Slide Title Goes Here

Renewable Energy: Assessing the experience of South Africa’s

Renewable Energy Independent Power Producer Procurement Programme

(REIPPPP)

Mark Pickering

Globeleq South Africa Management Services

Portfolio

India

Pakistan

Sri Lanka

Bangladesh

Philippines

Tanzania

Kenya

Cote d’Ivoire

South Africa

Mauritania

Egypt

Costa Rica

Honduras

Chile

Argentina

Bolivia

Peru

Panama

El Salvador

Dominican Republic

Nicaragua

Jamaica

Guatemala

Dominica

St Lucia

Globeleq

• Private generation company (IPP)

• Emerging market mandate (Africa & Central America)

• Largest private power producer in Africa

• Owned by Actis private equity fund.

• DfID’s Commonwealth Development Corporation (CDC) is a

major investor

• SA REIPPPP Round 1

• Bid and won four projects

• Withdrew from one wind project due to supplier issues

• Closed 138 MW Jeffreys Bay Wind project

• Closed 50 MW De Aar solar PV project

• Closed 50 MW Droogfontein (Kimberley) solar PV project

• Active in Round 3

Credentials

Presentation objectives

• Overview of REIPPPP procurement

mechanism

• Lessons from REIPPP

• Coming challenges with IPP procurement

• Way forward?

Objectives

IFC experience with renewable procurement

Feed in Tariffs (FITs)

• Used in 60+ countries

• Used in 30+ developing countries

Renewable Portfolio Standards

• Extensive use in the US and Europe

• Just a few in the developing world – India, Chile, The Philippines

Competitive Procurement / Auction (MW or MWh)

• Most power pools in the US procure MW and ancillary services competitively

• New Jersey one of the first states to adopt competitive procurement for MWh

• LAC pioneered with dynamic auctions

• Mexico has been using competitive bidding for a decade

• MENA – seems to be preferred choice (except CSP)

• India (PV), China (offshore wind), South Africa

How to Promote Renewable Energy Investments?

(Source: Luiz Maurer, 2012. IFC)

REIPPPP Ministerial Determination to Procure

Technology Capacity

(MW) Tariff Cap

(R/MWH 2011) Tariff Cap (USc/kWh)

Onshore wind 1,850 1,150 13.5

Solar photovoltaic 1,450 2,850 33.5

Concentrated solar power

200 2,850 33.5

Biomass 12.5 1,070 12.6

Biogas 12.5 800 9.4

Landfill gas 25 840 9.9

Small hydro (≤ 10 MW)

75 1,030 12.1

Small scale (1-5 MW)

100 TBA

Total 3,725

Programme Design • Up to 5 bidding rounds • Notice of intention to bid • Right to rebid • Price caps may reduce from Rd. 3 • Minister may reallocate MW

between technologies • High standard for compliant bids

• Most permits in place • Debt and equity committed • Considerable paperwork

• Competition in the event of: • Competition for grid capacity • Competition for capacity allocation

• Ambitious timetable • www.ipprenewables.co.za

REIPPPP Outcomes

Bidders Round 1 Round 2 Round 3

Bidders 53 79 ??

Preferred bidders 28 19 ??

Success rate 53% 25% ??

Closure rate 100% ?? ??

Awards (MW) Available Round 1 Round 2 Balance

Wind 1,850 634 563 653

Solar PV 1,450 632 417 401

CSP 200 150 50 0

Other 125 14.3 111

Total 3,625 1,416 1,044 1,165

Tariffs Round 1 Round 2 Change

ZAR/kWh USc/kWh ZAR/kWh USc/kWh %

Wind 1,143 14.3 897 11.2 -22%

Solar PV 2,758 34.5 1,645 20.6 -40%

Procurement model changed R1 to R2

(Capped allocation)

Shift to real competition

Significant drop in average bid tariff

REIPPPP Geographic Distribution of Round 1 Preferred Bidders

What do we learn from REIPPP? Greenfield IPPs in Africa

Morocco (3): Tetouan, Jorf Lasfar, Tahaddart Tunisia (2): El Biban, Rades II

Algeria (2): Kahraba, Kahrama

Egypt (3): Sidi Krir, Port Said, Suez

Ethiopia (1): Gojeb*

Kenya (4): Westmont, Iberafrica,

OrPower4, Tsavo

Tanzania (4):Tanwat, IPTL,

Songas, Mtwara

Mauritius (4): Belle Vue, Deep River,

FUEL, St Aubin

Angola

(1):Chicapa*

Senegal (2): GTI Dakar,

Kounoune I IPP*

Congo (1): Sonda

(X)

Nigeria (3):

AES Nigeria

Barge, Okpai,

Afam*

Ghana (1): Takoradi II

Cote D’Ivoire (2): Vridi

Ciprel, Azito

Burkina Faso (1): Hydro

Afrique

Greenfield IPPs in Africa (2010) • 40 IPPs in 15 countries • 10,000 MW • US$8 billion invested • Almost no wind/solar

Source: Eberhard, 2010. UCT GSB. Based on WB PPI

database and author’s compilation.

