 0 0 0 0 0 0 0 0 -75 250 237 0 0 400 300 100 0 1212 66574

2022 0 0 0 0 0 0 0 0 0 0 -1870 250 0 805 1143 400 300 100 0 1365 67939

2023 0 0 0 0 0 0 0 0 0 0 -2280 250 0 805 1183 400 300 100 1600 2358 70297

2024 0 0 0 0 0 0 0 0 0 0 -909 250 0 0 283 800 300 100 1600 2424 72721

2025 0 0 0 0 0 0 0 0 0 0 -1520 250 0 805 0 1600 1000 100 1600 3835 76556

2026 0 0 0 0 0 0 0 0 0 0 0 1000 0 0 0 400 500 0 1600 3500 80056

2027 0 0 0 0 0 0 0 0 0 0 0 250 0 0 0 1600 500 0 0 2350 82406

2028 0 0 0 0 0 0 0 0 0 0 -2850 1000 474 690 0 0 500 0 1600 1414 83820

2029 0 0 0 0 0 0 0 0 0 0 -1128 250 237 805 0 0 1000 0 1600 2764 86584

2030 0 0 0 0 0 0 0 0 0 0 0 1000 948 0 0 0 1000 0 0 2948 89532

TOTAL 1463 4332 4338 1332 1020 390 700 200 125 100 -10902 6250 2370 3910 2609 8400 8400 1000 9600 45637

appendix 2: south african integrated resource Plan 2010-30

APPENDICES

Source: Department of Energy (2012).

44

APPENDIx 39

appendix 3: reiPPPP economic development Objectives

Objectives

Categories Overall Weights Description BEE Community

BenefitsJobs & SA Content

1. Job Creation 25%

SA-basedemployeeswhoarecitizens 6.25%

SA-basedemployeeswhoareblackcitizens 6.25%

Skilledemployeeswhoareblackcitizens 6.25%

SA-basedemployeeswhoarecitizensfromlocalcommunities 6.25%

2. Local Content 25% Valueoflocalcontentexpenditure 6.25%

3. Ownership 15%

Blackshareholdingintheprojectcompany 3.75%

Blackshareholdingintheconstructioncontractor 3.75%

Blackshareholdingintheoperationscontractor 3.75%

Localcommunityshareholdingintheprojectcompany 3.75%

4. ManagementControl 5% Blacktopmanagement 5.00%

5. PreferentialProcurement 10%

BBBEEprocurementexpenditure 3.33%

SMMEprocurementexpenditure 3.33%

Women-ownedvendorprocurementexpenditure 3.33%

6. EnterpriseDevelopment 5% Communityenterprisedevelopmentcontributions 5.00%

7. Socio-econ.Development 15% Communitysocio-economicdevelopmentcontributions 15.00%

Totals 32% 30% 38%

Source: Authors’ compilation, based on RSA, 2011-13.

APPENDICES

45

APPENDIx 4 9

appendix 4: reiPPPP economic development scoring categoriesOnshore Wind*

1st Round Scoring

Element Measurement Threshold Target

1. Job Creation

SA-basedemployeeswhoarecitizen/numberofSA-basedemployees 50% 80%

SA-basedemployeeswhoareblackcitizens/numberofSA-basedemployees 30% 50%

Skilledemployeeswhoareblackcitizens/numberofSA-based 18% 30%

SA-basedemployeeswhoarecitizensfromlocalcommunities/numberofSA-based 12% 20%

2. Local Content Valueoflocalcontentexpenditure/totalprojectvalue 25% 45%

3. Ownership

Shareholdingbyblackpeopleintheprojectcompany/totalshareholding 12% 30%

Shareholdingbyblackpeopleintheconstructioncontractor/totalshareholding 8% 20%

Shareholdingbyblackpeopleintheoperationscontractor/totalshareholding 8% 20%

Shareholdingbylocalcommunitiesintheprojectcompany/totalshareholding 2.5% 5%

4. Management Control Blacktopmanagement/totalsizeoftopmanagement -- 40%

5. PreferentialProcurement

BBBEEprocurementspend/totalprocurementspend -- 60%

QualifyingSMMEprocurementspend/totalprocurementspend -- 10%

Women-ownedvendorprocurementspend/totalprocurementspend -- 5%

6. EnterpriseDevelopment

Enterprisedevelopmentcontributions/revenue -- 0.6%

Adjustedenterprisedevelopmentcontributions/revenue -- 0.6%

7. Socio-economicDevelopment

Socio-economicdevelopmentcontributions/revenue 1% 1.5%

Adjustedsocio-economicdevelopmentcontributions/revenue 1% 1.5%

*Allsevenrenewableenergycategorieshavethesamethresholdsandtargetsexceptcontent–seeTableX1.Source: RSA, 2011-13

APPENDICES

46

APPENDIx 59

appendix 5: reiPPPP Projects

Project Name Technology Contracted Capacity (MW)

