Key factors in developing projects with the public and private stakeholders in the energy and environment sector

TUT 2nd Annual workshop on energy and environment for African public officials

Ayanda Nakedi

Senior General Manager: Renewables Business Unit Eskom Holdings SOC Limited

St. George’s Hotel, 10 October 2013

Contents

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Legislative framework in SA

Introduction

Environmental Management considerations

Progress of the REIPPP

IPP participation and Industry readiness

Tariffs and pricing regime

Funding and financing renewable energy projects

Socio economic imperatives

Eskom’s progress on its renewable projects

Introduction

• The purpose of this presentation is to share with the participants, key factors and aspects, that are important to the successful implementation of renewable energy projects.

• The projects as implemented by the private sector and government entities, must achieve the goals and fulfill the mandate set aside for renewable energy by government.

• The key factors that are important to the success of these projects include:

• An enabling legislative framework

• Participatory environment for private participants

• Funding and reliable financing plans

• Matured tariff and pricing regime

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The legislative framework in South Africa, has been set in place over the years to ensure a conducive environment for renewable energy to grow…

Integrating legislative and policy requirements ensures that renewable energy is geared for growth in accordance with the country’s plans. Important policies amongst others are:

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Planning

Technical

Operating

• National Development Plan • Integrated Energy Plan • Integrated Resource Plan • Carbon Tax discussion paper

• REIPPP • National Environmental Management

Act • Regulations on New Generation

capacity

• Electricity Pricing Policy • ISMO Bill • MYPD • NERSA regulations on distribution

networks • Eskom’s structures for connecting on

the transmission network

• The NDP has planned for 20 000 MW of

renewable energy by 2030 • IRP is aimed at finding a balance

between competing government objectives and diversifying the energy mix to attain:

• Affordability • Reduction of carbon emissions • Water conservation • Localisation and, • Regional development

• Through the New Generation

Regulations, the facilitation of the recovery of costs incurred by the buyer; and ensuring transparency and cost reflectivity in the determination of electricity tariffs is enabled.

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The REIPPP was a response to the Integrated Resource Plan

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South Africa has a high level of Renewable Energy potential and presently has in place a target of 10 000 GWh of Renewable Energy

The Minister has determined that 3 725 MW will be generated from IPP’s to ensure

the continued uninterrupted supply of electricity This IPP Procurement Programme was also

designed towards socio-economic and environmentally sustainable growth, as well as to stimulate renewable energy industry in South Africa.

IPP

Government Eskom

Government Framework Support

Agreement

Most renewable technologies would qualify for selection under the IPP Procurement Programme

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Onshore Wind • 1 850MW

CSP • 200MW

PV • 1 450MW

Biomass • 12.5MW

Biogas • 12.5MW

Landfill Gas • 25MW

Small Hydro • 75MW

Small Projects • 100MW

o The bidders will be required to bid on a tariff set out in the bid documents and the identified socio-economic development objectives of the Department.

o Each Facility procured in terms of this IPPPP will be required to achieve commercial operation by not later than the dates set out in the RFP.

o Based upon the principles of this IPPPP, the Department intends to introduce a separate Small Projects IPPPP for electricity generation projects < 5MW.

3 725MW

So far the Department of Energy has awarded projects to 47 bidders in the first and second rounds of the REIPPP

Window 1

Window 2

Window 3 Request for Proposals (RFP) tender documentation has been released into the market. Preferred bidders will be announced on the 29 October 2013, and this round was built on

lessons learnt from window 1 and 2

28 preferred bidders for projects allocation of 1,425 MW. The bid evaluation was split 70:30 between price, including project cost in Rands/MW,

and economic development, including job creation, socio economic and local content

There are 19 preferred bidders with a capital investment of R28 billion comprising 1,043.9 MW of wind, solar and small hydro projects.

Bid evaluation split between pricing and economic development were changed to 55% and 45% respectively.

The successful bidders committed to include community development initiatives within a 50-kilometre radius of each

project. Their collective commitment is worth R2 billion and targeted towards socio-economic development, and R1

billion towards empowering women in the energy field.

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IPPs participation requires that certain issues be in place to level the playing field

In order to ensure a balanced structure between buyers and sellers. This can be achieved through…

Cost reflectivity of tariffs: this is necessary to ensure economic efficiency, transparency and ongoing investment through the value chain.

Subsidies: this entails the creation of framework to manage subsidies that distort the market, such as cross subsidies to rural and residential customers, environmental levies and municipal surcharges.

Transmission costs: must be ring-fenced to prevent the cross subsidisation of other Eskom costs.

Distribution charges: assurance should be provided that no network, reliability and service charges should be allocated to IPPs.

Grid access: the network owners are supposed to provide security around service levels of energy to ensure successful bilateral trading and wheeling

In addition, IPPs need to have access to the grid through a single point of contact that can manage the service relationship with them.

Managing balance between demand and supply of

electricity. Generation resource planning. Transmission service and implementation Buying. Systems operation and expansion planning. Eliminate any conflict of interest between buyer and

sellers.

