AS the market prepares to submit bids under round three of the Renewable Energy Independent Power Producer Programme, there is a question around whether the South African consumer should carry the burden of protecting the environment for future generations.
Renewable energy comes at a cost but the involvement of the private sector in this area could not have come at a better time for South Africa.
In the process embarked upon by government, mechanisms have been put in place to ensure that, in the selection of the preferred bidders, the consumer should not be prejudiced.
As prescribed by the Electricity Regulation Act 4 of 2005 for New Generation Capacity, when a power purchase agreement between a buyer (in this case Eskom) and an independent power producer is concluded, the feasibility study must demonstrate value for money and that technical, operational and financial risk will transfer to the seller.
When determining the licence conditions relating to price, charges and the tariff, the regulator must ensure that the buyer is able to recover the full costs under the power purchase agreement.
The average consumer may not be interested in how value for money is demonstrated in the process, but price is not the only determinant.
Job creation, local procurement of equipment and services, economic development and demonstrating commitment to the promotion of South African ownership play an important part in determining value for money.
Once a bid has met the qualification criteria, it is then scored on the basis that 70% of points to be gained relate to the equivalent annual tariff, taking into account estimated inflationary increases. The lower the tariff, the higher the points. Economic development obligations account for the remaining 30% of the points.
The key drivers in determining the tariff are the total capital costs, the term and cost of debt, the ongoing operational costs and the target returns of the investors.
With this in mind, it appears the South African renewable energy market is poised to take advantage of a perfect storm.
First, equipment prices have reduced significantly as a result of overcapacity in the developed world. Second, the local financial markets are still offering longer-term debt when compared to Europe and North America, and this has a significant impact on tariffs. Also, solar irradiation and wind resources in South Africa are in fact superior to what is available in Europe.
Finally, South Africa, as a relatively safe jurisdiction for investment, has seen a large number of developers chasing transactions, resulting in targeted returns being set at lower levels than would normally be expected in undeveloped markets.
While the tariffs at which projects are being awarded are higher than Eskom's current all-in cost of about 45c/kWh, the projected 3.625MW of renewable energy set to be installed over the next three to four years will equate to about 4% of Eskom's current production and the overall impact on Eskom's current cost base is therefore estimated to be 14%.
While it appears at face value as though the cost of renewable energy is out of kilter with conventional thermal power, renewable energy will, over time, move into parity with thermal power. This is because the annual tariff adjustments under the renewable programme are known for the next 20 years and will be adjusted annually by changes in CPI. Given the competitive nature of the bids, however, investors and developers are proposing tariffs that will increase at a percentage of CPI, which will result in real tariffs reducing over time. The renewable sector can easily afford to carry increases at less than CPI.
