Renewable Energy Independent Power Producer Procurement: Department of Energy update

Meeting report

Renewable Energy Independent Power Producer (IPP) Procurement Department of Energy update
Mr Ompi Aphane, Deputy Director General (DDG): Electricity, Nuclear and Clean Energy (ENCE), made a presentation on the programme update of the Renewable Energy IPP Procurement. He noted that the Integrated Resource Plan (IRP) made provision for the determination of a New Generation Capacity that was to be done by the Minister, in concurrence with the National Energy Regulator of South Africa (NERSA). The determination was for the procurement of 3 725 megawatts (MW) across different technologies that were to be produced by IPPs. He noted that 100MW, of that total, was to be produced by Eskom, and another 100MW was to be produced by small projects. Procurement documentation was prepared and approved by the Director-General (DG) to procure power from the private sector. These documents were released on 03 August 2011, and the compulsory bidders conference for the first and second window was on 14 September 2011. A consultation programme was also conducted with lenders to eliminate their risk concerns. There were 53 bids received in the different technologies, by 04 November 2011 and evaluation was conducted at Gallagher Convention Centre between 04 and 28 November. He then noted that there were no bids received for Biogas, Biomass, Landfill gas, and Small Hydro, but rather that the bids received were for Wind, Solar Photovoltaic (PV) and Concentrating Solar Power (Solar CSP). The evaluation and adjudication process was subject to very strict security measures to ensure optimal confidentiality. He noted that there was a need to eliminate any controversy as the procurement project amounted to R50 billion.

As a background review, Mr Aphane noted that the initial determination had contemplated a non-competition scenario where it was a first-come-first-serve procedure when generation capacity was illustrated. The Department then made a decision to move away from this non-competitive position. He then highlighted the three different procurement documents that would be a part of this process: the request for proposals; the power purchase agreement; and the implementation agreement. In terms of the power purchase agreement, he noted that in the case of wind and solar energy, which was energy that could be ordered but rather obtained if and when available, this energy would be paid for in the instances when it was produced. In the coal fire industry, payment was for the energy produced, as well as the capacity created.

In terms of the implementation agreement, Mr Aphane noted that matters such as risk management and Black Economic Empowerment (BEE) were hard-wired into this agreement. He noted that, as seemingly insignificant as this might be, it did serve to give assurance to the Department in that it might terminate agreements if the IPPs failed to comply with the regulations. In this way, the Department was able to enforce local economic development standards.

With regard to the request for proposal, he noted that this part was divided into three parts: Part A, referring to rules and requirements; Part B, referring to qualification; and Part C, referring to a comparative evaluation (see presentation for details). Compliance with the requirements of each part would enable qualification for participation in the subsequent parts. Reference was made to the fact that no prices were prescribed by the Department, but rather these would be determined using particular financial models, to illustrate proposed prices, as well as to show what underpinned such price determination. It was important to ensure that land considerations were taken into account to ensure that land that could best be used for agricultural purposes was not being presented for the purposes of power production. Parts A and B were mainly about compliance, while Part C was primarily focussed on competition. In this regard, there was a requirement that each project would have to be at least 40% South African owned, as well as compliant with BEE requirements to ensure success of the bid. The evaluation template was presented upfront to ensure that there was no tampering to favour preferred bidders. All bidders were subjected to the same requirements. The evaluation itself was subjected to moderation and scrutiny, to ensure independence and fairness (see presentation for evaluation composition). He noted that one of the over-arching requirements was that of economic development and non-compliance in this regard cold lead to the termination of the agreement. Producers would then have to bear this risk to ensure that they delivered in commitments made in the agreement.

In terms of the recommended preferred bidders, Mr Aphane noted that of the 53 bids received, only 28 of these bids had passed (see slide 9 of presentation for details). He then made special reference to the fact that there were no preferred bidders from KwaZulu-Natal (KZN), Gauteng and Mpumalanga provinces. The process was then subjected to an independent audit review that illustrated that the process had been fair and free of bias, as well as the fact that there was comfort in the financial models used.