(X) Denotes cancelled projects. (*) denotes projects under

construction. Emergency power units not depicted. Why renewables in South Africa?

What do we learn from REIPPP? History of IPP Procurements in SA

Programme Year Sponsor Nature Status

Kelvin 2000 Johannesburg Old coal ~600 MW. Sale Municipal privatisation

Kudu ~2000 Nampower Gas Namibia 800 MW. Inter-government

negotiations

Failed?

DOE Peaker 2004 DOE 1,000 MW Diesel OCGT. International

competitive bid.

Failed?

Mammabula 2005+ Coal/IPP Coal 1,200 MW. Negotiations. Failed

Cogen (PNCP) 2007 Eskom Cogen 6,000 MW. International competitive bid. Failed

MTPPP 2007 Eskom 8 year PPA ~6 GW. International competitive bid. Largely failed 273 MW

Multi-site Base Load 2008 Eskom Mixed ~15 GW. Qualification round. Failed

Nuclear 1 2008 Eskom 3,200 – 3,600 MW. EPC bids. No award. Failed

Kusile privatisation 2009 Eskom Coal 4,800 MW. Offered minority stake in partially

built asset.

Failed

Moamba 2008 IPP Gas Moz ~200 MW. Negotiations. Failed?

Benga, Moatize 2010+ Coal/IPP Mozambique coal plants. Negotiations Failed?

Sere / CSP 2009 Eskom 100 MW wind. 100 MW CSP

RfI for co-investors. EPC procurement.

Failed?

REIPPPP 2011 DOE/Treasury 3,725 MW 1,416 MW award. Closed

Baseload RFI 2012 DOE/Treasury Mixed , 60GW RFI

Aggreko 2012 Eskom Gas Moz, 100 MW PPA signed.

Multiple failures, extensive delays, limited success. REIPPPP learnt from failures

“Private investors place importance on the stability and

enforceability of laws and contracts”

“Private investors seek predictability and control of risks

to avoid threats to their investment returns”

“The roles of private participants in the power sector

should match their capacity to take on investment risks

under specific country conditions”

(World Bank, 2006. Reforming power markets in developing countries:

What have we learned?)

What do we learn from REIPPP? The importance of policy certainty

Investors seek certainty, and an appropriate allocation of risks.

REIPPPP outcome indicates these conditions were finally met.

What do we learn from REIPPP? The importance of policy certainty

Significant policy uncertainty en route. BUT sufficiently strong signals over three years to stimulate private investment in project development.

By mid 2010 Eskom reported renewable project grid applications for ~20 GW.

1998

White

Paper on

Energy

Policy

1998 2004 2008 2010 2012 2009 2011

2004

White

Paper on

Renewable

Energy

Dec 2008

NERSA

consult’n

paper on

REFIT

Apr 2009 NERSA

regulatory

guideline on

REFIT for wind,

PV, landfill gas,

CSP

Jul 2009

NERSA

consultation

paper (+ six

technologies,

draft PPA)

Aug 2009

Minister

gazettes New

Generation

Regulations

Oct 2009

NERSA

publishes

REFIT tariffs

2010 Inter

Ministerial

Committee

Nov 2010

Minister gazettes

amended New

Gen Regulations

Dec 2010 National

Treasury PPP Unit

appoints

consultants

Aug

2011

RFP

issued

Dec 2011

Round 1

Preferred

Bidders

What do we learn from REIPPP? The importance of policy certainty

Wind Tariff Evolution

Positive pricing signals were a major factor in attracting developers, investors, equipment suppliers

and lenders to the market – despite the unusually higher regulatory and social burdens.

2013 REFIT

Round 3

average bid

??

Transaction Advisor Team

Legal: Commercial – Bowman Gilfillan (“BG”), Edward Nathan Sonnenbergs

(“ENS”), Ledwaba Mazwai (“LM”) and Webber Wentzel (“WW”)

Legal: Land Use – BG, ENS, WW

Legal: Environmental – BG, ENS, WW

Financial – Ernst & Young (E&Y) and PricewaterhouseCoopers (PwC).

