South Africa’s Independent Power Producer Procurement programme
It is important to regularly pause, reflect and appreciate a job well conceived and well executed. Back in 2010 the South African government took the bold decision to create a legislative and practical environment in which the Department of Energy could procure power generated by private entrants to the market. This decision was informed by the need to diversify and strengthen SA’s energy mix and to ignite and maintain economic growth. The programme would procure – competitively and transparently – private power from the Coal, Gas and Renewable Energy (RE) sectors. At that time, South Africa’s power mix was dominated by coal, sourced by Eskom for its own power plants.
With first independent power procured in 2012, the programme has seen 1000 MW Coal and 14 725 MW RE power procured, with the first Gas procurement set to begin in 2017. The RE programme (REI4P) has attracted R194 billion in new investment, of which 27.5% represents the foreign direct investment share, with the balance secured from South African financial institutions. This represents the largest source of investment growth in the economy in recent times. It has created the much-needed fiscal space for National Treasury to invest in the socio-economic welfare of the country through its budget allocations for education, health and social grants.
The programme has created 26 790 jobs, of which 47% are occupied by youth and women. A total R92.1 billion has been committed over the twenty-year contract period to Socio-Economic Development (SED), almost exclusively in rural communities. A total of R65.5 billion has been spent on procurement from BBBEE firms to-date.
Perhaps of even greater value from a taxpayer perspective, the REI4P has delivered its power on-budget and on-time 98% of the time. This is remarkable on a continent where investors in infrastructure typically lower their normal expectations of delivery and performance. Not surprisingly, the appetite amongst investors and developers for the chance to bid in successive rounds opened by the government grew rapidly and remains high, with the result that costs of renewable electricity delivered into the grid have become ferociously competitive. The CSIR has estimated that enewable power now costs 40% less than that of new coal and nuclear power.
At the same time the industry has been praised for its strict adherence to bidding policy and legal guidelines and for working with the precautionary principle as a priority in their operations. By the same token, government’s selection of preferred bidders has not been challenged on a single occasion, indicating that the industry has had high confidence in government’s application of their own rules.
Key to all of this has been the leadership and custodianship of the Department of Energy and National Treasury. Their combined efforts are manifest in the effectively run IPP office. Its track record of service excellence ensured that by late 2015, the REI4P had developed a solid reputation for stability, predictability and success.
Since then the programme has been stalled, pending conclusion of 37 duly procured power purchase agreements (PPAs) with the monopoly utility, which is still the sole buyer of independent power. While Eskom has expressed many concerns relating to affordability, these have been repeatedly addressed by the National Energy Regulator, National Treasury and the Department of Energy.
The clear direction of the President in his SONA of this February, followed by further confirmation of high-level continued support for RE industry growth from the Finance Minister in his budget vote later that month, was finally followed by an instruction from the then Minister of Energy that Eskom make ready to sign outstanding Power Purchase Agreements (i.e. achieve financial closure) on April 11th this year at the latest.
The affected preferred bidders immediately began the work of ensuring that they were ready for this deadline. Since almost two years had passed since the winning bids were announced, it was necessary to update all relevant documentation, plans and commitments, to reflect current financial positions. Given that IPPs pay for their connections to the grid, these quotations now needed to be updated.
Together with the IPP office, RE IPPs will gather at the government’s IPP office in Centurion to sign two of the three agreements required to achieve financial closure – the signature of PPAs. Once all three agreements are signed most IPPs will need just two years of construction and commissioning before they start supplying power into the grid. Eskom payments under the PPAs are triggered only once electricity is actually supplied to the grid.
If one wants an example of impeccable governance combining with competitive enterprise to produce a public good that will deliver well into the future – and there are too few such examples worldwide – one need look no further than South Africa’s IPP programme.