Discussion
Mr K Moloto (ANC) wanted to know the role of Matt Macdonald team, and if in fact it was to do a due diligence on the correctness of the resource as stipulated by the bidder. On the environment issue, he also wanted to know if the Department was confident as to adequate consultation being conducted with the communities to ensure that there would not be litigation in the future as to the location of these power plants. With regard to the concerns that were expressed by NERSA, he then wanted to know how these had been resolved in this process. On the issue of stranded investments, he noted an example of Siyiya, and wanted to know how value was to be unlocked from these investments.

Mr Aphane replied that the risk around the resource and the representation that the bidders made around the resource was their risk. The Department was not in a position to ensure that the resource was adequate. He noted that lenders would be the ones to ensure that the due diligence would interrogate the resources stated. The role of Mott Macdonald was to ensure that the Department’s economic development criteria were in line with the process. With regard to community consultation, the environmental laws dictated that the interested and affected parties were adequately consulted. With regard to NERSAs concerns, he noted that issues related to the Electricity Regulation Second Amendment Bill (ERA) as it stood, and the fact that a particular process must be followed in terms of licensing. In this regard, NERSA was not able to pre-determine tariffs. He noted that the Department sought to circumvent this by following the law in determining prices and licences. This, he noted, resolved the concerns. In terms of unlocking investments, he noted that the R50 billion investment came from foreign investments and SOEs were therefore not allowed to act as IPPs in this regard. There was a need for foreign entities to make the investment and incur the risks in this regard. He then noted that another way to unlock investments was to encourage SOEs to seek partnerships with private entities to be able to be classified as IPPs.

Mr J Smalle (DA) wanted to know if the Department was in fact intending on having a rigorous pertaining to windows two and three as well, and if this subsequent exercise was in fact a budgeted cost project. He also wanted to know if the processes were in fact on track to meet the June 2012 deadlines as indicated. He then wanted to know if, in the areas where there were no bids received, would the Department be ensuring that these areas were bided on in the subsequent windows. He also posed a question as to the necessity of the bidders being asked to sign a confidentiality clause, and if there could be any insight given by the Department as to the price determinations and influences in this regard. He sought assurance as to whether the Department was confident that the process was independent, transparent and fair. He also wanted to know if the Committee could perhaps have access to the review reports.

Mr Aphane responded by noting that the Department was currently evaluating window two in line with a window one post-mortem. He noted that the bidders who had failed were advised as to where they had failed and how they could rectify this. At this stage, he then noted that these bidders had also sent in recommendations as to how to better the processes, which were being taken into consideration in the evaluation of subsequent windows. In terms of the budget costs, he noted that there was a budget in relation to the amounts that must be paid in terms of the contracts that already existed. He also noted that in the multi-year price determination 2 (MYPD2) budget programme, some funds were already allocated for this programme. He then noted that there was no procurement budget, but noted that there was a mechanism adopted to counter this problem, namely that the bidders were required to pay a development fee into the project development fund that was administered by National Treasury. This fee was a fraction of the total fees to be incurred by the bidders. With regard to the failed bidders, he noted that the Department had no obligation to them, but they had subsequently submitted in subsequent windows as they had pre-qualified, and failed later. In terms of the other small projects, he noted that there would have been a separate programme that would cater for these, and the market was aware that there would be a programme to come, which then explained their lack of involvement at this stage. In terms of the requirement for bidders to sign confidentiality clauses, he noted that the information submitted in this process was ultra sensitive and could be used unfavourably by interested parties, i.e. in terms of how much they were able to collude with each other. On the issue of the price cap around the second window, he noted that there was no reference made to a price cap due to the favourable effects from the first window. In terms of the fairness and transparency of the process, Mr Aphane gave assurance in this regard and noted that this was not only a requirement of the Public Finance Management Act (PFMA), but also of the Constitution. He noted that the Department dealt with this through external reviews. In terms of the review, he noted that this should and could be made available to the Committee. In terms of the June deadlines, he noted that of the 28 projects that had been short listed, three or four had indicated problems that would hinder them from meeting the deadline, while the others were expected to meet deadlines. If the projects failed to meet the deadline, then those MWs would fall into the next window and the Department would have the right to cash in their bid bonds as the risk fell to the bidder.

