South Africa: At Last, IPPs Get A Look In

South Africa: At Last, IPPs Get A Look In

At long last, and prodded by South Africa’s increasing power deficit, the government has given the green light to the private sector to engage in energy production. While the area allocated to IPPs is circumcribed, the development has received an enthusiastic welcome.

The South African government kicked off 2012 with news that was music to the ears of local energy entrepreneurs. At long last the private sector will be allowed to contribute to the national energy industry in a meaningful way, albeit that this ground-breaker will be limited to renewable resources.

Coal and gas energy generation, over 90% of the total power output, will remain the exclusive preserve of state-owned utility Eskom.

Generation restrictions aside, the move is an undoubted step in the right direction for sooner rather than later carving a meaningful niche for private sector electricity providers.

This first stage will contribute 1,416MW of renewable energy to the national grid from 2014 to 2016, while a further four bidding processes are planned for 2012 and 2013, culminating in the generation of a total of 3,725MW from IPPs by 2016.

The first 28 preferred bidders have until June next year to take their projects to financial closure while 26 of the selected IPPs would need to be generating power by mid-2014.

Selected projects include 18 solar photovoltaic units, eight wind-powered facilities and two using concentrated solar power (CSP). Solar capacity amounts to 631.53MW, wind will provide 633.99MW and CSP accounts for 150MW. No small hydro projects were selected.

The projects are located across seven of South Africa’s nine provinces, excluding KwaZulu-Natal and Mpumalanga. The next bidding window will offer 2,309MW in due course.  

“The electricity supply-demand situation is very tight and it will remain so for a while,” notes South Africa’s Energy Minister Dipuo Peters. “Eskom is doing everything in its power to improve the situation, but they need South Africans’ assistance to use energy sparingly and responsibly.”

The relaxing of state power utility Eskom’s monopoly to allow outside players has been widely welcomed in both public and private sectors. Eskom will buy the output generated by the IPPs and was not allowed to take part in the bidding process.

Power purchase agreements with producers will be signed as soon as the process is concluded. “This arrangement was intended to bring new players in to the market,” says Eskom spokeswoman, Hilary Joffe. “We fully support the IPP process because it advances both power supply and climate change goals.”

Eskom has its own renewable energy projects on the cards, bankrolled by a R5bn ($615m) loan from the World Bank and African Development Bank. The funding will develop a 100MW wind power plant and a 100MW solar project. The rush by private punters to bid on energy projects shows a growing appetite for involvement by investors both domestic and foreign.    

Noting the encouraging level of interest being shown by prospective IPPs, Mike Peo, head of infrastructure, energy and telecoms at Nedbank Capital, says the fact that “more than 400 prospective bidders registered their interest in the lead-up to the tender closure demonstrates a readiness by industry in this country to get behind this important component of South Africa’s developing green economy.”

Energy department director-general Nelisiwe Magubane

reported that bidders are very keen to participate in the renewable independent power producers’ programme. The number of applicants with the required expertise took the department by surprise and might prod the government into upping the 42% of renewable power generation it has put out into the market. Something similar has already happened. A 1998 white paper on energy stipulated private sector renewable energy generation of 1,250MW. In light of the quickly accelerating demand for electricity, “We felt we needed to expand the allocation and capped it at triple the original amount at 3,750MW,” says Magubane. “We believe that a procurement programme of this magnitude will address both the energy needs as well as provide sustainable growth for the renewable energy industry.”

Boost to remote economies

At this time, the IPP contribution comprises a start-up involvement of 1,850MW on onshore wind, 1,450MW of solar voltaic, 200 concentrated solar and a 175MW combination of biomass, biogas, landfill gas and small hydro. Most of the renewable IPPs will be located in remote areas with limited economic activity to help relieve rural unemployment.

Winning bids from the first round included 630MW of wind projects and a similar quantity of solar photovoltaic, plus 150MW of concentrating solar power to get the ball rolling. A further 2200MW of renewable projects will be announced over the coming two years.

“We have liftoff”, says Steve Sawyer, Global Wind Energy Council’s Secretary General, on the announcement. “The South African government is to be congratulated for taking the first step towards putting this country in a position to lead the energy revolution in Africa.

“Much of sub-Saharan Africa has tremendous wind and solar potential, a dynamic and growing economy and severe water shortages; perfect conditions to grow a renewable energy industry. We hope that South Africa will be the hub and driver of that development. Thousands of new high-quality jobs and billions in investment based on the development of clean indigenous energy sources will provide a major boost to the fledgling economies in the region.”

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Written by African Business Magazine

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