What was the basis for selecting a bid-in tariff for South Africa’s REIPPP program?
In 2009, the National Energy Regulator of South Africa (NERSA) approved The Renewable Energy Feed-in Tariff (REFIT) policy where tariffs were designed to cover generation costs plus a real return on equity of 17 percent, fully indexed for inflation. There was uncertainty in the market about the legality of feed-in tariffs within South Africa’s public procurement framework compounded by delays in finalizing power purchase agreements and interconnection agreements with the national utility, Eskom.
In March 2011, NERSA released a consultation paper with lower feed-in tariffs, based on changes in a number of parameters, such as exchange rates and the cost of debt. Moreover, the capital component of the tariffs would no longer be fully indexed for inflation. NERSA’s revised financial assumptions did not change the required real return for equity investors of 17 percent.
After receiving legal advice that feed-in-tariffs were inconsistent with public finance and procurement laws, the Department of Energy announced that a competitive bidding process for renewable energy would be launched, known as the Renewable Energy Independent Power Producer Procurement (REIPPP) program. The feed-in tariffs were abandoned, and no off-take agreement had been signed in the two years since the launch of the REFIT program.
While feed-in tariffs provide price certainty to investors, which represents lower risk for individual firms, auctions of fixed amounts of megawatts (MW), through competitive bidding, incentivize competition and drive down prices, which is better for consumers and society at large.
Through the competitive bidding process, the REIPPP program effectively leveraged rapid, global technology developments and price trends, buying clean energy at lower and lower rates with every bid cycle, resulting in South Africa getting the benefit of renewable energy at some of the lowest tariffs in the world.
To what do you attribute the success of the program?
A 2016 World Bank Case Study, entitled Developing Renewable Energy through an Independent Power Producer Procurement Program, highlights a number of success factors. The program offered an expedited mechanism to roll out new, utility-scale power-generating capacity to broaden the energy mix, as envisaged in the Integrated Resource Plan 2010. The REIPPP program was designed to roll out a significant amount of power in a very short amount of time, using transparent procurement and implementation framework.
High-level political support, champions in government to drive the program and the largely ad-hoc, arm’s length from government, institutional status of the IPP Office encouraged an operating approach that emphasized problem-solving to make it successful.
An important lesson highlighted by the World Bank is that, regardless of size or location, private sponsors and investors in the renewable energy sector are seeking to invest in renewable power in emerging markets, especially when those markets adopt a business-friendly approach. If deals are reasonably profitable and key risks are mitigated in an acceptable manner, considerable private sector interest, expertise, and financing are likely.
In many instances, a convincing case needs to be made repeatedly to justify the procurement of renewable energy. The REIPPP program was preceded by several years of policy proposals, analytical and market enablement work, and engagement with the private sector.