By Alexander Sarac, Partner, Projects, Energy & Infrastructure and Kiran Arora, Partner, Projects, Energy & Infrastructure of Berwin Leighton Paisner
In 2011, South Africa instigated the most successful and effective public-private renewable energy policy initiative in the African region. Together the Department of Energy, National Treasury and the Development Bank of South Africa established the Renewable Energy Independent Power Producer Procurement Programme (REIPPP), borne of a need to combat South Africa’s escalating energy prices and disproportionately high emissions levels.
So far, the scheme has successfully produced 39 functioning projects, with almost 30 more under construction, generating more than 2000MW of renewable energy. It is estimated that in the coming years, generation will double to at least 4000MW to supply the country’s ever-growing energy demands.
The cornerstone of the REIPPP is its competitive bidding process, which encourages private investors to bid on renewable energy power projects including solar photovoltaic, concentrated solar thermal, onshore wind, biogas, biomass solid, landfill gas and small hydro. Eskom, the South-African Government-owned electricity utility then purchases the power generated by the renewable projects and transports it onto the main power grid.
The tender and bidding process has been designed to promote intense competition between bidders, therefore keeping costs comparatively low. This has been achieved by introducing caps on the maximum capacity to be acquired through certain renewable energy categories in addition to caps on the price for each renewable energy technology itself.
An unusual feature of the bidding process is the requirement for bidders to ‘lock-in’ their financing before bids are submitted. This way the burden of risk is shifted onto the lenders and enables deals to be closed with greater efficiency by encouraging realistic offers that are practically viable once the contracts are agreed. The demanding participation requirements and the related costs and risk for the investors and developers were off-set by the fact that the REIPPP included several bidding rounds, thus allowing unsuccessful bidders to resubmit their project.
There have already been several successful rounds of bidding, each time the process is being refined to streamline the procurement system and to further increase competition amongst investors.
Why was the REIPPP so suited to South Africa and could it be replicated in other countries with sufficient scale and demand?
In view of the significant triumph of the REIPPP in South Africa, it is worth asking if the REIPPP could be replicated or at least serve as a role model in other sub-Saharan countries and if so, which countries would be the most likely candidates for such an approach.
The success of the REIPPP is underpinned by an interplay of factors that have created the optimum conditions for the scheme to thrive. The programme has benefitted from a watertight management team whose transparency eliminated the mistrust often associated with public-private partnerships. It was aided by high-level political support which promoted clean energy and the reduction of carbon emissions. Moreover, the issuing of sovereign guarantees by the Treasury in support of Eskom’s purchase of power from the renewable projects has been instrumental in the scheme’s smooth running. The World Bank highlights, in its 2014 report on the REIPPP, the willingness of investors and lenders to accept these guarantees without necessitating political risk insurance due to South Africa’s reasonably strong international credit rating. Last but not least, the de-risking through various bidding rounds requires scale within the system.
Therefore, the delicate interaction of the above-mentioned factors cannot be underplayed. Each country’s prospect of success at replicating the REIPPP will depend on the scale of the possible projects that could justify significant investments in such a scheme and attract the critical mass of investors and developers and their respective government’s will to cooperate transparently with private investors through such a scheme.
Initiative to replicate the REIPPP scheme in Nigeria
The foundations for a similar programme to the REIPPP have already been laid in Nigeria. Since 2011, the Nigerian Government has made efforts to privatise existing power generation and distribution companies and has worked on several initiatives to introduce mandatory competitive tendering into the sector (e.g. in response to the Regulations on the Procurement of Generation Capacity 2014 a competitive procurement process - much like the REIPPP - has become mandatory for power plants larger than 10MW). More recently, the German Agency for International Co-operation and Development (GIZ) has committed to finance an 18 month consultancy project to develop the regulatory framework and produce the minimal required technical input to replicate the REIPPP in Nigeria focusing on the features that made the REIPPP a success in South Africa, which is an encouraging development.