Economic Development – LM

Technical – Mott MacDonald

Independent Review Team

Legal evaluation teams – Linklaters

Technical teams – Blueprint Consult

Financial – cross moderation by both PwC and E&Y of each other’s work

Independent governance review by Ernst & Young

• observed receipt and evaluation of Bid Responses

• Identified areas of non-compliance with the Evaluation Manual

Costs

DBSA loan, to be repaid from 1% transaction fee on successful projects

REIPPPP The importance of competent transaction advisors

What do we learn from REIPPP? The importance of political support

Equity

Lenders

Eskom Department of

Energy National Treasury

EPC O&M Land Lease Local Permits

Dept. of Environment

20 year PPA

Implementation

Agreement

ROD

3 year lock-in

No change in control

without DOE consent

20 years

+5 years Typically 5-10 years

NERSA Generation

License

Inter-Governmental Framework Agreement (Government Guarantee)

Land use

Building

PPP Unit

Dept. of Water Affairs

Mining

rights

Presidency

DTI

Dept of Econ. Development

Supportive

Credit Rating Agencies

IPP Unit

OEM Contractors Logistics

Dept. of Min. Affairs

Water use

license

Government has succeeded in aligning its’ elements.

REIPPP Project

Basis of political consensus?

Driver 1: Reduction in carbon intensity

• IRP 2010 predicated on reducing CO2 emissions

from 912 g/kWh to 600 g/kWh by 2030

Driver 2: Additional generation capacity

• Quickest to build

• Builds on learning from failed IPP initiatives

• Simpler than other IPP transactions

Driver 3: Economic development opportunities

• Extensive obligations

Will the policy consensus be sustained? Will REIPPPP deliver on its promises?

Will other IPP programmes achieve consensus?

What do we learn from REIPPP? The importance of political support

Key success factors

• Political support across multiple ministries

• COP17 push factor

• Built on previous IPP procurement failures –

continuity of leadership

• Achieved policy certainty

• Highly dependant on international advisors

• Lucky timing (counter-cycle to global downturn)

What do we learn from REIPPPP?

• World class renewables procurement

• BUT, is it replicable for other technologies?

Reflections on REIPPPP MK1

New Generation Capacity Timing realities

Medupi

Ingula Kusile (Source: Eskom, March 2011. Presentation to Parliament)

All three projects will take a decade or more from start of

construction to COD.

Even more time is required beforehand for planning, permitting and financing.

Station Original Eskom plan

(~9 mths/unit)

Nov 2010 MTRMP

Scenario 1

Delay (mths)

Medupi Unit 1 COD Apr-11 May-13 25

Medupi Unit 6 COD Jan-15 Sep-15 8

Kusile Unit 1 COD Mar-12 Jul-16 52

Kusile Unit 6 COD Dec-15 Oct-19 47

(Source: www.eskom.co.za (new build programme)

DOE, Nov 2010. Medium Term Risk Mitigation Programme)

The IPP Procurement Challenge Scale of the challenge in MW

Ministerial determinations herald a major shift from public to private investment. Functional IPP procurement system is now a precondition for supply security.

The IPP Procurement Challenge

Massive policy shift from public to private supply. Based on what?

The IPP Procurement Challenge Scale of the challenge in transactions

Public: One decision remains. IPP procurement: Multiple programmes required.

Political support

• How to sustain political support?

Gas and hydro

• Auction model will not translate easily

• Limited primary energy supply options.

• Key infrastructure bottlenecks

• Need to pay especial attention to process integrity

Coal

• Similar constraints for coal (supply, location, water)

Co-gen

• Auction may work for co-gen, but price cap concept

would need to be reviewed.

The Way Forward Lessons from REIPP

Future IPP procurement will be more difficult than REIPPP, with a much higher risk of delays and failures.

Risk of overbuild?

• Baseload IPP determinations may represent too much

capacity, given economic downturn. Programme

timing needs to be more clearly defined.

Financial

• For how long can Treasury back PPAs with

government guarantees?

• Depth of local debt market? Partial $ PPAs?

Institutional

• Boom and bust for Eskom’s capital projects

department?

• Can DOE manage multiple procurement

programmes?

The Way Forward Lessons from REIPPPP

Where will institutional reform come from?

• Single buyer model creates a bottleneck in the

system

• Besides REIPPPP the single buyer model has

had a very unsuccessful history in the South

African institutional context

• Could a wholesale market increase supply

security?

• What sector reforms would be required to

achieve this?

• Where is the vision for power sector evolution

going to come from?

The Way Forward Lessons from REIPPPP

Thank You