South Africa Renewable Energy tenders

South Africa relies more than any other country in the world on indigenous coal for electricity
generation and has also one of the lowest electricity consumer tariffs globally. Nevertheless, the most
recent electricity plan1 contains ambitious targets for renewable energy: 8,400 MW each of wind
power and solar PV and 1,000 MW from CSP, out of a total projected system capacity of around 90
GW, by 2030. Not the least, this objective will assist in reducing greenhouse gas reductions
significantly, which the government pledged to achieve.
In 2009, the energy regulator NERSA announced renewable energy feed-in tariffs for a range of
technologies. However, despite a pressing demand for electricity, there was little interest in the
original FIT rates. NERSA therefore raised the rates, doubling the FIT for wind and even trebling it for
concentrated solar power. Rates were designed for a real return on equity of 17% with full inflation
indexation. Furthermore, the payment period was extended from 15 to 20 years. Nevertheless, in early
2011, two years after FITs had been first announced, no power purchase agreements had been signed
with ESKOM, the major state-owned electricity provider and official purchaser of all RE FIT electricity.
One reason for this has been probably that no real procurement occurred, that licensing and
permission procedures remained unsolved and that ESKOM was not really willing to purchase
electricity at prices far above their own generation costs. Furthermore, some parties considered that
the preferential treatment of RE electricity was unconstitutional in an environment that is based
mainly on the competitive procurement of electricity supplies with regard to private producers.
The government therefore decided to replace the FIT scheme with renewable energy bids (competitive
tenders) that have drawn considerable competition from international developers. The new
Renewable Energy Independent Power Producer Procurement (REIPPP) program was started in August
2011. The program is mainly used to tender installations with more than 5 MW each, but a capacity of
100 MW is reserved for small-scale projects with between 1 and 5 MW. It is considered to end in 2016,
after a maximum of five bidding rounds. The maximum capacity volume to be tendered has been fixed
at 3,725 MW, including 1,850 MW of wind and 1,450 MW of solar PV.
So far, three auctions have taken place in 2011, 2012 and 2013. The first auction was not capped in
terms of capacity (except for the overall maximum), the second round had a cap of 1,044 MW, the
third (which ended on August 19, 2003) of 1,166 MW. In the third and second round the maximum
capacity was set per technology, so that there was no competition across different RE sources. Most
capacity has been awarded in the first two rounds for electricity from wind energy (1,196 MW) and
from solar PV (1,098 MW). All solar PV projects are large ground-mounted installations, ranging in size
from 5 to 75 MW. The average contract price has decreased considerably: from US-ct 14.3 per kWh for
wind in 2011 to US-ct 11.2 per kWh in 2012, and from US-ct 34.5 per kWh for solar PV in 2011 to USct 20.6 per kWh in 2012. Prices varied in 2012 from 10 to 12 US-ct per kWh for wind and 17 to 22 USct per kWh for solar PV. All those prices already contain an inflation index and will not be adjusted
during the contracted period. Despite lower prices in round two, it is still expected that real returns on
equity are still well above 10%. The major difference between the two auctions was, that in round one
the ceiling prices (being about equal to the former FIT rates, except for solar PV) had been disclosed
to the public, with price offers generally close to the limit. While in round two the ceiling prices were
kept undisclosed, leading to more competition in combination with the capacity cap.
The selection of projects is following a two-step approach. In the first step, compliance with general
financial and technical criteria as well as with minimum threshold requirement for economic
development and other requirements is checked. For example, wind developers are required to
1

Department of Energy, Integrated Resource Plan for Electricity 2010-2030, Final Report, 25 March 2011.

South Africa Renewable Energy tenders

provide 12-months wind data and a generation forecast. The economic development requirements are
complex, incorporating 17 sets of minimum thresholds. Wind projects for example, have to
demonstrate that at least 12% of company shares are held by black South Africans and another 3% by
local communities. At least 1% of the revenues has to be donated for social purposes. Furthermore, a
minimum threshold was set for the local economic content. Only bidders satisfying all criteria in the
first step could proceed in the evaluation. In the second step bid prices counted for 70%, while the rest
was weighted by projected job creation, local content, enterprise development and other factors. All
selected bidders have to apply for a generation license with the regulator.
All projects are contracted by Eskom under a Power Purchase Agreement (PPA) and a fixed price for
20 years. All contracts out of the first auction round, including PPA and implementation agreements
with the government, had been signed by November 2012, after a partly lengthy administrative
process. Contracts for projects from round one were finalized in May 2013. Those projects are now
under implementation with the contracted of round two to be commissioned until the end of 2014. It
needs to be seen, if all projects will be realized or some may fail due to financial hurdles, lack of
construction permissions or for other reasons. If all works out as planned, the REIPPP program in its
first phase could trigger an investment volume of up to US$ 15 billion until the end of 2016.
Critics point out that the very stringent criteria for the bidding contest (e.g. the requirement for local
content) lead to high transaction costs on the side of the bidders. This could also be one of the reasons
why the contracted prices are still significantly higher than in other parts of the world. High transaction
costs were also faced on the site of the government that had to rely on external advisors. Size and
complexity of the REIPPP program put considerable constraints on legal and financial advisory services.
It has also been remarked that the stringent economic development criteria could easily lead to higher
costs in a still small and non-competitive RE manufacturing market.
In December 2012, the government published a new IPP Procurement Program that calls for procuring
another 3,200 MW of RE capacity, as well mainly from wind and solar PV, to be operational between
2017 and 2020.

References:
www.ipprenewables.co.za
Anton Eberhard, Feed-in Tariffs or Auctions?, in: viewpoint No. 338, April 2013, publication of the
World Bank
Adele Greyling/Eskom, Renewable Energy Independent Power Producer Procurement Programme
An Eskom perspective (presentation), 27 July 2012
IRENA, Renewable Energy Auctions in Developing Countries, 2013

Author:
Detlef Loy, Loy Energy Consulting, Berlin/Germany, October 2013
dloy@loy-energy-consulting.de