South Africa s Renewable Energy IPP Procurement Program: Success Factors and Lessons

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1 South Africa s Renewable Energy IPP Procurement Program: Success Factors and Lessons Sustainable Energy Investments in Africa Copenhagen 25 June 2014 Anton Eberhard University of Cape Town

2 Introduction and overview South Africa now occupies central position globally in debate around most effective policies to expand RE Abandoned FIT in favour of competitive tendering In less than 3 years: US$14 billion committed 64 projects, mainly wind and PV projects 3922 MW More than 100 shareholder entities

3 Introduction and overview 86% of finance raised locally. Two-thirds of debt from commercial banks with balance from DFIs and pension/insurance funds Over 3 bid rounds, PV prices dropped 68% and wind 42% Also improvements in economic development commitments This paper analyses success factors and challenges and global lessons learned June PPIAF BBL Washington D.C. 3

4 South Africa s Energy Sector National state owned utility, Eskom, generates about 96% of SA s electricity, 44 GW installed capacity, 90% from coal As recently as 2007 tariffs were as low as 2.5 USc/kWh but have since trebled to fund US$40bn Eskom investments, mainly in 2 mega coal power stations Despite no UNFCCC commitments, SA volunteered reduction in GHG emissions at Copenhagen COP 2009 Carbon cap incorporated in electricity planning since GW of renewables by 2030 planned

5 Initially experimented with Feed-in tariffs 2009: energy regulator developed a REFIT policy Published generous rates, 17% real return on equity and prices indexed with inflation Delays in finalising contracting and connection agreements with off-taker Eskom 2011: regulator revised REFIT downwards REFIT abandoned in late 2011 without any contracted REIPPPs DOE & National Treasury engage private sector and explore alternatives ZAR cents / kwh Wind PV CSP June PPIAF BBL Washington D.C.

6 Competitive tenders for RE IPPs 2011 DoE issues RfP for 3625MW of renewable power Procurement caps for individual technologies Price caps for each technology Standard 20 yr, local denominated PPAs + IA + DA Up to 5 tender rounds envisaged at 6 month intervals Bids due 3 months after RfP Financial close 6 months after preferred bidder status CoD required within 18 months of financial close

7 Tight (impressive) time lines REIPPPP milestones RFP published Round 1 Bid submission Round 1 Preferred bidders Round 1 Financial close Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 3 Aug 4 Nov 7 Dec Jun 5 Nov Round 1 Planned COD Mar Dec Round 2 RfP Round 2 Bid submission Round 2 Preferred bidders Round 2 Financial close 7 Dec 5 Mar 21 May Dec 9 May Round 3 RfP Round 3 Bid submission Round 3 Preferred bidders May 19 Aug 29 Oct

8 Evaluation process Qualification Criteria Structure of project Legal Land Environment Financial Technical Economic development Bid guarantee Evaluation Criteria Price 70% Economic 30% Development Job creation Local content Ownership Management control Preferential procurement Enterprise development Socio-economic development.

9 Tender and evaluation process Tender exempted from standard PPP regulations Ad-hoc DOE IPP office established, led by experienced PPP manager US$ 10 million was spent on tender design and bid evaluation Large legal, technical and financial advisory team assembled (local & international) General consensus that quality of documentation excellent Secure and transparent evaluation process

10 Round one outcomes Tendered 3625 MW 53 bids received 2128 MW 28 qualified 1416 MW Prices marginally below tender caps Financial close and contract signing within 15 months of RfP Total investment ca. US$6 billion Mostly by local banks Real returns close to 17% All have commenced construction WBG finance for PV and Wind between totaled $ 1.8 bn

11 Round two outcomes Tendered 79 bids 51 qualified 1275 MW 3255 MW 19 preferred 1045 MW Prices drop sharply Local content increases All projects have reached financial close Total investment US$3.5 billion

