Hailed as a new dawn for South African renewables, the South African REIPPP (Renewable Energy Independent Power Producer Procurement) programme has been successful in contracting over 6000MW of additional generation capacity through the competitive procurement of independent renewable energy projects in four rounds since 2011.
Given the need for additional generation capacity in Sub-Saharan Africa generally, as well as high generation costs, if a similar approach can be applied elsewhere in the region, it would be a significant step towards achieving South Africa’s sustainable development goals. As well as having the potential to deliver value for money and speed of procurement, renewable technology can also make more efficient use of the grid, and reduce exposure to fuel price volatility.
Although a number of other countries in the region have incorporated renewables into their development plans, only a handful of projects have reached financial close to date.
However, recently Uganda and Zambia have adopted new programmes sharing a number of features with REIPPP, led by development institutions, and there are now plans to roll out the same programmes to other countries in the region.
The REIPPP model
In 2006, responsibility for planning and procurement of additional generation capacity was assumed by the Ministry of Energy (MoE), which established a renewable energy procurement programme following a conventional feed in tariff model, but there was limited uptake.
In 2011, this was replaced by the REIPPP programme, whose key features include stakeholder management, ensuring appropriate scale, market engagement, institutional capacity, standardised documentation, and competitive procurement.
As an example of good stakeholder management, the MoE proactively engaged with relevant stakeholders, both with the general public with local communities close to the project locations as stakeholders, having identified the same beforehand, which engagement was reflected in the inclusion of socio-economic criteria in the programme.
Questions as to the scale of the programme were dealt with by the MoE having committed at the outset to procure a specific substantial amount of capacity through the programme.
Market engagement saw the MoE take soundings from the international developer and investor community prior to the programme launch in order to test market appetite and capacity. It also ensured that messages to the market were clear and consistent.
Also key to the programme was the creation of institutional capacity: a dedicated unit was established to manage the programme on behalf of the MoE. The unit was adequately resourced, with access to a panel of advisers experienced in international best practice.
Lastly, the programme utilised standardised documentation: standardised forms of project documentation were developed which were consistent with international best practice, containing a bankable allocation of risks.
The competitive procurement elements of the programme was organised in successive rounds to allow the level of interest to be accurately gauged and to take advantage of competitive pressure to progressively improve terms. By the fourth round, the tariffs achieved were between 46% and 71% of the first round tariffs (depending on technology);
Several aspects of the more general environment also contributed to the success of the programme, including the positive legal and regulatory framework, which was generally of a high standard, and the programme followed a tried and tested PPP procurement framework.
It also benefited from a strong investment grade credit rating, as South Africa had an investment grade credit rating, sufficient to obviate any need for country risk mitigation;, and the relative ease of doing business, something for which South Africa is ranked in the top 40% of nations globally.
Finally, the programme benefited from the country’s domestic debt capacity: South Africa has a large and sophisticated local currency commercial debt market, able to provide long term project finance loans.
The GETFiT and Scaling Solar programmes
GETFiT and Scaling Solar are renewable energy programmes developed by the German development bank, KfW and the International Finance Corporation (IFC), respectively. GETFiT, which covers multiple technologies up to 20MW, was applied in Uganda between 2013 and 2015, and Scaling Solar, which is solar-PV specific and up to 50MW, in Zambia in 2016.
Apart from their scale, which is considerably smaller, these programmes replicate the key features of REIPPP above, although in the case of institutional capacity this is by way of technical assistance under which KfW/IFC advises the procurer.
They also contain a number of additional elements, required because of differences in the prevailing local environment, or to help control or partially de-risk the development phase to ensure that the projects are sufficiently attractive to investors and developers to generate competition.
For example, the procurer is responsible for obtaining necessary permits and consents, while finance and insurance facilities are made available to whoever is awarded the tender. The programmes also safeguard the relevant legal and regulatory framework, through a review and enhancement of that framework.
Risk mitigation instruments, such as partial risk guarantees and political risk insurance are made available to whoever is awarded the tender, while site selection and title risk are also managed by both programmes. Unlike REIPPP, the sites are designated by the procurer, which may also provide the right to use land. Although this is unusual in terms of market practice, it helps in managing the cost of interconnection for the utility, whilst also addressing a major development risk.
The first round of Scaling Solar in Zambia attracted a large number of bids, and the tariffs achieved were as low as USD 6.02 kWh. The fact that this was achieved in a first tender round, where the scale of the programme is a lower order of magnitude from REIPPP suggests that positive outcomes should be achievable in other jurisdictions.
Notes of caution
It is necessary to sound a note of caution in relation to the potential for roll out of the programmes in that there are some constraints which they cannot fully address, including the legal and regulatory framework, the exchange risk, and utility and host government risks.
The legal and regulatory frameworks are aspects of the programme which are relevant to the risk profile in any jurisdiction; these are extensive, and addressing any issue may necessitate changes to legislation. Whilst the project documents may provide protection against changes in law, they do not cover issues arising under the existing legal and regulatory environment or dispense with the need for due diligence by prospective developers.
Exchange risks arise for the off taker where the tariff is wholly or partially indexed to compensate for currency movements relative to USD. In the case of REIPPP it was possible to avoid this mainly due to the depth of the local currency debt market. However this is at present something unique to South Africa.
Lastly, utility and host government risk must be considered. In most countries, commercial lenders will require political risk mitigation of some kind to be provided. However it should not be assumed that risk mitigation instruments will automatically be available.
The provider of coverage will be assuming utility risk and government risk, and they will not always be comfortable doing so, particularly where the utility has significant solvency or liquidity issues. Development finance institutions and multilaterals may lend on an uncovered basis, but their capacity is limited and they prefer to co-finance with commercial lenders.
Nevertheless despite these challenges, the two programmes do appear to be the beginning of a step change which will create major new opportunities for developers, investors and contractors.