Mr G Selau (ANC) sought clarity as to the mention made to the 100MW allocation to small projects and the 100MW allocation to Eskom. He wanted to know which was which in the references made. Then, in terms of Solar and Wind references, he wanted to know if there were any plans to ensure that manufacturing also took place locally, and what these plans were in comparison to the initiatives of the Department of Trade and Industry (DTI). With regard to parts A, B and C, he noted the various role players in the sections identified in part B and wanted to know what the relationship was in unfolding these functions with other role players.

The Chairperson then expanded on the above and wanted to know what the Department and the state owned entities (SOEs) involvement, and their roles, were.

In response, Mr Aphane noted that reference was being made to two different 100MW allocations; one was to Eskom, and the other was to small projects. In terms of the manufacturing of components and other SOE involvement, he noted that work was conducted in a consultative cluster that involved DTI, the Departments of Environmental Affairs and Water Affairs, the National Treasury, the Departments of Economic Development, Transport, Rural Development and Land Reform, and Agriculture, Forestry and Fisheries. He then noted that even if departments did not fall into this cluster, other departments were triggered through the interests that they might have when the processes were undertaken.

Mr L Greyling (ID) noted the move from a refit to a rebid programme, and that, in the refit programme, the model that was worked on was looking at a price that would generate a certain internal rate of return that was acceptable in terms of what the country was willing to pay. He then wanted to know if such considerations were made in evaluating the bids received (i.e. internal rate of return), disqualifying those bidders with very high internal rates of return. On the reduction of prices in the second window, he wondered if the Department felt that this was a product of the increased competition, or the decrease in the cost of technologies. With regard to there being no bids submitted in biomass, biogas, landfill gas and small hydro, he then wanted to know if the Department felt that this was a result of the maximum price being too low. He noted that, if this was the case, then perhaps this was something that needed to be looked at as these were energy areas that need to be exploited. He then wanted to know the role that the South African Renewables Initiative (SARI) would be playing in assisting financially as he felt that this programme warranted its involvement in this regard.

In response, Mr Aphane noted that the problem with the refit and rebid programme was the recognition that there was a very dynamic price situation that existed, that depended on the goings on in foreign markets. As a result, it became important to consider the capital costs at a presented time. He noted that many bidders were still seeing very attractive internal returns regardless of the limitation mechanisms that existed. The only thing that had assisted in this regard had been the competition element that had compelled bidders to submit competitive prices. In terms of factoring in SARI in the incremental costs, he noted that SARI's philosophy was to cushion the costs relating to the financing of these projects through the provisions of concessionary loans into the programme.

The Chairperson then wanted to know how many four-roomed houses 100MW could power. On the issue of bidders, the Chairperson wanted to know the highlights of the Investors' Conference, and possibly the percentage of international bidders. He then sought clarity as to which concerns, that were received, were genuine and which were imagined. He also wanted to know how much power would be produced in the ideal scenario that all 53 bidders had passed. In terms of NERSA and the licensing process, he then sought an indication as to how licensing fitted into the process. He then sought insight as to the monitoring mechanisms that were to be implemented in monitoring execution. He noted the Committee's keen interest in the small projects that had not been bid on at this stage as he felt that these were very important. In terms of local manufacturing, he noted that some players had stated that the current offer was not enough for local manufacturing and that the Department’s position had been to improve this. He then sought comment as to this position being on track when it came to the subsequent windows. He then sought insight as to the number of jobs that this project was expected to create. In terms of there not being any successful bidders from various parts of the country, particularly in Gauteng, he wondered if there was anything that these investors could have missed that caused their bids to fail.

In response, Mr Aphane noted that 2 kilowatts (KW) was sufficient to provide power to one household, a standard three bedroom house, and 1KW would be enough for one Reconstruction and Development Programme (RDP) house; therefore 100MW would be sufficient to provide power for 100 000 RDP houses. In terms of the Investors' Conference, he noted that one of the highlights was the attendance which was overwhelming. He then noted that more than 90% of the investors were overseas based, this being due to the design of the project, which was to attract foreign investment. The role of South African entities was often to bring land into the equation, and not necessarily the equity. He then noted that 100% of the technologies were foreign-based, which provided challenges for local employment. He then noted that in the first window, there was a heavy reliance on external transaction advisers (international) and that most of that capacity was sitting outside of Government. As a result, in the subsequent windows, there had been controls put in place to counter this problem. He then made reference to the concerted effort being made by the Department to increase capacity in various regards. In terms of the power that all these bidders would have produced had they all been successful, he noted that the number was in the region of 50 000MW. He then noted that reflection on the processes followed had been postponed for a later stage; however, there had been indications in the subsequent window considerations that showed that the path followed in window one had been the most ideal.