The Independent Systems and Market Operator (ISMO) legislation aims to set up a national public

entity that ring fences the systems and market operator responsible for:

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While preparing for the ISMO implementation, Eskom established the Grid Access Unit to facilitate access to the grid

This new structure has brought challenges to Eskom of:

Integrating different departments, to ensure a holistic view and approach to the IPPs.

Managing interfaces to coordinate the complex set of new business and new roles and responsibilities brought about by IPPs

Connection process

Pricing settlements

Operational and legal functions

Set- up and organisational

functions

Its role is to provide end-to-end grid access activities and processes such as:

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Range of levelised costs of energy for different technologies

Levelised Cost of Energy (US$/MWh)

Levelised costs of renewable plants are generally higher than those of conventional plants

10 SOURCE: Lazard – Datamonitor 2012

Therefore it is important for the successful implementation of renewables projects to have highly reliable electricity tariffs…

Creating transparency on

pricing policy, network contracts,

and operating agreements

Clearly defining the revenue recovery strategy of service

providers (cost reflective tariff)

Understanding the nodal differentiated point tariff for entry TUOS charges to

generators

Creating a pricing path which ensures that the

service provider and the industry remain

financially viable , sustainable, and

affordable.

Using a public competitive bidding, or tendering process

that encourages participation in the

deployment of renewables.

The tariff determination should take into consideration the service providers’ and customers’ needs by:

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• Nersa uses the Multi-Year Price Determination (MYPD) for electricity prices

• In 2013, NERSA announced an average annual increase of 8% for the MYPD 3 (2013 to 2018) which is for a five-year period.

• For the first time, the tariff makes an obligatory allowance for IPPs by splitting the tariff into 6% for Eskom and 2% to support the entry of new IPPs

Throughout the REIPPP, investment in the renewables industry has been encouraged by government’s support and commitment to investors.

DBSA - approved a loan facility of R9.6 billion for renewable energy projects in South Africa

Industrial Development Bank and German Development Bank (KfW) - under the framework of the South African-German Financial Cooperation established a R500 million facility for energy efficiency and small scale renewable energy projects.

Standard Bank Group and the Industrial and Commercial Bank of China – offering a USD $2 billion funding support for renewable projects for a period until 2025

Investec and European Investment Bank – agreed on a funding of EUR 100 million to promote clean energy

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• Funding should be in place • Government loans and guarantees • Subsidies to encourage project development • Tax incentives should be agreed on

The following factors must be visible for sustainable funding of renewables projects

Financial support for the REIPPP has been satisfactory

The competitive tariffs as determined by the bidders and off take agreements for the power produced have given greater transparency and impetus to the investors

Renewable energy projects must also address some socio economic consideration for the country

Local content and localisation

• By promoting local

manufacturing and stimulating job creating.

• So far, the local content threshold has been set at 50% for key equipment and components for all the renewable projects bidding for Window 3.

Job Creation & BBBEE

• Department of Trade and Industry (DTI) , the South African Photovoltaic Association (Sapvia) and WWF-SA (by Urban-Eco) calculated higher levels of localisation through an employment multiplier effect of between 40% and 50% depending on the market segment.

• The Window I and Window II projects are estimated to create 7059 jobs during construction and 328 jobs during operation by the DTI.

Investment promotion

• The renewable projects

provide opportunities for foreign and domestic investments in key sectors of the economy as set out in the Industrial Policy Action Plan (IPAP).

• Green economy opportunities include manufacturing and assembly of wind turbines/blades, solar panels, energy saving industries and waste management industries.

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The implementation of the projects must acknowledge the environmental rights as expressed through the National Environmental Management Act

Most of the renewable energy projects are greenfield projects which are developed in remote areas in the country.

The project activities thus trigger listed activities as prescribed by the NEMA.

These areas are mostly sensitive to the following: • Visual Impacts • Noise Impacts • Social impacts • As well as the overall footprint of

the project

In addition, the competing objectives of land for agriculture and land for energy have the potential of delaying environmental authorisation for renewable projects.

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• The duration of the environmental authorisation process is one of the challenges to renewables projects • However, the process allows for all issues that may arise with stakeholder to be resolved and the

environmental duties be planned for.

Eskom aims to contribute significantly to improving the country’s energy mix over the medium to long term

Small Scale projects Solar PV installations with an installed capacity of ±1.62

MW was constructed at the following Eskom sites:

MWP Lethabo Kendal

100MW CSP power plant in Upington (Northern Cape) Eskom will be engaging the market soon to commence

the procurement process. The project is expected to be commissioned in 2018.

100MW Sere Wind Farm Project in Koekenaap Construction has started, with the commissioning date

planned for end of December 2014 The project is funded by a group of development finance

institutions, including the World Bank, the African Development Bank, Clean Technology Fund and Agence Francaise de Developement.

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In responding to the growing electricity demand within South Africa, the need for diversifying Eskom's energy mix, as well as meeting the country's targets for renewable energy, Eskom has undertaken initiatives to establish renewable forms of electricity generation capacity by: • Conducting research to investigate South Africa's sources of renewable energy, to identify appropriate alternative

solutions to meet the electricity needs of the country by implementing the Concentrating Solar Thermal project in the Northern Cape

• By diversify its energy also implement renewables energy for self consumption purposes.

Thank you!