South African government’s procurement process for renewable energy – how it could affect the rest of Africa
The South African government’s private procurement Renewable Energy Independent Power Producer Programme (REIPPP) process has grown over the past two years to become a rare, major government success, lauded by almost everyone who knows about it. There have even been calls to emulate it in other infrastructure and government procurement scenarios, and suggestions that other African countries may use similar processes to harness the private sector in order to solve their electricity generation deficits.
Other African countries are reportedly keen to copy the REIPPP process. If they do, that will lead to more transparency and access by the private sector to renewable energy projects in those countries.
The South African process has also reflected how market mechanisms can produce much sharper prices than bureaucrat-decided prices (which were envisaged under South Africa’s previous renewable energy feed-in tariff (Refit) programme). Initial tariffs set under Refit, before that system was abandoned, were much higher than those eventually clinched in the latest (2013) round of the REIPPP.
Under the REIPPP process, within two years, a significant reduction in renewable energy pricing has seen the gap between fossil-fuel and renewable energy shrink. This has been a major, unexpected development. With it has come the shedding of the image of renewable energy projects as reenpeace-type enterprises which must be subsidised. That in turn opens the potential for renewable energy to be used in industry on a strictly commercial basis in future.
Tariffs contracted for over the three REIPPP rounds dropped by 68% for solar photovoltaics to average 88 South African (SA) cents (6.8USc); and for wind, by 42% to average 74SAc (5.7USc) (and a lowest price of 66.4SAc (5.10USc)). These prices compare with one estimate of 105SAc (8.1USc) (per kilowatt hour from the huge coal-fired Medupi power station which is currently being built by South African’s state-owned energy generator, Eskom – and even that 105SAc is without payment for any “externalities” (carbon taxes, etc) and is based on dubious accounting (“that 105SAc cost is in dreamland,” according to one observer).
According to a University of Pretoria and Greenpeace study, Eskom’s full “externalities” costs range from an additional R0.97 (7.5USc) to R1.88 (14.5USc) per kilowatt hour.
Eskom, which also controls the electricity distribution grid in South Africa, is obliged to buy the power production of the REIPPP projects.
The three REIPPP rounds over the past two years have been the biggest and most complex private-public procurement exercise ever accomplished in South Africa. Brazil has a somewhat similar process for renewable energy project procurement, but given all the conditionalities and requirements (particularly for community participation, black economic empowerment and socio-economic expenditure) in South Africa, South Africa’s process is the most complex in the world.
Despite the complexity, the South African process has become a new benchmark. The process has also transformed South Africa from zero to hero in the world of renewable energy, and many eyes are now upon it.
Locally, none of the IPPs (independent power producers) has publicly challenged any of the contract awards that have been made. Nor have there been allegations of corruption or attacks on the process by unsuccessful bidders.
And on the ground, in places like Cookhouse, Eastern Cape province, where a wind project is being set up, Johan van den Berg, CEO of the South African Wind Energy Association (SAWEA), reports huge excitement both among the local community and among the project suppliers and owners.
This extraordinary success seems to prove that the private sector will invest in infrastructure and energy if the right structures are in place.
In the three rounds, projects involving investments of about R110 billion ($8.46bn) have been committed to. Collectively, this has been the largest fixed investment in South Africa in the past two years – much of it from foreign sources – and spending on associated socio-economic developmental projects in remote areas.
The new electricity from the REIPPP projects began to flow into the South African electricity grid from early 2014, in the first major boost to South Africa’s generation capacity for many years.
The new electricity generation is in contrast to major new projects currently being constructed by Eskom, which projects are years late and are yet to produce electricity.
In total, if all goes according to plan, the three rounds of the REIPPP will result in 64 independent power projects producing a total of 3,800MW. This compares to Eskom’s 45,000MW installed capacity currently, and Eskom’s projected installed capacity of 55,000MW by 2018.
If the REIPPP system can be extended for public-private procurement generally both in South Africa and elsewhere in Africa, it has the potential to restrict the number of deals that are done individually, in smoke-filled meetings between politicians and crony capitalists.
Marc Immerman of private equity fund Lereko Metier Sustainable Capital Fund (LMSC), which is investing in South African projects which have landed contracts in the REIPPP rounds, says his fund expects to invest in projects elsewhere in Africa.
He says: “Given that renewable energy projects will often be competing with diesel-based generation, the renewable technologies can offer a cost reduction and less carbon-intensive energy generation. Another constant challenge in Africa is weak transmission grids. Because renewable energy is now competitively priced (against diesel and other energy sources), it offers the potential for distributed energy generation, and is quick to construct, it makes great sense.”