In terms of licensing, he noted that there were no problems and draft licences had already been circulated for comment. In terms of the monitoring mechanisms for implementation, he noted that it should be the focus of Government to increase capacity,  in which regard the Department would leverage monitoring mechanisms that existed within Government. He then noted that a number of landfill projects had been pre-qualified in the first window against a certain price cap. He further noted that transaction costs became large percentages of the project costs which deterred small project bidders, which was magnified by the fact that there would be rounds specific to these projects in the future.

Mr Greyling then noted that his interaction with potential biogas developers had yielded their concern that maximum price that was offered under this was far too low to make it viable, but rather what was more viable was to use it for liquefied petroleum gas (LPG). The problem that that would create was the interaction that would have to occur with municipalities and getting permission from said municipalities to make use of their resources.

The Chairperson echoed this sentiment and encouraged the Committee and the Department to be steadfast in their interaction with municipalities.

Mr Selau suggested that perhaps the Department should extend an invitation to the Committee to be present during the launch process so as to be able to gather information. He noted that it would not be the intention of the Committee to be involved in procurement, but rather to carry out its oversight function.

Mr Aphane then noted that the suggested programme should become a grid electricity programme that would then have to be synchronised with the gas projects to ensure that one did not sterilise the other. He conceded that this would be something that the Department would have to give special attention to. He then remarked that, in terms of local manufacturing and whether window one was on track, he sought to link this question with the question on job creation. He noted that one was now able to quantify how many direct jobs could be created by the various activities but could only give numbers at a later stage post evaluation. He then stated that, in construction, 20 000 jobs would be created, and, in the life-cycle, there would be 7 000 jobs created. Furthermore, he noted that the renewable energy sector had, comparatively, not been able to  create more jobs; compared to coal, however, there were large numbers being created. On the provinces that failed to pass bids, he noted that the coastal provinces had superiority in wind generation due to their location, and the Northern Cape dominated solar power generation due to its climate. In Gauteng there was an issue of land and its being utilised in other ways, i.e. for land, etc.

The Chairperson noted the landfill gas potential that needed to be researched, particularly in Gauteng and in the various metros in that province, as there were large amounts of waste in this region, and he encouraged  attention to be given to this research.

Mr Selau voiced his agreement with the assertion that Eskom fell outside of the IPP category, and noted that this was due to the fact that IPPs were independent in as much as they were independent from Eskom. He also agreed with their refusal to submit certain documents to Eskom as Eskom was in essence their competitor. He then noted that Eskom was also a generator and distributor of coal, which was a situation that was expected to be rectified by the passing of the Independent System and Market Operator Establishment Bill (ISMO BIll). He then made reference to the different stakeholders and wondered whether, for the purposes of technology research and skills, the Department of Science and Technology could not be a stakeholder. He then noted that if someone was to pose a question, through the Committee’s external interactions, on how many MWs of electricity South Africa was currently using and how many would be needed in the future to reach universal access, he would not be in the position to answer that question as he was not privy to that information. He noted that this was essential information for him to know as a Committee Member.

Mr Aphane responded by stating the need for putting the renewable energy project in the wider context of the work done by Government in energy, namely the work that was done in the Industrial Policy Action Plan 2 (IPAP 2), and the segment that dealt with green energy. He noted that, at this level, there were various forms of participation with many other Government stakeholders, and that this involvement was then translated into programmes. He then noted that other projects were at different stages of readiness in terms of implementation. He then noted that figures for electricity consumption were available once a week in the Business Day, and that the recent figure was about 34 000MW, and 4 000MW was reserved, and about 2 000MW was out of commission, so the total was about 40 000MW. He then noted that, by 2030, the capacity was expected to double to 80 000MW, indicative of the growth in electricity demand of 1.2%.

The Chairperson extended his vote of thanks for the update that was being received as this area was one of interest. He then asked for the Committee to be added to a communication list for certain information to ensure that the Committee was kept in the loop.

The meeting was adjourned.