Taking into consideration the scale and demand required to implement a scheme equivalent to the REIPPP, in theory there are multiple African countries that could meet these thresholds. Below are the countries we consider to have the building blocks necessary to translate into successful private procurement programmes in the renewables sector.
Ghana’s system of feed-in-tariffs which was set up under the 2011 Renewable Energy Act has recently demonstrated its shortcomings in the context of large scale solar power. The Nzema Project, a vast 155MW solar PV plant set to be one of the largest in the world has recently been halted by the Ghanaian Government who have imposed a temporary cap of 150MW on such projects. The FiT scheme has proved unsuitable as although it has attracted wide investor interest, there are simply too many projects in the immediate pipeline and the FiT structure crucially fails to exploit competition between investors. Therefore energy prices remain high and alternative solutions are needed. Ahiataku-Togobo, the Director of Renewable Energy at the Ghana Ministry of Energy recently announced that the Government are proposing to hold the country’s first competitive tender for solar projects. He has highlighted the need to lower costs and has indicated that details of the tender will be announced shortly.
Kenya has announced its aim of increasing its power capacity tenfold by 2030 and is focusing primarily on the renewables sector to achieve this objective. These ambitious intentions are evidenced by the construction of the large scale 310MW Lake Turkana wind project expected to commence generation in October 2015. However Kenya’s system of overcomplicated land law and the application of public procurement regulations to the renewables sector have caused investors difficulties in accessing the market. The Kenyan renewables sector has enormous potential, and could benefit hugely from reforms and the initiation of a bidding platform for private investors who will be able to operate more easily in a transparent, deregulated market.
February, 2016 saw the introduction of the Electricity (Competitive Power Procurement Framework) Regulations 2015 in Tanzania. These lay the groundwork for a competitive bidding platform for small-scale renewable power projects (up to 10MW) and for all large scale power projects, whether renewable or not. Under the regulations, different rules apply to different renewable technologies. For example a non-competitive procurement procedure applies to biomass, hydro and very small solar and wind projects whereas a competitive bidding procedure applies to wind and solar projects that exceed 1MW in capacity. This is clearly a step in the right direction but is missing key features such as capacity allocations or targets for large renewable projects based on technologies, proof of financing, and several bidding rounds.
Ethiopia has a total land mass of 426,000 square miles and a population of 101 million people. The recent Gibe III hydroelectric project (estimated to more than double Ethiopia’s power generation capacity) goes some way to address the energy needs of such a large population but it is clear it will need to be supplemented by further renewable energy projects. The REIPPP could be an effective way of procuring these projects.
Off grid solutions for other countries/rural areas
Although using REIPPP as a role model could work for other larger countries such as Angola, Ivory Coast, and Uganda but unfortunately its success cannot be repeated everywhere. Many countries in sub-Saharan Africa and indeed elsewhere in the world are still lacking adequate power grids with the capacity to cope with vast amounts of electricity being transported onto the network. In addition to this, the REIPPP on its own cannot solve the need to electrify more rural areas which often have no grid access at all.
However there are solutions that can exist in harmony with schemes such as the REIPPP or equally on its own: off-grid renewable systems. The International Renewable Energy Agency has predicted that off-grid solutions will become an important area for growth in the coming years due to their improving performance and decreasing costs. The premise of off-grid renewables is that any electricity generated will not be put onto the main grid but instead will be put onto smaller localised grids, or when on a smaller scale, stored in batteries. A declaration of the South Africa International Renewable Energy Conference 2015 highlighted that renewable off-grid and decentralised solutions are at long last being considered as a serious alternative to supply electricity to rural areas for the first time. These projects can either be developed as stand-alone renewable solutions or as hybrid renewable systems combining existing diesel generators, with small hydro and biomass power. Recently we have seen an increase of these hybrid off-grid projects as a result of an upgrading of existing diesel mini-grids to hybrid-grids. In the most rural areas, the much smaller solar home systems are becoming more and more affordable and thus popular contributing to a healthy mix of cost effective solutions to meet the African power challenge.