12 Round three outcomes Tendered 1473 MW 93 bids 6023 MW 74 qualified 17 preferred 1456 MW Prices drop further Total investment US$4.5 billion Emergence of corporate finance Despite large number of unsuccessful bids, no legal challenges Emerging challenges around grid connections South Africa among top 10 global RE investments in 2012/13 June PPIAF BBL Washington D.C. 12 US$14bn exceeds total IPP $ in Africa over 20 years

13 Price outcomes ZAR cents/kwh 2011 real prices Round 1 Round 2 Round 3 Wind % - 42% PV % - 68% CSP

14 no. of projects per shareholder Prominent shareholders More than 100 different shareholder entities - 46 participated in 2 or more projects

15 Billions no. of projects per lender Major debt providers ZAR 18 ZAR 16 ZAR 14 ZAR 12 ZAR 10 ZAR 8 ZAR 6 ZAR 4 ZAR 2 ZAR 0 Nedbank Standard RMB ABSA IDC DBSA EKF Investec Old Mutual IFC Rest Window1 Window2 Window3 The rest category includes OPIC, AfDB, Liberty Group, ACWA, EIB, Sanlam, FMO PROPARCO and Sumitomo

16 Debt funding Life funds 5% DFIs 31% Commercial Lenders 64% International 14% South African 86% 16

17 ED scoring categories Onshore wind Elements Weights Numerator Denominator Threshold Target 1. Job Creation 25% SA-based employees who are citizens Number of RSA-based employees 50% 80% SA-based employees who are black citizens " 30% 50% SA-based employees who are citizens of local communities " 12% 20% Skilled employees who are black citizens Number of skilled employees 18% 30% 2. Local Content 25% Value of local content expenditure Total project value 25% 45% 3. Ownership 15% Black shareholding in the project company Total shareholding 12% 30% 4. Management Control Measurement Round 1 Scoring Black shareholding in the construction contractor " 8% 20% Black shareholding in the operations contractor " 8% 20% Local community shareholding in the project company " 2.5% 5% 5% Black top management Number of people in top management -- 40% 5. Preferential 10% BBBEE procurement expenditure Total procurement expenditure -- 60% Procurement SMME procurement expenditure " -- 10% 6. Enterprise Development 7. Socio-econ. Development Women-owned vendor procurement expenditure " -- 5% 5% Community enterprise development contributions Total project revenue % 15% Community socio-economic development contributions Total project revenue 2% 3.0%

18 Local content requirements/results Technology First Bid Second Bid Third Bid Threshold Target Actual bid Threshold Target Actual bid Threshold Target Actual bid Onshore Wind 25% 45% 27.4% 25% 60% 48.1% 40% 65% 46.9% Solar PV 35% 50% 38.4% 35% 60% 53.4% 45% 65% 53.8% Solar CSP 35% 50% 34.6% 35% 60% 43.8% 45% 65% 44.3% Biomass 25% 45% No bids 25% 60% No bids 40% 65% 40.0% Biogas 25% 45% No bids 25% 60% No bids 40% 65% No bids Landfill gas 25% 45% No bids 25% 60% No bids 40% 65% 41.9% Small hydro 25% 45% No bids 25% 60% 76.3% 40% 65% No bids

19 ED criticism & controversy 1. Complaints by bidders 2. The international trade perspective 3. Questions about administration 4. Government views

20 Key success factors (1) Program management: Political support Institutional setting Management team Management style Program resources Quality of transaction advice Shortcomings Risks.

21 Program design: Key success factors (2) Fast roll-out of new generation Program size Potential project profitability Shift from FITs to tenders Multiple bidding rounds Exemption from PPP regulation Non-negotiable program elements Economic development requirements Sovereign guarantee Shortcomings Risks

22 Key success factors (3) Market factors: Global supply/demand of renewables Donor & MDB support for renewables South African banking sector Other advisory services Shortcomings Risks

23 Lessons Learned Adopt a business-friendly approach Take a long term approach Outreach, recognizing procurement processes Take advantage of external sources of funding Make a case for renewable energy ( and keep making it!) Find a program champion Understand the local environment and identify a program design that suits country circumstances Ensure quality procurement and contracting documentation and processes are in place