SA’s IPP project sets the standard
It is important to regularly pause, reflect and appreciate a job well conceived and well executed. Back in 2010, government made 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 South Africa’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 sectors. At that time, South Africa’s power mix was dominated by coal, which was sourced by Eskom for its own power plants.
With the first independent power procured in 2012, the programme has seen 1 000 megawatts of coal and 14 725 megawatts of renewable energy power procured, with the first gas procurement set to begin this year. The renewable energy programme 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 financial space for National Treasury to invest in the socioeconomic welfare of the country through its budget allocations for education, healthcare and social grants.
The programme has created 26 790 jobs, of which 47% are occupied by youth and women. A total of R92.1 billion has been committed over the 20-year contract period to socioeconomic development almost exclusively in rural communities. A total of R65.5 billion has to date been spent on procurement from broad-based empowerment companies.
Perhaps of even greater value from a taxpayer’s perspective, the renewable energy programme 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 among investors and developers for the chance to bid in successive rounds opened by government grew rapidly and remains high, with the result that costs of renewable electricity delivered to the grid have become competitive. The CSIR has estimated that renewable 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 its operations. By the same token, government’s selection of preferred bidders has not once been challenged, indicating that the industry has much confidence in government’s application of its 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 Independent Power Producer (IPP) Office. Its track record of service excellence ensured that, by late 2015, the renewable energy programme 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 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 of SA, National Treasury and the department of energy.
The clear direction of the president in his state of the nation address in February, followed by further confirmation of high-level continued support for renewable energy industry growth from the former finance minister in his budget later that month, was finally followed by an instruction from the then minister of energy that Eskom get ready to sign outstanding Power Purchase Agreements – to achieve financial closure – by Tuesday.
The affected preferred bidders immediately began the work of ensuring that they were ready for this deadline. Almost two years had passed since the winning bids were announced, so 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 also needed to be updated.
Together with the IPP office, renewable energy IPPs will gather in Centurion to sign two of the three agreements required to achieve financial closure – the signature of Power Purchase Agreements. Once all three agreements are signed, most IPPs will need just two years of construction and commissioning before they start supplying power to the grid. Eskom payments under the agreements are triggered only once electricity is actually supplied to the grid.
If one wants an example of impeccable governance working with competitive enterprise to produce a public good that will deliver well into the future – and there are few such examples worldwide – one need look no further than South Africa’s IPP programme.
Martin is the CEO of the SA Wind Energy Association and the chair of the SA Renewable