The caveat for further private investments in REIPPP projects is that at the prices of the third round, profit margins are likely to be tight. Anthony Hewat, managing principal of LMSC says that accordingly, prices are unlikely to fall much further in South Africa, having achieved globally competitive levels.
How the REIPPP works
The REIPPP process is definitely not for the fainthearted or the under-resourced. It is complex and costly – but these qualities have also meant that, remarkably, there have been no failures of the 64 REIPPP projects approved so far.
South Africa’s National Treasury and its Department of Energy designed the process, and they drive the evaluation and selection of successful bidders.
A project begins with developers, who may be individuals who may come from the renewables industry or may represent some particular technology. They come up with an idea and a site, and they generally “develop” it by negotiating with the owner and by getting environmental, water, zoning and other authorisations. It can take a few years to get all of these permissions.
Then the financial models are prepared and the shareholder and debt finance is organised.
In formulating a REIPPP bid, “it must be clear that you have the money and on what terms (equity and debt); that it’s going to make a return; and the technology to be used and that it is sufficiently proven,” says LMSC’s Michael Goldblatt. “All of this involves a lot of outsourced expertise.”
“There is a bid date, a selection date, and a close date. You bid, it is then evaluated and selected (if you’re lucky), and it is then financially closed.”
Says LMSC’s Marc Immerman, who, with Goldblatt, brought the Bokpoort (Northern Cape) concentrated solar plant project to LMSC: “The adjudication process is hard-core. The documents for our project totalled 40,000 pieces of paper and seven full CDs. You transport these to the place of evaluation (in this case, Gallagher Estate, Midrand, Gauteng); the REIPPP officials open the boxes and do an initial check on whether you have the basic required documents; then everything is kept under lock and key. Relays of different independent consultants working for the authorities are allowed to access them – they may only take in a pencil and paper.
“It is complex and labour-intensive and any fatal flaw can cause you not to be selected.
“In the evaluation and selection of successful bidders, there is a price factor and there is a non-price factor. The evaluation is based 70% on price (on the lowest compliant bid) and 30% on economic development (on the highest compliant bid). You get points for each of them and they are added up and you are ranked.
“Black empowerment, local community ownership and local enterprise development are important criteria for success.”
Having been selected, the project is built to a completion date, after which it produces electricity.
The lack of failures of projects so far is partly because the projects’ plans are independently assessed. But, says Immerman, “the success is also because of what’s required to be complied with. So simply to bid, you need all your money in place, equity and debt, with full board approval. The lenders must have detailed term sheets. And all licences must be in place.
“The advisers, consultants and lawyers … it’s a spectacular-lawyer fest to bid and especially to close. Each project has to have the lenders’ counsel, technical advisers for the lenders (an engineering company), etc.
“At the cheapest, bids cost R5 million ($385,000) each, and often more. So, at least about R500 million ($38.5 million) was spent on each bidding round. In the first-round there were 53 bids, 28 of them successful; in the second, 79 bids, 19 successful; and in the third 93 bids, 17 were successful (with the prospect of a some more approvals).
“The successful projects aggregate to a total investment cost of about R110 billion ($8.46 billion) investment to build (besides the cost of bidding).
“In our Bokpoort project, the lead-up to the bid was three years of work. Between the bid and selection was 4-6 months. Between selection and financial close, you take all in-principle plans for financing and operations and the build part (which includes engineers and international and local people) and ongoing operations and maintenance; socio-economic development; etc.
“You put all this in your plan and at financial close you convert that plan into binding agreements. “There is a co-incident point at which everything is binding. Once the bid is successful, this all turns into a binding agreement for offtake for 20 years.
“Then you go live into the build phase. In our Bokpoort technology of CSP (concentrated solar power) building takes 2 years, but in PV and wind it’s a shorter cycle,” says Goldblatt.
“The complexity is a positive for the country and the government. Internationally, the success rate of projects that actually finally produce after being selected has been considerably lower because, for instance, in the US, in one exercise, projects were approved solely on the basis of tariffs. The South African process means only the strongest and best organised projects succeed.”
The good news is that, according to Immerman, this bid method can be easily copied for other public-private infrastructure procurement.
In renewable energy, there are opportunities in the private sector in the projects themselves, and in their construction because a large proportion of them can be made locally.
Of course, the success of the REIPPP may conflict with the plans of politicians. This is because more scattered projects (as renewable energy projects inevitably are), allocated under a system which is relatively corruption-proof, are not highly suited for large patronage-related deals.