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Aug 17, 2009

SA working on financial instruments to boost renewable projects

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The Department of Energy (DoE) was developing financial instruments to ensure that renewable energy becomes a reality in South Africa, said clean energy division chief director David Mahuma on Monday.

Speaking at a conference in Pretoria, hosted by the Institute for Global Dialogue, he said that the government recognised the barriers faced by renewable energy project developers, and accepted that the uptake of these renewable energies did not "come cheaply".

He mentioned a number of initiatives established by the department in order to develop financial instruments, such as the regulator's recently published renewable energy feed-in-tariff (Refit); the renewable energy finance and subsidy office (Refso) within the department; the renewable energy market transformation (REMT) project; and the potential use of tradeable renewable energy certificates.

DoE new and renewable energy director Nomawethu Qase further explained that the renewable energy policy framework of South Africa, which was established in 2003 and was currently under review, set a renewable energy contribution target of 4% of total power generation capacity (equal to about 10 000 GWh) by 2013.

She also noted that while encouraging independent power producer (IPP) participation in meeting these targets, there was a role for Eskom to play and it was decided that the utility should contribute some 6 000 GWh towards the electricity production portion of the target.

Qase further explained that Refso was established in 2005, and was allocated a budget of R5,4-million in the 2008/9 financial year, which it spent, and in the 2009/10 budget, the office had a R10-million financing capability, and of that R6-million was already allocated.

Refso offered one-off capital subsidies to qualifying renewable energy projects, and among other qualifying factors, projects should be located within the borders of South Africa, use commercially viable technologies, and generate at least 1 MW of power. Projects benefiting from Refso funding could also use other financial instruments such as the clean development mechanisms.

The office had already subsidised two hydropower projects, as well as biogas and landfill projects. Out of the funded projects, some 17 permanent jobs and 279 temporary jobs were created, added Qase.

With regard to the REMT project, Qase said that the DoE had about $6-million in donor funds, and said that the department was "begging you [project developers] to assist us in spending that money".

The REMT project looked at assisting developers in bringing projects to bankability through assistance with feasibility studies and environmental-impact assessments.

The department was also involved in the South African wind energy project, looking at establishing a wind atlas, which would, in turn, assist developers in deciding where to locate potential plants.

LONGER-TERM FINANCING QUESTIONED

In addition to discussion around policies and capital expenditure financing of renewable energy projects, the issue of the longer-term sale of this power, was also raised.

Eskom has been designated the renewable energy purchasing authority (Repa), and the single buyer office is also situated within the power utility. With this, comes the obligation to enter into agreement with renewable energy power generators, and pay them for power produced.

Eskom said it was committed to shortening the time taken to conclude power purchase agreements, and the procurement and approval process.

Importantly, the ‘wheeling charges', or transportation of energy from the place of generation to the Eskom transmission grid, would be at the cost of the Repa.

Eskom market development manager Yousuf Haffajee said that the challenge of connecting generators to the grid should not be underestimated, as it was substantial.

Renewable energy generation often takes place in small rural areas, where wind and sun are abundant, and the potential existed to generate 50 MW of wind power in an area that only needs 20 MW . Thus, connection to the national grid was vital.

"I think there are gaps in our grid code," added Haffajee. The issue of grid downtime, and the inability to receive energy would also need to be addressed.

The development of renewable energy power plants, which sat idle because they were unable to connect to the national grid was a situation to be avoided.

Haffajee also stated that in order to have a successful Refit programme, a supportive policy environment was required, as well as a tariff that gives a fair return to project developers and sponsors. There should also be appropriate risk allocation in the power purchase agreement for the seller and the buyer.

Eskom would need to ensure that it had the funds to pay renewable energy generators for the more expensive power they generated. Delegates at the conference, questioned whether the existing Eskom tariff would be adequate to ensure that.

Haffajee noted that estimates have shown that to meet the almost 700 MW target of renewable energy generation required by 2013, it would cost about R3-billion a year to recover the costs of purchasing that power.

A massive electricity price increase would be required to meet those targets and costs.

He noted that tariffs were already under pressure for current build programme, and careful decisions would have to be made considering additional funding schemes, beyond tariffs.

"We must have comfort that the cost recovery mechanisms are in place. Appropriate cost recovery principles are due for regulator board approval in August or September this year," said Haffajee.

The criteria for selecting IPPs would also need to be clarified, and unless the integrated resources plan was gazetted, it would remain unclear. This would deal with the preference to plant location, so that it contributes to grid stabilisation and mitigates against transmission losses.

 

 

Edited by: Mariaan Webb
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