LetsatsiSolarPhotovoltaicPark PhotovoltaicCrystalline–Fixed 64.00

LesediSolarPhotovoltaicPark PhotovoltaicCrystalline–Fixed 64.00

WitkopSolarPark PhotovoltaicCrystalline–SingleAxis 30.00

NobelsfonteinPhase1 OnshoreWind 75.00

TouwsrivierSolarPark PhotovoltaicCrystalline–DualAxis 36.00

DorperWindFarm OnshoreWind 97.53

SoutpanSolarPark PhotovoltaicCrystalline–SingleAxis 28.00

MuliloSolarPVDeAar PhotovoltaicCrystalline–Fixed 10.00

MuliloSolarPVPrieska PhotovoltaicCrystalline–Fixed 20.00

KaxuSolarOne ConcentratedSolarPower 100.00

DassieklipWindEnergyFacility OnshoreWind 27.00

KonkoonsiesSolarEnergyFacility PhotovoltaicCrystalline–Fixed 9.65

MetrowindVanStadensWindFarm OnshoreWind 27.00

KougaRedCapWindFarm-OysterBay OnshoreWind 80.00

RustMo1SolarFarm PhotovoltaicCrystalline–Fixed 6.93

Kalkbult PhotovoltaicCrystalline–Fixed 72.50

AriesSolarEnergyFacility PhotovoltaicCrystalline–Fixed 9.65

SlimsunSwartlandSolarPark PhotovoltaicCrystalline–Fixed 5.00

MainstreamRenewablePowerDeAarPV PhotovoltaicCrystalline–Fixed 45.60

JeffreysBay OnshoreWind 138.00

HopefieldWindFarm OnshoreWind 65.40

CookhouseWindFarm OnshoreWind 138.60

GreefspanPVPowerPlant PhotovoltaicCrystalline–SingleAxis 9.90

KathuSolarPlant PhotovoltaicCrystalline–SingleAxis 75.00

SolarCapitalDeAar PhotovoltaicThinFilm–Fixed 75.00

MainstreamRenewablePowerDroogfontein PhotovoltaicCrystalline–Fixed 45.60

HerbertPVPowerPlant PhotovoltaicCrystalline–SingleAxis 19.98

KhiSolarOne ConcentratedSolarPower 50.00

BokpoortCSPproject ConcentratedSolarPower 50.00

GoudaWindProject OnshoreWind 135.50

SolarCapitalDeAar3 PhotovoltaicThinFilm–Fixed 75.00

SishenSolarFacility PhotovoltaicCrystalline–SingleAxis 74.00

APPENDICES

47

APPENDIx 5 9

appendix 5: reiPPPP Projects (continued)

Project Name Technology Contracted Capacity (MW)

AmakhalaWindProject OnshoreWind 133.70

TsitsikammaCommunityWindFarm OnshoreWind 94.80

WindFarmWestCoast1 OnshoreWind 90.82

WaainekWindPower OnshoreWind 23.28

GrassridgeOnshoreWindProject OnshoreWind 59.80

ChabaWindPower OnshoreWind 21.00

Aurora-RietvleiSolarPower PhotovoltaicCrystalline–Fixed 9.00

VredendalSolarPark PhotovoltaicCrystalline–Fixed 8.82

StortemelkPowerPlant SmallHydro 4.40

Linde PhotovoltaicCrystalline–SingleAxis 36.80

Dreunberg PhotovoltaicCrystalline–SingleAxis 69.60

JasperPowerCompany PhotovoltaicCrystalline–Fixed 75.00

BoshoffSolarPark PhotovoltaicCrystalline–SingleAxis 60.00

UpingtonAirport PhotovoltaicThinFilm–Fixed 8.90

NeusbergHydroElectricalProject SmallHydro 10.00

Mkuze Biomass 16.50

IlangaCSP1/KaroshoekSolarOne ConcentratedSolarPower 100.00

!XiNaSolarOne ConcentratedSolarPower 100.00

JoburgLandfillGastoElectricity LandfillGas 18.00

LongyuanMuliloGreenEnergyDeAar2NorthWind OnshoreWind 138.96

LongyuanMuliloDeAarMaanhaarbergWindEnergy OnshoreWind 96.48

NojoliWindFarm OnshoreWind 86.60

Loeriesfontein2 OnshoreWind 138.23

Noupoort OnshoreWind 79.05

KhobabWind OnshoreWind 137.74

RedCap-GibsonBay OnshoreWind 110.00

AdamsSolarPV2 PhotovoltaicCrystalline–Fixed 75.00

ElectraCapital(Pty)Ltd PhotovoltaicCrystalline–Fixed 75.00

MuliloSonnedixPrieskaPV PhotovoltaicCrystalline–Fixed 75.00

MuliloPrieskaPV PhotovoltaicCrystalline–SingleAxis 75.00

TomBurkeSolarPark PhotovoltaicThinFilm–Fixed 60.00

PulidaSolarPark PhotovoltaicThinFilm–Fixed 75.00

Source: Authors’ compilation. based on DOE data.

APPENDICES

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